Health Spending Accounts

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Did you know that you could make all of your health care expenses tax deductible?  

There are 3 ways to pay for health care expenses:

 1. Paying from your personal bank account (paying out of pocket)
2. Personal or group insurance with monthly premiums
3. Your company can pay these expenses by using a Private Health Services Plan (PHSP)

Paying Out of Pocket

The money we earn through our work, whether it is from an employer or through our own company, is taxed.  What would you have had to earn to pay $3,000 in medical expenses for your family?  If you earned $70,000 a year and had $3,000 in medical expenses you would have had to earn $4,478 to have $3,000 cash in hand after taxes.

You have the ability to write off a small portion of medical and dental expenses on your personal tax returns but it is very minimal. For example if you had a net income of $50,000 a year and had $3,000 in medical expenses you would have approximately $255 as an allowable deduction on your personal return.

Traditional Health and Dental Insurance

Traditional insurance is when you pay a monthly premium even if you never make a claim. If you do have a claim there is a good chance that you will still have to pay a deductible or co-payment; meaning you are rarely covered 100% for services you need.  For example, you may have 100% dental coverage but only on scaling, cleaning, fillings, examinations and polishing.  If you need a crown or some other specialty item you are only covered at 50%. What if your child needs braces?  Are they fully covered? Often not.  In reality you could be paying up to $1.60 for every $1.00 in health care expenses.  When you purchase health insurance you typically do so because you would like to be able to have your health and dental costs covered by the insurer, so you don’t have to take the money out of your own pocket.  Shouldn’t this mean that you would spend less money?  Actually you spend on average 60 cents over and above every dollar worth of benefits you receive.  If you end up using more coverage dollars yearly than you pay in premiums then your premiums will go up.

What is a PHSP?

A Private Health Services Plan allows you to expense your medical, health care and dental costs (for you and your employees) through your company.  In 1988 CRA (Canada Revenue Agency) stated that if your medical and dental benefits are administered through a third party arms-length administrator, they can be 100% tax deductible to your company.  These benefits are also tax free to your employees.  This means with a PHSP you are able to have an approved third party insurer administer your benefits plan and you have the maximum tax savings possible.

In some Health Spending Accounts, the company makes advance payments (incl. Administration Fees and Taxes) on behalf of Employees, for Health and/or Dental expenses. In other Health Spending Accounts, payments can be made on a "pay as you go" basis.

Eligible Claims are reimbursed to the Employee (must be a bona fide employee and not just a shareholder or unincorporated owner), and are non-taxable benefits for the Employee.  Expenses (Claims, Administration Fees and Taxes) are a 100% business deduction for the Employer.

Let’s compare the example used above where your family needed to earn $4,478 to pay $3,000 in medical expenses.  Using a PHSP instead, you would only need $3,339 including all taxes and administration. 

Your tax savings would therefore be $1139 or 25% compared to paying out of pocket.  If you earn more or spend more on medical, prescription drugs, vision, and dental, your savings would increase.  
Who is Eligible?

If you have an incorporated business or limited company you qualify. The size of your business does not matter. You could be the only employee or you could have numerous employees.

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