Private Health Services Plans AKA Health and Welfare Trust AKA Health Spending Accounts

While each of the above names are in fact slightly different they are all fairly interchangeable and they all have the same goal at heart; making medical expenses tax deductible.

Government likes a healthy electorate, so they encourage business to provide health benefits by making benefits tax preferred. Health and Dental benefits are tax deductible to a business, AND non-taxable to the employee. Health insurance is basically tax free!

I use the words Health and Welfare Trust in the image below, it works the same way.

Back in the day, insurance companies would only offer insurance to businesses with at least 10+ employees. This was a problem to most small businesses because it meant they couldn’t offer medical benefits. So along comes Mr. Taxman and creates the Private Health Services Plan (PHSP). A private health services plan is essentially a trust fund set up by a company to pay employee medical expenses. Because the business pays into a trust, it is tax deductible, and because the trust pays the medical expenses for the employee, the benefit is non-taxable. It is NOT insurance, once you run out of money in your trust you are on your own. PHSPs save a heck of a lot of money in taxes.


Some of the rules that apply to all PHSPs is that all claims must be adjudicated by a third party, typically a trust company or an insurance company. There are two reasons for this requirement: First, so privacy is maintained for employees. Secondly, so that all claims are verified eligible. These plan administrators usually charge a small fee, typically 10%, to push the paper and process the claim.

PHSPs are very flexible, they will pay for expenses that no insurance company will touch. Rather than use a plan design, (we will cover 80% of this drug but only 50% of that drug) any prescription, medical device, dental expense or vision care is eligible. What is and is not covered is dictated by the Income Tax Act, the Act is very vague and if you can justify it as a medical expense it is probably eligible.

Sample List of Eligible Expenses (PDF)

With the PHSP now any size business can provide health benefits to their employee’s. Incorporated business are essentially unlimited to how much they want to provide in benefit, unincorporated businesses such as sole proprietors have a few rules to follow.

Unincorporated
If you are unincorporated Canada Revenue has a harder time tracking your actual business income. Because of this they impose some strict rules to prevent money laundering. If you are unincorporated, your benefit cannot exceed the following

$1500 per year for yourself
$1500 per year for your spouse (if any)
$750 per dependent child (if any)

The average family of four gets $4500 in tax free medical and dental each year. Of note is that the money can be spent by anyone in the family, if you are greedy and want to spend $4500 yourself and let little Timmy’s teeth rot, you can.

Incorporated 
If you have employee's you MUST provide a "like benefit" which just means give them a piece of the pie as well. The rule of thumb is that no class of employee should receive more than 10 times the next class. So if you are the owner and want $10,000 your employees should all receive $1,000. If you don't you risk creating a shareholder benefit, which is taxable.



My providers
I use two providers, Olympia Trust and Quikcard. I use two because they suit different needs.

Olympia Trust is excellent for sole proprietors or single person companies. They allow payment to be sent in at the time of claim, rather than requiring a trust fund be prepaid. Downside, they charge almost $400 to set up a plan. Their administration fee is 10% of the paid claims.

Quikcard, has no setup fee but requires prefunding of a trust, this means writing a cheque for $1500 to $4500 at the beginning of the year or making monthly contributions, and letting them sit on it. If you don’t spend the money you can have it back, it is yours after all, but not a lot of people like letting go of that much cash if they don’t have too. Their administration fee is 12% of paid claims.


TL;DR: If you are self employed incorporated or not, with any medical, dental or vision care claims you can save a boat load of tax dollars with a Private Health Services Plan

Edit: April 1, 2011 - I have changed providers away from Benecaid and to Quikcard, as Benecaid has implemented a $95 per year fee which started on April 1, 2011 and they provided very little notice of this change.