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Private Health Service Plans (PHSP) for Canadian Businesses

250.590.5747

Information for Accounting Advisors

Coast Mountain Benefits Inc. does not sell insurance nor do we look at private health services plans  (PHSP's) as an extension of an insurance product. Since we are owned and operated by a CPA, CA, we structure our PHSP's with Canada Revenue Agency ("CRA") in mind. We maintain a KNOTIA tax library and receive daily emails from KNOTIA detailing changes in the CRA landscape which we filter for information relevant to private health services plans and the medical expense tax credit.

Private health services plans are not cookie-cutter simple. At Coast Mountain Benefits we do not believe it is possible to properly set up and document the private health services plan until we get to know the business. We believe that the number one key to establishing a PHSP that qualifies under the Income Tax Act, is appropriate documentation. The second is establishing a plan that is tailored to your business circumstances. What is good for one company may not be right for your company in the eyes of CRA.

The following information on this webpage is intended for professional accounting advisors to assist them in assessing whether private health services plans are right for their clients. This webpage is not intended to be a substitute for professional advice, as each person's situation differs.

This webpage is organized as follows:

  1. How private health services plans are available to corporations under the Income Tax Act,
  2. Why payments with respect to a PHSP are deductible to a corporation,
  3. Why payments to employees are received tax free, and
  4. A Listing of Canada Revenue Agency resources.

At the highest level...

  1. A Private Health Service Plan is defined in section 248(1) of the Canadian Income Tax Act
  2. A deduction to the business is allowed under section 18(1)(a)
  3. Payment from a PHSP is excluded from an employee's income in Income Tax Act section 6(1)(a)(i)

Here are some details

How private health services plans are available to corporations

A Private Health Service Plan is defined in section 248(1) of the Canadian Income Tax Act (ITA)
Per ITA 248(1)
"private health services plan" means

(a) a contract of insurance in respect of hospital expenses, medical expenses or any combination of such expenses, or
(b) a medical care insurance plan or hospital care insurance plan or any combination of such plans,

except any such contract or plan established by or pursuant to

(c) a law of a province that establishes a health care insurance plan as defined in section 2 of the Canada Health Act, or
(d) an Act of Parliament or a regulation made thereunder that authorizes the provision of a medical care insurance plan or hospital care insurance plan for employees of Canada and their dependants and for dependants of members of the Royal Canadian Mounted Police and the regular force where such employees or members were appointed in Canada and are serving outside Canada;

Why payments with respect to a PHSP are deductible to a corporation

Incorporated businesses are subject to section 18(1)(a)

Per ITA 18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

General limitation

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

This is a general provision allowing for any deduction so long as it is for the purpose of gaining or producing income from a business. The treatment of private health services plans with respect to corporations has evolved over the years with IT-339R2, income tax rulings and tax court judgements.

  1. There is no limit to the amount that can be deducted by a corporation in respect of private health services plans, however the deduction and corresponding benefit to the employee must be reasonable and consistent with what would be offered to an arm's length employee providing similar services
  2. Payments to the employee must be as a result of a contract of employment
  3. The private health services plan cannot be arbitrarily cancelled by the employer
  4. Shareholders who are employees can be members of a private health services plan but
    • the benefit as an employee must be reasonable and consistent with what would be offered to an arm's length employee providing similar services
    • the shareholder must be actively engaged in the business activities of the corporation as an employee receiving T4 income
  5. Annual private health services plan limits of employees need not be the same. The corporation can set up different limits for different employee groups

Why payments to employees are received tax free

Payment from a PHSP is excluded from an employee's income in Income Tax Act section 6(1)(a)(i)

Amounts to be included as income from office or employment

6.(1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable

Value of benefits

(a) the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment, except any benefit

(i) derived from the contributions of the taxpayer's employer to or under a registered pension plan, group sickness or accident insurance plan, private health services plan, supplementary unemployment benefit plan, deferred profit sharing plan or group term life insurance policy,
(ii) under a retirement compensation arrangement, an employee benefit plan or an employee trust,
(iii) that was a benefit in respect of the use of an automobile,
(iv) derived from counseling services in respect of

(A) the mental or physical health of the taxpayer or an individual related to the taxpayer, other than a benefit attributable to an outlay or expense to which paragraph 18(1)(l) applies, or
(B) the re-employment or retirement of the taxpayer, or

(v) under a salary deferral arrangement, except to the extent that the benefit is included under this paragraph because of subsection 6(11);

Other Canada Revenue Agency Resources include:

Warning: Buyer beware when it comes to Health Spending Accounts
CRA press release discusses requirement for shareholders to receive T4 income and requirement for sole proprietors to have employees
https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2019/warning-buyer-beware-when-it-comes-to-health-spending-accounts.html?utm_source=news&utm_medium=email&utm_campaign=not_applicable&utm_content=0003 

T4130 Employers' Guide - Taxable Benefits and Allowances
(page references below refer to the CRA PDF version)
http://www.cra-arc.gc.ca/E/pub/tg/t4130/README.html 
See Page 29 (bottom left halfway down the page) for private health services plans

IT 339R2 Meaning of private health services plans
(currently in archive document on the CRA website but still referred to in current folios. At this point it is to be replaced by a CRA folio)
http://www.cra-arc.gc.ca/E/pub/tp/it339r2/README.html

Income Tax Folio 1 Chapter 1 Medical Expense Tax Credit
http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s1/f1/s1-f1-c1-eng.html

Income Tax Folio 1 Chapter 1 Health and Welfare Trust’s
http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s2/f1/s2-f1-c1-eng.html#N1022E 
Section 1.5 for private health services plan

Canada Revenue Agency Webpage – What’s New
New position of private health services plans – Questions and answers
http://www.cra-arc.gc.ca/whtsnw/tms/phsp-rpam-eng.html