Business -> Private Health Services Plans (PHSP)
Private Health Services Plan or Health Spending Account - Tax-Free Benefit for Employees
A business may deduct Private Health Services Plan (PHSP) or Health Spending Account (HSA) payments made on behalf of employees and their dependants. These payments are not taxable to the employees, and there are no CPP or EI premiums charged on these payments.
If employees pay a portion of the PHSP premiums, this qualifies as a medical expense of the employee for purposes of the medical expense tax credit.
S. 248(1) of the Income Tax Act defines a PHSP as
except provincial and federal government health care insurance plans.
Canada Revenue Agency (CRA) considers that a plan is a PHSP as long as all or substantially all (generally, 90% or more) of the premiums paid under the plan are for medical expenses that are eligible for the medical expense tax credit (METC). These expenses include prescriptions, medical, dental, vision care and hospital expenses. For more information on qualifying medical expenses, see our article on eligible medical expenses.
Both incorporated and unincorporated businesses (self-employed proprietors, partnerships) can have PHSPs, but there are different restrictions on each. The treatment for corporations is more favorable than that for unincorporated businesses.
A Health Spending Account (HSA) may qualify as a PHSP if it meets the criteria set out in IT-339 (see links at bottom). See IT-529 below for more information on Health Services Spending Accounts and other flexible employee benefit programs.
There must be a document which outlines the coverage for employees under the PHSP. If there are no limitations to the coverage, the plan will be unlikely to qualify as a PHSP. In this document, the corporation can set different annual limits for PHSP benefits provided to different employee groups in the company.
PHSP for Corporations
In order to be considered an employee, besides being actively involved in the business, the shareholder should have an employment contract with the corporation. Does a salary have to be paid to the shareholder/employee, or can payment be made by dividends only? We have not found a clear answer to this question. To err on the side of caution, it would be wise for the shareholder to receive at least a portion of compensation via salary.
PHSP for Sole Shareholder Sole Employee
Technical Interpretation 2014-0521301E5 (pdf) issued by CRA on June 25, 2014 indicates that a plan for a sole employee-shareholder would not likely qualify as a PHSP since it does not contain the necessary elements of insurance. The conclusion of the interpretation is "Generally, where a sole shareholder is also the sole employee, CRA would consider the sole shareholder-employee to receive the benefits in his or her capacity as a shareholder unless he or she can demonstrate that employees, who are not shareholders, with similar duties and responsibilities to another corporation of a similar size receive similar benefits under a similar Plan."
Penalty Where Payment to Shareholder Does Not Qualify as PHSP Payment
If the payment of shareholder medical expenses does not qualify as a PHSP payment, this will be a taxable benefit to the shareholder, and will not be a deductible expense for the corporation, so there is double taxation of the amount. In the 2004 Tax Court case Spicy Sports Inc. v. the Queen, it was determined that a shareholder benefit had been conferred on a shareholder/employee when a large payment was made from a cost-plus PHSP.
Administration of the PHSP
There are many organizations which will set up and administer a PHSP for a business, often on a "cost plus" basis.
Payments made directly from an employer to an employee for reimbursement of qualifying medical expenses may qualify as PHSP premiums, where the employer is required by the employment contract to pay such expenses. It is essential to have the employment contract properly set up, and professional advice in this area is advised.
PHSP for Unincorporated businesses
Income Tax Act s. 20.01
Payments made by an unincorporated business (self-employed individual or partnership) to or under a PHSP may be deductible from business income, under S. 20.01 of the Income Tax Act, if
An unincorporated business cannot simply make payments directly from employer to employee, as this will not qualify as a PHSP. It is necessary to have an insurance plan or a "cost plus" plan through a third party. Further, if there are no employees covered by the PHSP besides the sole proprietor, the CRA's view is that a "cost plus" plan will not constitute insurance, so will not qualify as a PHSP. See Tax Interpretation 2001-0101935. The plan in place must be an insurance plan, not based on cost plus an administration fee.
The allowable deduction for PHSP costs for an unincorporated business is limited by S. 20.01(2) of the Income Tax Act. Where the business provides coverage under the PHSP to full-time arm's-length employees, and 50% or more of the employees of the business are arm's-length employees, the maximum allowable deduction for the sole proprietor and dependants will be equal to the cost of equivalent coverage under the plan in respect of the arm's-length employees.
Where there are no other employees, or fewer than 50% of the employees are arm's-length employees, the maximum allowable deduction for the sole proprietor and dependants will be an annual amount equal to the total of $1,500 for each of the sole proprietor, spouse, and dependants age 18 or more, plus $750 for each dependant under 18. Thus, for a sole proprietor with a spouse and 2 children under 18, the annual allowable deduction would be a maximum of $4,500.
Insured and Self-Insured Plans and "All or Substantially All"
See Tax Interpretation 2016-0651291E5 issued January 2019 regarding CRA's position regarding insured and self-insured plans and how they can satisfy the "all or substantially all" condition for a calendar year.
Canada Revenue Agency (CRA) Resources:- Warning: Buyer beware when it comes to Health Spending Accounts
- T4002 Business and Professional Income (unincorporated businesses) - search for Private Health Services Plan
- IT-529 Flexible employee benefit programs (Archived)
- Income Tax Folios:
- S2-F3-C2: Benefits and Allowances Received from Employment - as of May 24, 2019, currently under review
Revised: May 24, 2019
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