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 and unincorporated businesses (Sole Proprietors, Partnerships and Independent Contractors) under the Income Tax Act,
  2. Why payments with respect to a PHSP are deductible to a corporation or an unincorporated business,
  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 and unincorporated businesses

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 or an unincorporated business

Unincorporated businesses and corporations are treated differently by CRA

Unincorporated businesses are subject to section 20.01 of the Income Tax Act which dictates specific criterion by which unincorporated businesses qualify for private health services plans and restrictions on amounts that may be claimed

Per ITA 20.01 PHSP premiums - Notwithstanding paragraphs 18(1)(a) and (h) and subject to subsection (2), there may be deducted in computing an individual's income for a taxation year from a business carried on by the individual and in which the individual is actively engaged on a regular and continuous basis, directly or as a member of a partnership, an amount payable by the individual or partnership in respect of the year as a premium, contribution or other consideration under a private health services plan in respect of the individual, the individual's spouse or common-law partner or any person who is a member of the individual's household if

  • a) in the year or in the preceding taxation year
    1. the total of all amounts each of which is the individual's income from such a business for a fiscal period that ends in the year exceeds 50% of the individual's income for the year, or
    2. the individual's income for the year does not exceed the total of $10,000 and the total referred to in subparagraph (i) in respect of the individual for the year,

on the assumption that the individual's income from each business is computed without reference to this subsection and the individual's income is computed without reference to this subsection and subdivision e; and

  • b) the amount is payable under a contract between the individual or partnership and
    1. a person licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada an insurance business or the business of offering to the public its services as trustee,
    2. a person or partnership engaged in the business of offering to the public its services as an administrator of private health services plans, or
    3. a person the taxable income of which is exempt under section 149 and that is a business or professional organization of which the individual is a member or a trade union of which the individual or a majority of the individual's employees are members.

(2) Limit - For the purpose of calculating the amount deductible under subsection (1) in computing an individual's income for a taxation year from a particular business,

  • a) no amount may be deducted to the extent that
    1. it is deducted under this section in computing another individual's income for any taxation year, or
    2. it is included in calculating a deduction under section 118.2 in computing an individual's tax payable under this Part for any taxation year;
  • b) where an amount payable under a private health services plan relates to a period in the year throughout which
    1. each of one or more persons
      • (A) is employed on a full-time basis (other than on a temporary or seasonal basis) in the particular business or in another business carried on by
        1. the individual (otherwise than as a member of a partnership),
        2. a partnership of which the individual is a majority interest partner, or
        3. a corporation affiliated with the individual, and
      • (B) has accumulated not less than three months of service in that employment since the person last became so employed, and
    2. ii. the total number of persons employed in a business described in clause (i)(A), with whom the individual deals at arm's length and to whom coverage is extended under the plan, is not less than 50% of the total number of persons each of whom is a person
      • (A) who carries on the particular business or is employed in a business described in clause (i)(A), and
      • (B) to whom coverage is extended under the plan,

    the amount so deductible in relation to the period shall not exceed the individual's cost of equivalent coverage under the plan in respect of each employed person who deals at arm's length with the individual and who is described in subparagraph (i) in relation to the period;

    • (c) subject to paragraph (d), where an amount payable under a private health services plan relates to a particular period in the year, other than a period described in paragraph (b), the amount so deductible in relation to the particular period shall not exceed the amount determined by the formula

    (A/365) x (B + C)

    where

    A - is the number of days in the year that are included in the particular period,
    B - is the product obtained when $1,500 is multiplied by the number of persons each of whom is covered under the plan, and

    • i. is the individual or the individual's spouse or common-law partner, or
    • ii. is a member of the individual's household and has attained the age of 18 years before the beginning of the particular period, and

    C - is the product obtained when $750 is multiplied by the number of members of the individual's household who, but for the fact that they have not attained the age of 18 years before the particular period began, would be included in computing the product under the description of B; and

    • (d) where an amount payable under a private health services plan relates to a particular period in the year (other than a period described in paragraph (b)) and one or more persons with whom the individual deals at arm's length are described in subparagraph (b)(i) in relation to the particular period, the amount so deductible in relation to the particular period shall not exceed the lesser of the amount determined under the formula set out in paragraph (c) and the individual's cost of equivalent coverage in respect of any such person in relation to the particular period.

(3 )Equivalent coverage - For the purpose of subsection (2), an amount payable in respect of an individual under a private health services plan in relation to a period does not exceed the individual's cost of equivalent coverage under the plan in respect of another person in relation to the period to the extent that, in relation to the period, the amount does not exceed the product obtained when

(a) the amount that would be the individual's cost of coverage under the plan if the benefits and coverage in respect of the individual, the individual's spouse or common-law partner and the members of the individual's household were identical to the benefits and coverage made available in respect of the other person, the other person's spouse or common-law partner and the members of the other person's household

is multiplied by

(b) the percentage of the cost of coverage under the plan in respect of the other person that is payable by the individual or a partnership of which the individual is a member.

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. The resulting treatment for corporations is more favourable but certain conditions have evolved:

  1. Unlike unincorporated businesses there are no restrictions on 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, although not necessarily collecting a salary
  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:

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 does 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

With Respect to Unincorporated Businesses T4002 Business and Professional Income
(page references below refer to the CRA PDF version)
http://www.cra-arc.gc.ca/E/pub/tg/t4002/README.html 
See Page 27 (right hand side one third of the way down the page) for private health services plans