Tax Commentary

The Health Plan offers a standard private health services plan, as provided in paragraph 6(1)(a) of the Income Tax Act (Canada) (the Act), which provides that the value of such receipts are not taxable to an employee. Payments on the other hand made by a corporate employer on behalf of an employee to a private health services plan are tax deductible.

As long as amounts paid are reasonable, or extended equally to arm’s length employees the working of this type of arrangement in well known to financial advisors. If the amounts are unreasonably large and not extended to arm’s length employees there is a risk that Canada Customs and Revenue Agency will attempt to categorize the payments as not made to the owner of the corporation in their capacity as an employee, but in their capacity as the controlling shareholder of the corporation and thus taxable as a benefit conferred on a shareholder and perhaps not deductible to the corporation making the payment.

The Health Plan goes on to provide a mechanism which is less well known in the financial community, namely the exploitation of subsection 20.01 of the Act, which extends effectively the same treatment available to incorporated businesses to the self-employed after 1997. Put simply this new regime allows the self-employed individual to participate in a private health services plan for themselves, their spouse, and members of their household. The self-employed business person gets to deduct amounts paid to The Health Plan, within the limits specified by this new provision and there is no tax inclusion, for themselves, their spouse or members of their household who are reimbursed for medical/dental expenditures. The annual deductible amount is $1,500 for the self-employed individual, their spouse and adult members of their household and $750 for members of the household less than 18 year of age at the beginning of that year.

To the extent that such coverage is extended to more arm’s length employees by the self-employed individual, than to themselves and those that they are related to, and if such coverage is greater than that noted above, then the deductible amount, both for arm’s length and related parties of the self-employed individual, can be increased.

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