Private Health Services Plan (PHSP)

A private health services plan (PHSP) takes advantage of Section 248(1) of the Income Tax Act of Canada. A private health service plan allows business owners to pay for their personal health and medical expenses tax free and deduct 100% of those expenses from their gross business income. The benefits are tax free to the employee and are tax deductible to the employer. There are no required monthly or annual contributions or premiums that have to be paid. A private health service plan can be used as needed for medical expenses, they offer tax savings to employees and business owners facing large medical bills.

Private health service plans are designed for privately held and unincorporated companies. A sole proprietor can establish a private health services plan (PHSP) for themselves and their family. If they have employees they would be required to offer themselves the same level of benefits as the lowest amount received by one of their employees. The rules for private health services plans are outlined in Canada Revenue Agency (CRA) bulletin IT-339R2 called “Meaning of Private Health Services Plan.”

The rules for contributions, fund rollovers and deductions are as follows:

1. 1. There is a cap on annual maximum contributions of $1,500 per sole proprietor, $1,500 per dependent over 18 years of age and $750 per dependent under 18 years of age.

   2. Contributions are pro-rated based on the tax year, meaning you can only contribute a pro-rated amount depending on when in the calendar year you make the contribution.

   3. Start date of the plan also limits the amount a company can deduct as a business expense.

   4. Funds contributed into the plan have to be used within a 24 month period, if not used they are forfeited to the third party offering the private health services plan (PHSP).

Premiums

The premiums for the benefits provided by a private health services plan, as defined by the Income Tax Act of Canada, qualifies as a business expense. A private health services plan is an insurance contract or plan that provides coverage for hospital and/or medical expenses. 

Private Health Service Plan (PHSP) for Sole Proprietor or Partner

A sole proprietor or partner is able to deduct premiums paid or payable to a private health services plan if the following conditions are met:

1. 1. Net income from self-employment (excluding losses and premiums for a private health services plan) for the current or previous year is more than 50% of total income, or

   2. Income from sources other than self-employment is $10,000 or less for the current or previous year,

   3. The sole proprietor or partner is actively engaged in their business on a regular and continuous basis, and

   4. The premiums are paid or payable to insure the sole proprietor or partner, their spouse or common-law partner, or any member of their household. 

Sole Proprietor or Partner Who Does Not Have Any Employees

A sole proprietor or partner with no employees is able to deduct up to a maximum of: 

1. 1. $1,500 for themselves,

   2. $1,500 for each of their spouse or common-law partner and household members that are 18 years of age or older at the start of the period when they were insured, and

   3. $750 for each household member under the age of 18 at the start of the period.

Sole Proprietor or Partner Who Has Employees

A sole proprietor or partner is not able to deduct any premiums for a private health services plan as a business expense if the employer does not offer coverage to the employees. Instead, the premiums may be claimed as a medical expense for the purposes of a medical expense tax credit.

A sole proprietor or partner can deduct premiums for a private health services plan for themselves, their spouse or common-law partner, or their household members based on the following criteria:

1. The percentage of insurable employees who are full-time arm’s length employees.

2. The cost of the coverage provided to each employee that would be equivalent coverage for the sole proprietor or partner.

3. The percentage of the premium for each employee that is paid by the sole proprietor or partner.

For more information please visit Canada Revenue Agency (CRA) IT-339R2 Meaning of private health services plan [1988 and subsequent taxation years].

Stone-Hedge Financial Group Inc. offers employee benefit plans from insurance companies and third party administrators. Plans can be customized to meet the specific needs of business owners and unincorporated professionals.

Contact Us to Set Up a Private Health Service Plan

The information provided on this web site is intended for general information only. It should not be construed as legal, accounting, tax or specific insurance and investment advice. Clients should consult a professional advisor concerning their situations and any specific insurance and investment matters. While reasonable steps have been taken to ensure that this information was accurate as of the date hereof, Stone-Hedge Financial Group Inc. and its affiliates make no representation or warranty as to the accuracy of this information and assume no responsibility for reliance upon it.