Do you own a small business corporation in Canada?
Do you and your family receive compensation 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).
Private Health Services Plan
A Private Health Services Plan (PHSP) is an alternative to group insurance plans. It allows an employer to provide its employees with tax-free benefits in the way of paid medical expenses. It can also be an effective way to reduce corporate income taxes, and draw funds from your corporation tax free.
How It Works
A PHSP is relatively simple and inexpensive to implement. At high level, the mechanics are:
- The employer chooses an amount to assign to its employees; amounts can vary between different employee “classes” (eg. $1,000 for staff and $2,000 for managers, etc).
- The company selects a PHSP plan administrator who will manage the allowable limits and reimbursements to employees. Having an administrator reduces administration time in the company, helps maintain a level of confidentiality for the employees and usually costs less than a 10% administration fee.
- The employee chooses how to spend their benefit limit, within certain parameters of course (described below). An employee can choose to spend their benefits in a way that suits their family’s needs – all on dental, or just massages, or prescriptions, or any combination of qualifying medical expenses.
1. All the expenses covered by the PSHP must be for medical or hospital expenses, or expenses incurred in connection with a medical or hospital expense (ie. medical travel).
2. All or substantially all of the premiums paid (generally considered as greater than 90%) must be for medical expenses that would otherwise qualify for the medical expense tax credit.
For a list of common eligible medical expenses go to Eligible medical expenses you can claim on your tax return.
Additionally, any amounts paid under the plan must be for one or more of the following:
a) The employee
b) The employee’s spouse
c) The employee’s dependents (a member of the household to which the employee is connected by blood, marriage, or adoption)
In the case of an employee/shareholder:
• The benefit must be received by the shareholder in their capacity as an employee, not a shareholder
• The shareholder must be actively engaged in the activities of the corporation
• The benefit must be reasonable and consistent with what an ordinary, non-arm’s length employee would receive
• If the premiums paid on behalf of a shareholder do not qualify as PHSP payments, they will then be considered a taxable benefit to the shareholder
Benefits of a PHSP
• Amounts paid under the PHSP can be deducted in calculating business income, thereby, reducing the corporate tax expense
• It provides a cost-efficient way of giving your employees tax free benefits – this can increase job satisfaction and overall employee retention
• A PHSP often costs much less than traditional insurance plans
• It allows plan users the discretion to choose how they spend their medical benefits
• As a shareholder, a PSHP can reduce your personal taxes, as illustrated in the following example:
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 your business. 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.
This type of plan can benefit many small and medium sized businesses. If you are interested in implementing a PHSP or have further questions about this type of plan, you can reach out to your accountant to discuss further.
Written by: Laura Kristian, CPA