Private Health Services Plans for Physicians or Medical Professionals 

Private Health Services Plan or Health Spending Account – Tax-Free Benefit for Employees

The benefits paid by an employer to an employee are taxable as income, except for some exemptions allowed by the Income Tax Act of Canada. One such exception is the payment to or under a Private Health Services Plan (PHSP) or Health Spending Account (HAS).

A business may deduct PHSP payments made on behalf of employees and their dependents. These payments are not taxable to the employees, and there are no CPP or EI premiums charged on these payments.

The Canada Revenue Agency (CRA) considers that a plan is a PHSP as long as all or substantially all (generally, 90% or more) of the premiums paid under the plans are for medical expenses such as prescriptions, medical, dental, vision care, and hospital expenses.

What is a PHSP? How does it work?

The Private Health Services Plans is much more economical than health coverage obtained for employees through a traditional group health plan. Because the monthly premium for a group health plan is based on the risk assessed regardless of the actual expense. In PHSP, the employer only pays when there is an actual medical expense. Also, since the PHSP is designed specifically for an employer’s needs, it is much more flexible.

Typically, a PHSP is set up through a third-party service provider. The employer will contract with the PHSP provider to cover certain medical costs as defined in the employment contract on a “cost-plus” arrangement.

As the employee, or one of the family members, incurs a medical expense, they pay for it out of their pocket and submit the medical receipt to the employer. The employer issues a cheque to the PSHP provider for the expense, plus an administration fee of a certain percentage of the costs (10% in most cases). The PSHP provider in turn will reimburse the employee for their actual costs and keep the administration fee.

This arrangement can also be more cost-effective if it was paid for directly by the employer rather than going through a third-party service provider. As per the CRA, such payment may qualify as PHSP. As noted in paragraph 7 of Interpretation Bulletin IT-339R,  “This occurs where the employer is obligated under the employment contract to reimburse such expenses incurred by the employees or their dependents. The payments given by the employer is considered to be the employee’s covenants as found in the collective agreement or the contract of service.”

Both incorporated (physician or medical professional corporations and unincorporated businesses (self-employed proprietors, partnerships) can have Private Health Services Plans, but there is a different requirement for each. The treatment for corporations is more favorable than that for unincorporated businesses.

There needs to be a corporate policy document describing the coverage for each employee (or employee group). Also, there should be a coverage limit, otherwise, it might not qualify as PHSP.

PHSP for shareholder-employee 

Payments for medical expenses of shareholders (of a physician corporation or a medical professional corporation) will only qualify if the shareholder received the benefit in his/her capacity as an employee, not as a shareholder. To qualify as an employee;

1) the shareholder must be actively engaged in day-to-day business and

2) benefit must be reasonably commensurate with what would be offered to an employee who is not a shareholder.

PHSP for sole shareholder sole employee

CRA’s recent Technical Interpretation indicates that a plan for a sole employee-shareholder would not likely qualify as a PHSP since it does not contain the necessary elements of insurance. Unless a shareholder-employee can demonstrate that employees, who are not shareholders, with similar duties and responsibilities to another corporation of a similar size receive similar benefits under a similar Plan.

Penalty where payment to shareholder does not qualify as PHSP payment

If the payment of shareholder medical expenses does not qualify as a PHSP payment, this will be a taxable benefit to the shareholder, and will not be a deductible expense for the corporation, so there is double taxation of the amount.



PHSP for unincorporated businesses

PHSP for Unincorporated businesses (self-employed individuals or partnerships) need to meet certain conditions for a payment to qualify as PHSP such as;

1. business actively must be carried out on a regular and continuous basis
2. more than 50% of the individual’s total income for the year is from the business
3. income in the year from sources other than the business does not exceed $10,000

An unincorporated business cannot simply make payments directly from employer to employee, as this will not qualify as a PHSP. It is necessary to have an insurance plan or a “cost plus” plan through a third party.

If you are a physician, dental surgeon, or other medical professional and need assistance with tax filing, tax planning, accounting, and bookkeeping, the Source Accounting Team will be happy to help. Please get in touch with us at info@sourceaccounting.ca or call 647-930-8130 for further details.

    

Disclaimer: The above contents are provided for general guidance only, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. It does not provide legal advice, nor can it or should it be relied upon. Please contact/consult a qualified tax professional specific to your case.