Extended Health On Pre-Tax Income
A colleague once told me that as business owners, from a CRA perspective, we are given the keys to a Ferrari and yet we drive it like a compact car! A Health Spending account is one of those powerful tools that are only afforded to business owners. They transform health, dental & vision expenses from an after tax cost to you personally to a full tax deduction within your corporation.
There are two basic types of plans; one that is prefunded and another that is a pay as you go.
With a prefunded plan, as an employer you deposit a fixed amount per employee into an account with a third party administrator to be used for various expenses. The amounts then sit there until a claim is made by the employee. The claim is made directly to the administrator and charges the employer a small fee to do this. Both the fee and the amount deposited are fully deductible to the employer as a business expense. This plan is nice because you make a onetime lump sum deposit and don’t have anything else to do. The downside is that you are required to make a large cash payment and if the employee doesn’t use the funds within 2 years the deposit is non-refundable.
The pay as you go plan works like this:
$1,000 of approved expense incurred personally (requires $1,400 of income withdrawn from the business if you are at a 40% tax rate)
Complete form and send payment from the business to the Administrator with fees ($1,055 – fully tax deductible for the business)
Administrator sends $1,000 to the employee’s personal bank account
Your total out of pocket expense is the tax you paid on the income you paid yourself! These are nice because it is a pay as you go and don’t have to worry about large cash injections and don’t risk losing the funds if claims are made. There is a one-time fee to set up this program.
While Health Spending accounts are called many things (Health & Welfare Trusts, Private Health Spending Accounts to name a few) they operate in the same manner as described above. It is a very simple and powerful tax planning tool.
Submitting a claim is simple, and many providers have online systems to help streamline the process. It works like this:
Your business submits the employee’s claim that includes the original receipts and a company cheque for the amount of the receipts plus the cost of processing. The cost of processing ranges from 5% – 10% plus tax. Once the claim is processed your business deducts the entire cost. The Administrator (the company whom you have the plan with) then issues a tax-free reimbursement to the employee.
For as little as 5% of the amount of the claim a third party Administrator can convert personal health and dental expenses into a deductible business expense.
This strategy is available to incorporated businesses or sole proprietors with employees. Unfortunately you don’t qualify if you do not have employees. This is because there isn’t any element of risk as a one person sole proprietor. That said, one-person corporations do qualify with the CRA guidelines but the total costs must be reasonable, that is, you can only remit an annual amount that you would allow an unrelated employee to claim. The total amount available ranges between $6,000-$10,000 per year per family member. Yes, you can have your spouse and children on this plan as well!
One of the big questions we are asked is what can go through the plan. Any medication prescription by a medical doctor and filled at a pharmacy (must have a DIN), vision care including glasses & contacts, and most dental expenses including major procedures such as braces & implants. Paramedical services are also allowed such as chiropractic, massage, and visits to Naturopathic Doctors. Also, treatments received in an ND’s office are included but regular supplements purchased are not. This could be very beneficial to your practice as your patient may be more willing to have a treatment if they know it will go through their plan!
Be sure to include your accountant when you decide to move ahead with this type of plan so they can ensure the expenses are recorded properly.
This article was written by Sindy Billan, SB Wealth Solutions and Christine Lang, BA (Econ), CPA, CGA LANG Financial Consulting & Wealth Solutions Ltd. The information in this article are presented for general knowledge and the content should not be relied upon as containing specific financial, insurance , tax or legal advice. Practitioners must seek their own independent professional advice to discuss their personal circumstances before implementing this type of arrangement.
SBILLAN Wealth Solutions Inc. doing business as SB Wealth Solutions
LANG Financial Consulting & Wealth Solutions Ltd.