Make medical expenses tax deductible with a private health services plan (PHSP)

It is well known that medical expenses are personal expenses. They are only eligible for a tax credit (not a deduction) for the amount over 3% of net income.It is relatively little known that you can write off medical expenses if you own a business with a private health services plan (PHSP), a structure that is allowed under Section 248(1) of the Canadian Income Tax Act (ITA) introduced in 1989.

Benefits are tax free to employees

A PHSP allows for the deduction of qualified medical expenses paid by a business for its employees and their family members. The benefits received by the employees are tax free. And there are no CPP or EI premium issues.

The benefits can be extended to include direct family members.

Tax saving depends on the marginal tax rate of the employee who receives the benefit. The higher the rate is, the more the tax saving is.

Eligible expenses under a PHSP are the expenses which qualify as medical expenses under the Income Tax Act (ITA).

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Some conditions must be met

Both incorporated (corporation) and unincorporated (self-employed or partnership) businesses are qualified to have PHSPs.

A PHSP must be made available for all full-time employees, but individual employee can opt out.

A PHSP can be set up for a corporation with only shareholders as employees. But benefits to shareholders will qualify only if the shareholders received the benefit in their capacity as employees.

There is annul deduction limit for unincorporated business with no employees, or 50% or more employees are family members.

Third-party administrator needed

You need a third-party administrator to set up and manage your PHSP. Depending upon the provider, the cost normally includes an initial one-time setup fee that can range from $200 to $300 and a claim fee of between five and ten percent of each underlying medical claim.

The eligibility of deduction starts when the PHSP is setup. Any expenses incurred prior to the PHSP will not be eligible.

PHSP and traditional group health insurance plan

A PHSP can be set up as a cost effective alternative to a traditional group health insurance plan. It can also work in conjunction with a group plan to deduct the expenses which are not covered by the group plan or limited in coverage.

The CRA changed position on private health services plans (PHSP)

 

Additional information