If your business is incorporated and based outside Quebec, you have a unique tax saving opportunity.
It’s a Health Spending Account, sometimes called a PHSP, and it allows your company to reimburse you and employees’ out-of-pocket medical expenses, tax free.
Health Spending Account Helps Save Business Taxes
Many families have around $3,000 per year in out-of-pocket medical expenses. This might be dental bills, prescription drugs, even premiums paid out-of-pocket to non-provincial health insurance plans, such as Blue Cross Personal.
Without a Health Spending Account, you would have to take $4,300 or more out of your company to end up with the $3,000 to pay for these expenses. At the end of the year, you could try claiming the $3,000 back on your personal income tax; but typically this would save you almost no taxes! CRA will disallow the first portion of any amount, and will only credit you at the lowest marginal rate for the rest.
With a Health Spending Account, you would claim your out-of-pocket medical receipts from the Health Spending Account. Your Health Spending Account provider must evaluate each receipt for eligibility according to CRA’s rules. Your company will then be invoiced for the approved amount, plus a small administration fee (typically 10% of the approved amount), and the approved amount will be paid out to you. GST/HST will be charged only on the admin fee.
In this way, your $3,000 out-of-pocket medical expenses will cost your company only $3,300 via the Health Spending Account, instead of $4,300 or more! With or without a Health Spending Account, the money for your out-of-pocket health expenses is probably coming out of your company anyway; so you might as well save the taxes. Tax savings can easily be $2 to $4 per person per day. Your company can invest its savings back into the business, or pay it out to you as additional salary – either way you’ll come out ahead.
How to Save Taxes with a Health Spending Account PHSP- Lots of Medical Expenses Qualify
A long list of health expenses are eligible, including dental, vision care, prescription drugs and almost any service performed by a registered practitioner (including massage therapy, laser eye surgery, Dr Bernstein weight loss and much more). In fact, far more expenses are covered than by typical insurance!
If you are growing your business and adding employees, this is also the cheapest way to provide them with employee benefits. Traditional group insurance is hard to find for smaller companies, and far more expensive than a Health Spending Account.
Tips on Finding a Good Health Spending Account Provider
A good Health Spending Account provider will allow your company to control precisely what it’s willing to spend on health benefits. It will allow you to categorize your employees, and apply different spending limits to each category. It will have systems in place that ensure that employees won’t be reimbursed for more than your budgeted amount, and will provide you up-to-the-minute reporting on benefit usage.
When choosing a provider, also make sure that they have been reviewed by international tax and accounting firms for 100% compliance with CRA rules, that they have an on-line system and that they guarantee proper review of each medical receipt.
PreTax Health is a good Health Spending Account provider in Canada. Their Health Spending Account is entirely on-line, very comprehensive and compliant with CRA rules, as reviewed by a large international accounting firm. (A company representative from PreTax Health indicated that they were full compliant with CRA rules; for further information on compliance matters, please contact PreTax Health directly).
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.