Do you own a small business corporation in Canada? Do you and your family receive wages from the corporation and have medical expenses?
If the answer to both of these questions is yes, you may want to consider the benefits of a private health services plan (PHSP).
What is a PHSP?
A PHSP can be a way to pay less overall tax. They are generally simple and relatively inexpensive to set up and they have a number of purposes, including creating a deduction to your company, giving your employees added incentive through non-taxable benefits, and drawing cash out of your corporation on a tax-free basis.
How a PHSP works
A PHSP is similar to a regular health insurance plan. It is set up through an administrator who runs the plan. You decide who will participate in the plan (this can be just your family members, or can be your arm’s-length employees as well). You decide what the medical expense expenditure limit will be for each individual who participates. When a member of the plan has a medical expense, they pay it and are reimbursed by the PHSP plan administrator. The corporation funds the plan and deducts an expense and pays and deducts an administration fee for the management of the plan.
Why a PHSP is beneficial
When you claim medical expenses on a personal tax return, the first $2,000 or so are not allowed – so this is money you have to take out of the corporation and pay tax on personally.
Medical expenses above the $2,000 range are credited at 22% on your personal tax return – not a full deduction against income. So if you take out $5,000 from the corporation to pay personal medical expenses, you only get a tax credit of about $650 (5000-2000 x 22%).
PHSP tax savings
A simple calculation of the potential tax savings in a PHSP can be calculated as follows:
– You save the high personal rate of income tax that you would otherwise pay by drawing income out of the corporation to pay medical expenses;
– You lose the 22% credit for personal medical expenses above $2,000;
– You pay approximately 10% as an administration fee to the PHSP fund administrator
There are a number of considerations when determining whether a PHSP is right for you. There are limitations on the amount of benefits that can be made available in specific situations, especially if there are no arm’s-length employees involved in the plan.
When finding a PHSP plan administrator, it is important to determine whether the relevant income tax act rules are being adhered to.
Written by: Chris Brien, CA