Private Health Spending Accounts (PHSPs): A Smart, Tax-Free Health Benefit for Canadian Business Owners

A Private Health Spending Account (PHSP), also called a Health Spending Account (HSA), lets incorporated business owners pay for medical and dental expenses through their corporation, tax-free. Discover how GTA professionals and corporation business owners can use this CRA-approved plan to save on taxes while protecting their family's health.

For many incorporated business owners in the Greater Toronto Area, finding cost effective ways to cover health and dental expenses is a constant challenge. Traditional group insurance plans can be expensive and rigid, especially for small or family-run corporations. That's where a Private Health Spending Account (PHSP), also known as a Health Spending Account (HSA), can be a game-changer.

A PHSP allows your corporation to pay for eligible medical and dental expenses on a tax deductible basis, while you (and your employees) receive those reimbursements tax free. It's one of the most efficient and CRA-approved ways to turn corporate dollars into personal health coverage.

How a PHSP Works:

Your corporation sets an annual limit for each employee or class of employees, for example, $3,000 for staff and $8,000 for executives or owners.
The employee pays for eligible medical expenses personally.
They submit receipts to a PHSP provider or administrator.
The provider reimburses the employee and bills your corporation, which deducts the payment as a business expense.

This structure is simple, transparent, and designed to satisfy CRA requirements for Private Health Services Plans.

Who Can Benefit:

A PHSP is suitable for incorporated professionals and business owners across all industries, including:

Consultants, realtors, and IT specialists
Engineers, accountants, and lawyers
Family-run businesses, trades, and service companies
Medical and dental corporations
Owner-managers who want to cover their families tax-efficiently

If you have a corporation, even with one or two employees, a PHSP can help you convert after-tax personal health costs into corporate tax deductions.

Setting Contribution Limits:

CRA allows you to set different limits for different classes of employees, as long as it's reasonable and consistent. For example:

Executives or owners: $10,000 per year
Full-time employees: $3,000 per year
Part-time employees: $1,000 per year

The key is fairness and documentation, limits should be set in advance and applied consistently within each employee group.

Can You Change the Limit Each Year?

Yes, your corporation can revise PHSP limits from year to year, as long as the change is made prospectively (at the start of a new plan year) and applied consistently within each employee class. For example, you might increase the annual limit for full-time staff from $3,000 to $4,000 next year if your business performance allows it. Just ensure that the new limits are clearly documented and not adjusted mid-year to cover unexpected expenses, that could draw CRA scrutiny.

What to Avoid:

• Increasing limits mid-year to cover a large personal claim
• Offering one-time limits only for owners without a defined employee class
• Making frequent or inconsistent changes without a business justification

By keeping your PHSP structured, consistent, and well-documented, you can enjoy full CRA compliance while maximizing tax efficiency.

Eligible Medical Expenses:

Most expenses that qualify for the Medical Expense Tax Credit (METC) under the Income Tax Act are also eligible under a PHSP. This includes:

Dental and orthodontic treatments
Prescription drugs and medical devices
Vision care (glasses, laser eye surgery, etc.)
Chiropractic, massage, and physiotherapy
Private or semi-private hospital stays
Health insurance premiums not already claimed elsewhere

Key Tax Advantages:

Tax-deductible to the corporation: 100% of PHSP reimbursements are deductible business expenses.

Tax-free to the employee: Benefits are not included in taxable income.

No payroll deductions or CPP/EI implications.

No premium markups: You only pay for actual claims, plus a small administration fee.

In effect, you can use corporate pre-tax dollars to pay for personal or family medical expenses, a significant advantage compared to paying out-of-pocket after tax.

A Simple Example:

Suppose a Mississauga Physician operating a through a medical professional corporation (an incorporated business) and spends $4,000 a year on medical and dental costs for their family.

▪ If paid personally, they'd need to withdraw about $6,500 from the corporation (after corporate and personal taxes) to cover the same cost.
▪ With a PHSP, the corporation reimburses $4,000 as a deductible business expense, and the owner receives the benefit tax-free.
▪ That's roughly $2,500 in annual tax savings, depending on the corporate and personal tax rates.

Why More Business Owners Are Switching to PHSPs

Flexibility: You choose the coverage limit and eligible expenses.
Transparency: No hidden premiums or complex insurance pooling.
Employee attraction: Even a modest PHSP can make your compensation package more appealing.
CRA compliance: When structured correctly, PHSPs are fully recognized and legitimate under the Income Tax Act.

Key Takeaway

A Private Health Spending Account is one of the most tax-efficient and flexible health benefits available to incorporated business owners in Canada. Whether you operate a professional corporation or a traditional business, a PHSP can help you protect your family's health and lower your overall tax burden.

If you're considering setting up a PHSP for your business and have questions, Source Accounting Professional Corporation can help you answer questions you may have to ensure you stay CRA compliant.

Contact our office today to learn how you can pay for health and dental expenses through your corporation, the tax-smart way by calling at 647-930-8130.

At Source Accounting Professional Corporation, we help incorporated professionals and business owners across Mississauga, Toronto, Brampton, Oakville, and Milton design tax-efficient compensation and benefit structures — including Private Health Spending Accounts (PHSPs). Whether you're a consultant, medical professional, or traditional business owner, our CPA team can help you build strategies that maximize deductions while staying fully CRA compliant.

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.