Feb 2013

Personal Health Spending Account (PHSP)

Most employee benefits programs in Canada have limits and restrictions on their usage. And those without access to such plans, of course, pay for health care using their own money. The Private Health Services Plan (PHSP) is a government benefit that offers an excellent health care strategy for the self-employed or owners of an incorporated business.

Keep reading to learn more about the personal health spending account in Canada and how it works.

An Overview of the Personal Health Spending Account in Canada

With a PHSP in Canada, you are able to turn medical expenses and related costs into tax-deductible expenses. In short, medical and dental expenses are converted into a business expense, offering tax benefits. 

The list of allowable medical expenses can be found on the CRA website (www.cra.gc.ca) by searching “list of allowable medical expenses.” This is the same list accountants use to apply the medical expense tax credit to individuals who claim medical expenses on their tax returns. Claimable services include:

• Medical devices
• Dental Services
• Prescriptions
• Cosmetic Surgery
• Dentures
• Doctor, chiropractic, physiotherapy, naturopaths
• Eyeglasses
• Nursing services
• Co-insurance premium payment
• U.S. healthcare premiums

Tax Benefits of a PHSP in Canada

If you are claiming expenses on your income tax, it’s unlikely that the aforementioned services are included. Individuals currently apply for the “medical expense tax credit” on their income tax returns which credits a portion of medical expenses back.

The CRA will credit 15 percent of a taxpayer’s expenses back beyond the lesser of $1,925 and three percent of his or her net income for the tax year in question. Even if you apply all of your medical and dental costs via the credit, more savings are realized by utilizing a PHSP. 

For example:

• A self-employed individual making $100,000/year claiming $10,000 in expenses via a PHSP would save $1,398.11 compared to the same expenses being claimed on their income taxes
• A self-employed individual making $50,000/year claiming $6,000 in expenses via a PHSP would save $380.00 compared to the same expenses being claimed on their income taxes
• A self-employed individual making $200,000/year claiming $30,000 in expenses via a PHSP would save $5,724.00 compared to the same expenses being claimed on their income taxes

Generally speaking, higher-income earners can realize greater savings. If you are incorporated, a sole proprietor, or involved in a partnership, it is clear that money can be

saved by simply re-engineering your traditional health benefits program through this lesser-known strategy.

Additional Advantages of the Canada Health Spending Account

The PHSP advantages extend beyond tax savings. 

Pre-Existing Conditions Won’t Result in Denied Coverage

With no insurance underwriting involved, you can’t be turned down due to pre-existing conditions or poor personal health history.

More Cost-Effective Than Group Insurance

If you have group insurance in your business, a PHSP is often a viable and more cost-effective option. Group insurance requires guaranteed premiums regardless of plan use; reimbursed only when expenses are incurred.

In addition, contributions to a PHSP for an employee on behalf of an employer are excluded from an employee’s income. The employer can decide the level of benefits for the employees based on the criteria generated: skill level, years of service, title, etc.

In short, an employer can decide who gets to claim and how much.

The advantage to the business owner is that you can set the highest limits to the owners and shareholders as long as other employees are included in the arrangement.

Attract Top Talent for Your Company

A PHSP is a great way to attract and retain valuable employees. With no guaranteed premiums, it provides much of the value proposition contained in typical group insurance bundles, with nothing paid to insurance companies.

How to Make the Personal Health Spending Account Even Better

As a complement to the PHSP, consider buying inexpensive catastrophic insurance to protect against emergencies.

Modest premiums of about $10-$20 per month can transfer the staggering financial risk of getting sick to an insurance company. Some drug treatments can exceed $60,000 annually and can easily bankrupt someone without insurance. Pay the premiums through your PHSP.

Wait times for medical treatment reflect continuing challenges to Canada’s overworked and underfunded health care system.

One viable alternative is to seek medical treatments outside the country. Investigate insurance products designed to facilitate and provide treatments without the long waits and use your PHSP to pay the premiums.

Contact WEALTHinsurance.com to Learn More About the Personal Health Spending Account

If you’re interested in learning more about how the PHSP can benefit you, contact us here. At WEALTHinsurance.com, we specialize in helping Canadians maximize their finances in a way that protects them and their loved ones.

To learn more about how we’ve helped Canadians just like you with tax planning, estate planning, and much more.

Frequently Asked Questions

What is a health spending account in Canada?

A health spending account is a self-owned insurance plan employers create on behalf of their employees. It allows employers to provide tax-free health benefits.

Health spending accounts are also referred to as personal health spending accounts or private health services plans (PHSPs).

What is covered in a health spending account?

Health spending accounts are typically used to cover expensive medical procedures and treatments, including prescription medication, physical therapy, and equipment such as hearing aids.

Some additional expenses may be considered on a case-by-case basis.

Is a health care spending account worth it?

Health care spending accounts offer a number of important benefits for employers and employees. This includes tax benefits, savings on medical treatments, less restrictive coverage, and enhanced attractiveness of your company to qualified workers.

What happens to unused health care spending account money?

Unused health care spending account money belongs to the account’s owner (the employer who opened it). Unlike with health insurance premiums, this money is not considered lost if you never make a claim.

Do employees receive tax benefits for PHSP contributions?

Employees do not receive tax benefits when their employer makes PHSP contributions on their behalf. The primary benefit to employees lies in access to funds for health spending along with a lack of premiums.