PHSPs: Medical & Dental Coverage for Businesses
Did you know that personal medical expenses can be claimed through a
business and not be deemed a taxable benefit?
Revenue Canada allows for owner-operators to set up what is called a Private Health Services Plan (PHSP). Under a PHSP, the company can reimburse an employee for reasonable medical expenses which are tax deductible to the business and not a taxable benefit to the employee. There potentially is a significant tax saving as compared to the regular personal medical expense credit system. For instance, on a $5,000 medical item, there is roughly a $1,300 tax savings. This results from avoiding the medical credit threshold and also from the difference, if any, between one’s marginal tax rate and the lowest marginal tax rate.
In order to take advantage of this, there are some guidelines:
- Although not required, it is recommended that the obligation of coverage be set out in writing (i.e. terms of employment)
- The coverage provided must be reasonable. You need to consider if you would provide the same coverage to non-related employees, otherwise, a taxable benefit could arise. Limits for each employment category must be established.
- The medical items relate to yourself, your spouse and/or your children
- The nature of the allowable medical expenses parallels those deductible on a personal tax return
There are two fundamental concepts overlaying this Plan. First, three parties are involved: the company, the employee and the provider of the health service need. Second, PHSP is an insurance scheme, like life insurance, meaning that both the payer and the payee bear unknown risk annually as to what costs they will bear. The company’s annual risk is to bear costs between zero and whatever the employee limit is. The employee bears risk if large medical costs exceed the company limit.
The nature of the allowable medical expenses parallels those deductible on a personal tax return. CRA applies a “big stick” here: if any medical costs have been reimbursed under a PHSP which aren’t deductible under the Tax Act, the whole PHSP will be disallowed. Starting in 2015, an “error” rate of up to 10% of such reimbursements is allowed.
PHSPs can be set up by proprietorship entrepreneurs as well, but with some extra complications.
In order for medical expenses to be deductible for a proprietorship or partnership, PHSP coverage must be incurred under a contract with one of the following:
- An insurance company
- A trust company
- Person/Partnership in the business of administering PHSP’s, or
- Tax-exempt trade union, business or professional organization in which you are a member
The tax impacts are the same as that of an incorporated business above except that there are annual dollar limits as follows:
- $1,500 for owner
- $1,500 for spouse, common law partner and children 18 years and older when insurance began
- $750 for each child under 18 at the start of insurance
The annual limits are prorated for actual days insured. Any undeductible amounts can be included as medical expenses on the personal tax return.
To qualify for these deductions, the guidelines discussed above for incorporated businesses are applicable in addition to the following conditions:
- Your net income from self-employment (excluding losses and PHSP deductions) for the current or previous year is more than 50% of your total income. Total income is defined as the amount from line 150 on your tax return less employment-type deductions to arrive at net income for tax; or
- Your net income from sources other than self-employment is $10,000 or less, for the current or previous year.
If you have employees, similar coverage must be extended to them to take advantage of the above (in either case). Please contact us if you are in this situation.