The Hidden Gem of Canadian Tax Benefits: Health Spending Accounts

For Business Owners and Incorporated Individuals in Canada, managing medical expenses can be streamlined with the use of Health Spending Accounts (HSAs). This tool offers a plethora of benefits tailored for the self-employed and business owners, yet, many remain unaware of its advantages.

Understanding Health Spending Accounts (HSA)

For incorporated individuals, HSAs are a beacon of simplicity and financial efficiency. The standout feature? Every health and dental benefit channeled through this plan is tax deductible, eliminating the hassles of premiums, hidden charges, and complex policies.

HSAs: A Personalized Approach to Medical Expenses

For incorporated individuals, HSAs are not just about covering medical expenses; they’re about optimizing personal financial strategies. It can be approached in two ways:

1. For incorporated individuals, it’s a means to cover personal medical expenses.
2. For business owners with staff, it serves as an employee benefit.

Benefits for Businesses with Employees

Small businesses can leverage HSAs as a valuable employee benefits package. Unlike traditional health insurance, HSAs offer flexibility and cost control. They’re easy to set up, manage, and can be tailored to fit specific needs. Employees appreciate the tax-free, comprehensive, and adaptable nature of the benefit.

How It Works:

1. As the business owner, you set a yearly spending limit for your HSA, determining how much you wish to allocate for medical expenses.
2. When medical expenses arise, you pay out-of-pocket and later reimburse yourself tax-free from your corporation.
3. The amount received personally by you/the employee is tax-free
4. The entire claim reimbursed by the business becomes a tax deduction for the corporation, including the Admin fee. Note there is also 8% PST and 2% Provincial Premium Tax on the health claim amount only.
5. You have the freedom to claim any health and dental bills, and choose treatments without restrictions.
6. There is no need to fund the HSA unless a claim is being made
7. There are no premiums or deductibles with HSAs, ensuring your money is used solely for your medical needs.

Example of a $1,000 claim in Ontario

➤ Claim Amount: $1000

➤ Admin Fee: 10% or $100

➤ Premium Tax on Claim Amount and Admin Fee: 2% or $22

➤ PST on Claim Amount ONLY: 8% or $80

➤ HST on Admin Fee ONLY: $13

TOTAL = $1215.00

While this is more than simply paying $1,000 you must factor in the Pre-Tax withdrawal from your business. Assuming a marginal tax rate of 25%, you would need to withdraw $1,333.33 from your business to have $1,000 after tax.

The benefit of using the HSA?

$1,333.33 vs $1,215 = $118.33 in Savings

Note: The higher the tax rate the more beneficial it is to use a Health Spending Account.

Summary

For Business Owners and Incorporated Individuals in Canada, Health Spending Accounts (HSAs) offer a tailored solution to manage medical expenses. They provide tax deductions, freedom from premiums, and flexibility in choosing medical treatments. HSAs ensure that every cent is optimized for the individual’s benefit, making them a top choice for small businesses.