Private Health Services Plans for Non-Incorporated Businesses and Sole Proprietors
Since 1998, under the direction of then Finance Minister Paul Martin, the PHSPs have been available to non-incorporated businesses and the self-employed so that health and dental related premiums and charges can be deducted from taxable income. In order to utilize a PHSP, the CRA mandates that sole proprietors include an insurance element in their plan. This can include Stop Loss Insurance or another insurance product. Your PHSP administrator or broker can assist you in creating the plan that will best cover your health and dental needs.
"Since the early 1960s the way we work and we live have dramatically changed. People are leaving the traditional workplace and setting up home offices in increasing numbers, enjoying the many advantages of being home-based.
"These people, however, have not been afforded the same benefits and income tax considerations that incorporated companies, small or large, have enjoyed - until now!"
Paul Martin - excerpts from the 1998 budget
In addition, the following must apply to the sole proprietor or unincorporated business wishing to develop a PHSP:
- The individual is actively engaged in the company on a regular basis
- Excluding PHSP benefits, in the current or preceding taxation year at least 50% of the individual's income was generated by the company
- Any income generated from outside of the company must not exceed $10,000
Amounts payable unter the PHSP must be payable uner a contract between the taxpayer [fn 209] and:
- a licensed trustee,
- a licensed insurer,
- a public administrator [fn 220] of which the taxpayer is a member, or a trade union of which the taxpayer or a majority of the taxpayer's employees are members [fn 223].
For Sole Proprietors
- The individual must be actively engaged alone or as a partner in business.
- Self-employment must be the individual's primary source of income in the year (more than 50 per cent) or income from other sources cannot exceed $10,000.
- Equivalent PHSP coverage must be extended to all full-time arm's-length employees; this normally means non-family members. Anti-avoidance rules will ensure that this condition cannot be avoided by using a management company to hire employees.
- PHSP contributions will be deductible to a maximum of $1,500 for a qualified applicant and plus $1,500 for a spouse. There is an additional amount of $750 per child. However, if the child is attending a recognized educational institution, their limits will be raised to $1,500 from age 18 to 25. These limits are to be inclusive of fees. This is an actual family limit and not attributed per individual family member.
- PHSP costs will be deductible only if the plan is purchased from a third party in the business of selling insurance or if the plan is operated by a trustee who is in the business of operating such plans.
- Where a deduction for PHSP cost is claimed, the amount will not also qualify for medical expense tax credits. The benefits for the average business owner are best shown through the following examples: Taxpayers in the 26 per cent federal tax bracket (based on the 1996 B.C. tax form) would have to earn $167.52 before paying a S100 medical or dental expense. Taxpayers in the 29 per cent federal tax bracket would have to earn $203.79 before paying the same S100 expense.
Visit the T4002 - Business and professional income section of the CRA website and search "PHSP" for additional information on the plan structure for the unincorporated business.
For additional information on PHSP structure visit the following CRA links or see other related pages available on the Canada Revenue Agency website. Bear in mind that the Income Tax Act is constantly amid change, and thus it is in your best interest to discuss your PHSP structure with a qualified third party administrator or broker.
- The meaning of 'private health services plan' (1988 and subsequent taxation years): IT339R2
- Medical expense and disability tax credits and attendant care expense deduction: IT519R2-CONSOLID
- Flexible employee benefit programs: IT529
- Health and welfare trusts for employees: IT85R2