If the plan qualifies as a private health services plan, amounts paid for an employee's eligible expenses are generally not a taxable benefit. If it doesn't, or an owner receives the benefit as a shareholder, they generally are. Your accountant confirms the treatment.
Health Spending Account
Health Spending Accounts for Employers and Incorporated Owners
A Health Spending Account reimburses eligible health and dental costs up to a yearly amount set by the employer. It can suit a team with employees, but a one-person corporation carries real risk.
What It Is
What is a Health Spending Account?
A Health Spending Account (HSA) is an employer-funded plan that reimburses employees for eligible health and dental expenses, up to a set yearly amount. The Canada Revenue Agency (CRA) describes HSAs as self-insured health plans arranged by employers for their employees.
An employee pays the dentist or pharmacist, submits the claim, and the plan reimburses it. The employer pays as claims are made, plus fees.
It can stand alone or sit on top of insured coverage. See our group benefits overview and small business group benefits guide.
At a glance
- Employer-fundedA set yearly amount per person
- Must meet PHSP rulesOtherwise amounts are generally taxable
- One-person corporationsCRA says likely not a PHSP
CRA Rules
How does an HSA relate to CRA's private health services plan rules?
An HSA gets its tax treatment by qualifying as a private health services plan (PHSP). If it qualifies, amounts paid for employees are generally not a taxable benefit. If it doesn't, they generally are.
Some of this comes from archived CRA bulletins (IT-339R2 and IT-529), but CRA applied the same reasoning in 2022.
It must be insurance
The Income Tax Act defines a PHSP as a contract of insurance or a medical or hospital care insurance plan.
It needs real risk
There must be a reasonable element of risk. If there's little chance an employee won't collect the full yearly amount, CRA says the arrangement isn't insurance.
Only medical-type expenses
Covered expenses must be medical or hospital expenses or connected to them, and generally 90% or more must qualify for the medical expense tax credit.
No cash-outs
Employees can't withdraw the balance or move it to something like a group RRSP.
Who Qualifies
Who can be covered? Employee and arm's-length rules
An HSA is for employees, so the person claiming generally needs real employment with the business. Owners can be covered, but CRA asks whether they benefit as an employee or as a shareholder.
CRA generally presumes that an employee-shareholder who can significantly influence business policy receives a benefit as a shareholder, unless the facts show otherwise. CRA has said that can be overcome where the person is actively employed and the benefits are reasonable and consistent with what an arm's-length employee doing similar work would receive. If not, the benefit is generally added to the owner's income and the corporation generally can't deduct it.
| Your situation | General position | What to watch |
|---|---|---|
| Corporation with arm's-length employees | Can be eligible if the plan follows PHSP rules | An owner's yearly amount far above that of similar employees |
| Only the owner and family are employees | A question of fact, decided case by case | Comparability with non-shareholder employees at similar businesses |
| The only employee is the sole shareholder | A self-insured HSA likely isn't a PHSP | Taxable amounts and no deduction |
| Unincorporated, with at least one arm's-length employee | The owner and employees can be eligible | Separate deduction rules for sole proprietors |
| Sole proprietor, no arm's-length employees | CRA doesn't consider an HSA a PHSP | Not a deductible business expense |
Eligible Expenses
What expenses qualify?
Generally, the expenses that would qualify for the medical expense tax credit under section 118.2 of the Income Tax Act. Your plan's terms can be narrower.
CRA's guide RC4065, Medical Expenses has the full list, and many items have conditions. An expense reimbursed by the plan can't also be claimed for the credit.
Generally eligible
- Dental services, dentures and orthodontic work
- Prescription drugs recorded by a pharmacist
- Prescription eyeglasses and contact lenses
- Services from authorized medical practitioners, which vary by province
Generally not eligible
- Non-prescription medications, vitamins and supplements
- Fitness or athletic club fees
- Purely cosmetic procedures, including teeth whitening
One-Person Corporations
Can a one-person corporation have a Health Spending Account?
Some providers offer them, but this is the riskiest case. In 2022, CRA said a self-insured HSA for a sole shareholder-employee would likely not qualify as a PHSP.
At an industry roundtable that May (document 2022-0928901C6), CRA said the owner would likely be fully reimbursed each year, and the corporation they control could change or end the plan at any time. In CRA's view, the owner is effectively paying personal medical costs through the corporation, which assumes no risk.
A 2019 CRA tax tip, now archived, said corporations with as few as one employee can be eligible if the plan conforms to PHSP rules, but a 2014 CRA letter had already rejected a cost-plus plan for a sole shareholder-employee. These are CRA's views, not rulings on your facts.
If the plan fails, amounts are generally taxable to you, and the corporation may lose its deduction.
Before you sign
- Ask your accountant firstBefore any money moves
- Ask the providerWhich CRA position does the plan rely on, and who carries the tax risk?
- Consider insured coverageIt answers the insurance question, but not the employee or shareholder one
Is It Right for You
Who does an HSA fit, and what does it cost in Ontario?
You pay the claims, plus fees and taxes. Ontario guidance says 8% retail sales tax applies to claims paid under an unfunded plan, and 2% premium tax applies to benefits paid and administration fees. Ask for the all-in cost.
Often a good fit
- Small teams with arm's-length employees that want a set yearly cost
- Employers adding flexibility on top of insured coverage
- Incorporated owners with staff, covered on comparable terms
When it may not fit
- A corporation with only the owner, or only the owner and family, unless your accountant is comfortable
- Anyone needing protection from large claims, since payment stops at the yearly amount
- Owners who aren't actively employed by the corporation
Common Questions
Questions about Health Spending Accounts
It's the riskiest case. In 2022, CRA said a self-insured HSA for a sole shareholder-employee would likely not qualify as a private health services plan. Speak with your accountant before setting one up.
CRA's comments focus on whether you're actively engaged as an employee and whether your benefits are reasonable for that role. If you only take dividends, ask your accountant whether you can be treated as an employee for this purpose.
It depends on the plan. CRA accepts a carry-forward of up to 12 months, of either unused amounts or expenses but not both. Beyond that, unused amounts are generally forfeited, and employees can't cash out a balance.
We work with clients across Burlington, Oakville, Milton, Mississauga and Hamilton. Many first conversations start with a call to 289.339.8100.
This information is general in nature and is not tax, legal, accounting, insurance or investment advice. It is based on current Canadian tax legislation, which can change. Any strategy should be designed and reviewed with your accountant and legal advisors based on your circumstances. Plan terms, fees and eligibility vary by provider; the plan document governs.
Health spending accounts in Burlington, Oakville, Milton, Mississauga and Hamilton
Discuss Your Plan
See whether an HSA suits your business
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