One of the perks of being an employee, in many cases, is that your employer will provide health insurance benefits. Whether they pay for all of the premiums or only a portion, this can help to mitigate the costs significantly. Although, Canadians do have the luxury of Medicare, this is often inadequate and as anyone who has ever waited in an emergency ward can attest, may require you to take days off just to have your condition diagnosed (if one wants to look at this positively, it can be a great time to catch up on the classics). While the discussion of our Medicare system is a discussion for another time and another blog, the point is that having health insurance of some variety can help make the process a lot less painful. If you are self employed or a small business owner, however, the cost of health insurance can be prohibitive as you do not benefit from having a policy covering a group of people (thereby spreading the cost which is essentially how insurance companies work). On a personal level, Revenue Canada does provide for a tax credit, but this is only beneficial if your costs exceed 3% of your taxable income (up to approximately $2,000). Additionally the federal credit only reduces your income taxes payable by 15% of the excess of medical expenses over the three year threshold. Eg. if your taxable income is $50,000 and your medical expenses are $2,000, your net federal reduction to your taxes payable is$2000 –( $50,000X3%) = $500X 15% = $75.00. This is very small relative to the actual expenses incurred.
So, how can a small business owner or self employed individual convert their medical expenses into business expenses? The answer is to use what is known as a Private Health Insurance Plan or a PHSP.
What is a PHSP?
A PHSP is a health services plan that puts small business owners who do not have a health insurance on equal footing with businesses/corporations that do. Small business, by subscribing a to PHSP can essentially convert their medical expenses into tax deductible expenses.
How Does it Work ?
After you sign up with a PHSP, you may submit a claim, at any time to the PHSP along with the original receipts, and payment of the full amount of the expense + an administration fee . The PHSP then reimburses the business for the full amount of the expense in the same way as a health insurance provider.
How is it Different from Health Insurance?
Health insurance providers generally charge a fixed premium per employee, whereas with PHSPs you are charged for exactly the amount of expenses that you incur + a fee (usually a percentage of the cost). With health insurance, actual expenses incurred will almost never be identical to premiums paid as it is impossible to predict with accuracy the exact amounts.
What are the Benefits of PHSPs?
You only pay for medical expenses incurred
Expenses become tax deductible. In the example above you would reduce your income taxes by $75 for $2,000 worth of medical expenses. With a PHSP, assuming that your marginal tax rate is 22%, you would reduce your income taxes payable by 22% of $2,000 which is $440. The difference of $365 represents a substantial savings.
There is no taxable benefit to the employees or owners who are covered.
PHSPs allow insurance for your spouse and family members, subject to certain limits.
This method allows you to designate a fixed amount that each of your employees can spend during the year. For example you can allow your employees to submit $500 per year in medical expenses. This allows you to control the costs and provide them with a tax free benefit.
Conventional insurance plans can be expensive for small business owners or self employed individuals while still having restrictions.
There a number of costs that are covered including dental, physician, psychologists, massage and occupational therapists, lab services and prescription medications to name a few. A full list can be found here.
What are the Detriments of PHSPs
There is an administration fee, which is generally charged a percentage of the medical expense incurred. This can range from 5% to 15% depending on the PHSP.
When submitting your claim, you also have to submit a payment for the amount of the expense. Although this amount is usually promptly (within a few days) reimbursed, this can be problematic from a cash flow perspective.
Sole proprietors are limited to $1,500 of expenses per year. However, spouses can also claim $1,500 and children may claim expenses up to $750 each.
If you anticipate medical expenses during the year, are a small business owner or a sole proprietor and do not have health insurance, this one is almost a no brainer as except for a sign up fee (which is tax deductible), there are no additional costs. More importantly the tax benefits are almost always significant and as demonstrated above can result in substantial savings. Finally, although you may not have the opportunity to catch up on the classics in the hospital ER, it might make you feel better about incurring medical costs that allow you to saveyours and your employees’ time, which in some cases can be more valuable.
A list of providers and comparative fees can be found at the Brock Health website
For further info on this please see the CRA IT Bulletin IT-339R2
Ronika Khanna is Montreal accountant who helps small businesses achieve their financial goals. To receive regular updates of articles pertaining to small business, accounting, tax and other topics of interest to business owners you can sign up here. You can also follow her on Facebook or Twitter.