A Private Health Services Plan (PHSP), commonly called a Health Spending Account (HSA), lets your corporation pay for your family's medical expenses as a 100% tax-deductible business expense. You receive the benefit completely tax-free.
No premiums. No deductibles. No copays. No insurance company deciding what's covered.
It's one of the most straightforward tax planning tools available to Canadian business owners. And yet, most of the clients we work with at Jones & Cosman have never heard of it until we bring it up.
This guide covers everything you need to know: how PHSPs work, who qualifies, what's covered, how much you'll actually save, and the critical mistakes that can trigger CRA problems.
Important Disclaimer: This article is for general educational and informational purposes only. It does not constitute financial, tax, legal, or professional advice. The information presented is theoretical in nature and may not apply to your specific situation. Tax rules change frequently, and individual circumstances vary widely. Always consult with a qualified accountant, tax professional, or financial advisor before making any decisions about health spending accounts, compensation structures, or tax planning strategies. Jones & Cosman CPA accepts no liability for actions taken based on the contents of this article.
What is a Health Spending Account (HSA) in Canada?
A Health Spending Account is a CRA-approved arrangement that allows a Canadian corporation to reimburse its employees (including owner-employees) for eligible medical expenses. The reimbursement is a 100% tax-deductible expense for the corporation and a 100% tax-free benefit for the employee.
The formal CRA term is a Private Health Services Plan (PHSP), defined under section 118.2(2) of the Income Tax Act. You'll also see it called a Health Care Spending Account (HCSA). These are all the same thing: different names used by different providers for the same CRA-approved structure.
Important note for Canadians searching "HSA": A Canadian HSA is completely different from an American HSA. In the U.S., an HSA is a personal savings account with tax-advantaged contributions. In Canada, an HSA is an employer-funded plan where the corporation pays the expense directly. There is no personal contribution, no investment component, and no annual contribution limit in the American sense. If you've been reading U.S. financial content, reset your expectations. The Canadian version works differently.
The underlying mechanism is called the "cost plus" model. Your corporation pays the actual cost of the medical expense, plus a small administration fee to the HSA provider (typically 5-10%). That's the entire cost. No monthly premiums, no per-person fees, no deductibles.
Here's how the money flows:
- You or a family member incurs an eligible medical expense (dentist visit, prescription, therapy session)
- You pay out of pocket and get a receipt
- You submit the receipt to your HSA provider
- The provider reimburses you from your corporation's account
- The corporation deducts the full amount (expense + admin fee) as a business expense
- You receive the reimbursement tax-free. It does not appear on your T4.
That's it. No claims adjudication, no coverage limits set by an insurance company, no waiting periods for pre-existing conditions.
Who Can Set Up a Health Spending Account?
Not every business structure qualifies equally. The rules depend on whether you're incorporated or operating as a sole proprietor, and how you pay yourself.
Incorporated Businesses (Including One-person Corporations)
If you operate through a Canadian corporation, you have the most flexibility. Your corporation can establish a PHSP that covers you, your spouse, and your dependent children. This works even if you're the only employee of your corporation.
The key requirement: you must be an employee of your corporation, not just a shareholder. This means you need to be on payroll and receiving T4 income. This is where it gets important.
The Salary vs. Dividend Requirement (This is Critical)
Many incorporated business owners pay themselves entirely through dividends because dividends avoid CPP contributions and can be more tax-efficient in certain brackets. That's fine for general tax planning. But it creates a problem for PHSPs.
If you only pay yourself dividends and no salary, you are not technically an employee of your corporation. You're a shareholder. And a PHSP is an employee benefit. If CRA reviews your file and sees a corporation claiming