Vital’s approach to Health Benefit Plans is based on the concept of a Health Care Spending Account, which is eligible for favourable tax treatment as a Private Health Services Plan (PHSP). We offer PHSPs that cover the complete range of a business owner’s family health costs, thereby maximizing the tax deduction from business income without creating a taxable benefit in the hands of the recipient. 

Private Health Services Plan

The term “Private Health Services Plan” is defined under the Income Tax Act (Canada) (ITA). It is a plan in the nature of insurance that provides coverage for health and dental expenses as specified in S. 118.2 (2) of the ITA. This is the same list of broadly-defined health care expenses that is eligible for the Personal Medical Tax Credit. Certain government-sponsored health insurance plans are specifically excluded from the definition of PHSP. IT Bulletin 339R2 expands on the interpretation of PHSPs “Medical and hospital insurance plans offered by Blue Cross and various life insurers, for example, are considered private health services plans”.

Many employer-sponsored health benefit plans are managed by a third-party administrator on an Administrative Services Only (ASO) basis. This means that the employer does not pay insurance premiums to an insurer. When claims are received by the administrator, they are invoiced to the employer along with an administration fee and the applicable taxes. An ASO Plan may involve the employer providing funds on deposit with the administrator to pay claims on receipt, or not, as the case may be. This type of plan can also be referred to as a ”Funded Benefit Plan”, an “Unfunded Benefit Plan” or a “Cost-Plus Plan”. Provided they meet the requirements of the PHSP definition, such employer-sponsored plans also qualify as PHSPs.

Health Care Spending Accounts

A Health Care Spending Account (HCSA) is a different approach to meeting health care expenses than a traditional health insurance policy. Rather than having a detailed list of eligible coverage, the accountholder has a pre-determined amount of funding which may be used to meet any family health expense listed under S. 118.2(2). Each accountholder can use the funding to meet his or her own family needs. Properly structured HCSAs also meet the definition of PHSPs.

Health Insurance

We believe that insurance should be available to cover serious unanticipated risks, rather than routine health maintenance. Vital Health Savings Plan has arranged to provide an exclusive low-cost health insurance policy from SSQ Insurance Company Inc. for participating members of Vital Health Savings Plan. The SSQ Policy covers core medical expenses beyond a $2,500 annual deductible amount per person.

We recommend that the SSQ Policy coupled with an HCSA provides the best combination of effective risk management, tax-efficiency and overall minimum cost.

Income Tax Treatment

The technical side of Canadian income tax treatment differs for self-employed persons compared to those who are officers or employees of a corporation.

Tax Treatment for Officers or Employees of a Corporation

Employees are covered under a well-established section of the Income Tax Act, S. 6 (1) that provides that benefits received under certain defined employee health plans, including PHSPs, will not be a taxable benefit to the employee. This is true, despite the fact that the cost is deductible to the employer as a cost of employee compensation. This section is quite general and allows for flexibility in the design of Corporate Benefit Plans. There are several IT Bulletins that relate, notably:

• IT339R2 which expands on the definition of “private health services plan” (PHSP)
• FOLIO S1-F1-C1 (formerly IT519R2) which discusses all the different health expenses that are eligible to be reimbursed from a PHSP or claimed for a personal medical tax credit
• IT529 which describes how flex-benefit programs must be structured in order to be eligible as a tax-free benefit

In order to avoid adverse tax consequences, employer-sponsored plans must provide benefits to individuals in their capacity as employees and not as owners. The benefits must also be reasonable in the context of an arm’s length employee benefit plan.

TAX TREATMENT FOR SELF-EMPLOYED PERSONS

Prior to the 1998 Federal Budget, self-employed people could not deduct the cost of their own benefit plan. In that year, S.20.01 of the Income Tax Act was introduced to allow a limited deduction against self-employed business income for the cost of PHSP premiums. The rules are detailed and complex, and essentially require the following main provisions:

• The plan must be administered by an insurance company, a trust company, or a third-party administrator of benefit plans
• If there are employees in the business, the self-employed person cannot deduct more than the cost of equivalent coverage of each of the employees
• If there are no employees, the amount the business owner can deduct is subject to an overall annual limit based on the family household; i.e. the aggregate of:
  • $1500 for the individual,
  • $1500 for the spouse,
  • $1500 for other family members over 18 years old, and
  • $750 for children under 18.

As an administrative practice, Canada Revenue Agency has stated that it will not accept Cost-Plus Plans for self-employed business owners because they do not carry a requisite degree of risk to meet the PHSP definition.