Information for Accountants
The Private Health Services Plan (PHSP) and Health Spending Account (HSA) plan offered by Direct Reimbursement Associates Ltd is structured to qualify as a “Private Health Services Plan” (PHSP) as defined in Subsection 248(1) of the Income Tax Act of Canada. The enabling legislation for these plans is discussed in the Interpretation Bulletin IT-339R2. Additional references given in that document are paragraphs 6(1)(a), 18(1)(a), 118.2(2)(q) and 118.2(3)(b) of the Act. Direct Reimbursement Associates Ltd plans operate on the “cost plus” model. We do not offer the more complicated Health Trusts.
Incorporated businesses have enjoyed the deductibility of health benefit plans for some time, and this was extended to self-employed sole proprietorships in 1998, with some restrictions. These restrictions are discussed in the Canada Budget Notes from 1998 and in Subsection 20.01 of the Act.
The discussion of eligibility for claiming a specific health expense is discussed in the Income Tax Folio S1-F1-C1.
The tax-free operation of a Private Health Services Plan for planholders and covered employees is specifically explained in Income Tax Folio S2-F1-C1.
Some excellent information and examples for claiming PHSP expenses are provided by the CRA in the T4002 Business and Professional Income Guide. The specific discussion of deductions can be found under line 9270 – Other Expenses, on page 24.
A New Position on Private Health Services Plans came into effect on January 1, 2015. "The CRA's old position was that all medical expenses covered under a plan had to be eligible for the METC [Medical Expense Tax Credit] for the plan to qualify as a PHSP." The "CRA now considers that a plan is a PHSP as long as all or substantially all" of the expenses relate to medical expenses that are eligible for the METC. "Substantially all" means 90% or more [in dollar terms] of each claim must be eligible for the METC according to the CRA website.
The Key Concept
In most cases, Canada Revenue Agency expects a service business to trigger taxation at some point in a transaction. In the case of Private Health Services Plans, both the claimant (employee) and the planholder (employer or business owner) escape taxation under the enabling legislation shown above.
Under a PHSP health care expenses become classed as tax-free "medical plan reimbursement" - and not a taxable benefit - to the employee. A PHSP and any expenses incurred for its operation become tax deductible to the business as these expenses are made to reward and retain employees critical to its objective of earning a profit.
Normally a benefit with respect to a PHSP would be conferred on an individual as a shareholder and included in income. Revenue Canada has reversed this position with regard to PHSPs. CRA indicated that "when equivalent coverage under a private health services plan is extended to all employees, including the employees who are shareholders, the benefit provided to the employee-shareholders from such coverage is normally considered to be an employment benefit rather than a shareholder benefit".
If all employees of the corporation are shareholders, CRA states: "... the benefit from such coverage is also considered to be an employment benefit rather than a shareholder benefit. In such a case, the benefit is not included in the employee-shareholders' income by reason of the exclusion in subparagraph 6(1)(a)(i) of the Act, and the corporate employer is entitled to a deduction in respect of the contributions made for such coverage ...". For further details see the Technical Interpretation No. 9815645.
The eligible expenses are quite broad and often compare better than premium-based insured health plans carried by many employers which have co-pays, restrictions, limitations and outright exclusions. Also, the eligible expenses are 100% deductible (including the administration fee) and have no percentage coverage amounts or threshold of 3% of taxable income as in the Medical Expense Tax Credit (METC). The CRA issued a new position on Private Health Service Plans on Jan 1, 2015 which allows up to 10% of any single claim to be for non-METC health expenses.
As always with Canada Revenue Agency, the reasonableness of the deduction claimed is very important. The Planholder's accountant is the best person to provide this advice. When no “arm’s length” individuals are employed by the corporation the reasonableness should be especially prudent. For self-employed sole proprietorships or unincorporated partnerships, there are restrictions on the dollar value of the deduction. See Subsection 20.01 of the Income Tax Act of Canada for details. These restrictions are considerably relaxed if “arm’s length” employees are employed by the firm and covered by the plan.
The Accountant's Benefit
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