Making Self Employed Health Costs Fully Deductible in Canada
Prior to 1998, health, medical and dental insurance premiums paid by self-employed individuals in Canada for their own insurance coverage or for the coverage of their families were not deductible in computing business income. This placed such individuals at a disadvantage in relation to incorporated businesses, because corporations could deduct such premiums payable for insurance coverage on the owner-manager (as well as other employees).
Beginning in 1998, section 20.01 of the Income Tax Act (Canada) allows individual business proprietors, and individuals carrying on a business through a partnership, to deduct premiums payable by the individual or partnership under a private health services plan in respect of the individual and family members living with the individual, within certain monetary limits described. (As of the 2001 taxation year, this includes premiums paid in respect of same-sex partners.) The premiums must be payable in respect of the year in order to be deductible in that year.
Here is how the plan works:
- The individual pays for the health services. Eligible health services include all health insurance premiums plus any amount which would be deductible under the Medical Expense Credit section of the Income Tax Act - Section 118.2.
- Expenses are submitted to a third party administrator (generally a company licensed to conduct the business of insurance in Canada), together with a payment for the expense plus an administration fee charged by the trustee.
This total disbursement is a deductible expense to the self employed individual or partnership.
- The third party administrator reimburses the individual for the health expenses incurred. This receipt is not taxable to the individual, since it is merely a reimbursement.
- Any amount claimed through the PHSP as a health expense reimbursement cannot also be used as a medical credit on the individual's tax return.
- In order to claim the deduction, the individual's total business income, including business income earned through a partnership, for fiscal periods ending either in the current taxation year or in the preceding year must exceed 50% of the individual's total income for that year. Alternatively, the deduction is allowed if the individual's income from other sources (other than businesses) in the current year or in the preceding year does not exceed $10,000. For these purposes, the individual's income from each business is computed before the deduction under section 20.01, and the individual's income from other sources is computed without reference to the deductions allowed in sections 60 to 66.8 of the Income Tax Act (RRSP, and other deductions.)
A number of Canadian trust companies administer PHSP plans. For further information, please contact us.