Howland Tax Services

Howland Tax Services International

Income Tax Preparation

Canada and the United States

Turn Your Medical Expenses into Deductible Business Expenses

Author: Brad Howland
First Posted: May 13, 2011

Many individuals with substantial medical costs do not see any tax savings at all. Here's how to use a Private Health Services Plan to make medical expenses fully deductible, if you are self-employed or own a business.

Taxpayers in Canada are allowed to claim a non-refundable tax credit for medical expenses on their income tax return. The credit is however limited by 3% of net income.

Let's take the simplified example of a single self-employed person, living in BC with no dependants, net income of $30,000/year, and no other reportable amounts. That person's 2010 tax return would have shown a balance owing of $5,974. Net income would be $28,688 after the deduction for CPP payable on self-employment earnings. 3% of $28,688 = $860.65, so there would be no tax credit for medical expenses unless they exceeded $860.65 during 2010 (or a twelve month period ending in 2010).

However, there is an entity called a Private Health Services Plan (PHSP), set up by the federal government to assist small business with this very problem. I'm familiar with two PHSPs that my clients are using: Cost Plus (Cost Efficient Benefit Plan) and BizFlex (I signed up my own business with Cost Plus).

Here's how they work:

You sign up with an independent Private Health Services Plan such as Cost Plus or BizFlex (you can't just create one on your own). There is an enrollment fee to sign up. You can sign up as a self-employed individual or a corporation – if self-employed, you will be considered an employee for the purposes of the PHSP.

You pay your medical expenses as usual. Your business then makes a payment to the PHSP to cover the expenses, plus an administration fee (both are tax deductible). The PHSP then sends you a tax-free reimbursement of the medical expense.

You deduct the payment to the PHSP as a private health services plan premium on your tax return, for example, on Line 9270 of Form T2125.

The amount you are permitted to run through the PHSP if self-employed is limited to $1,500/year for the taxpayer, plus $1,500 for a spouse and $750 per child. If your business is incorporated there is no limitation as long as the amounts are reasonable. Cost Plus indicates on their website that expenses paid for parents and grandparents could also be included.

Turning back to our example of a self-employed taxpayer who paid $860.65 for medical expenses in 2010: if a Cost Plus member they would have sent $860.65 + 8% admin fee = $929.50 to the plan, then been reimbursed $860.65. They are therefore initially out of pocket $68.85, but the entire $929.50 is deductible as a business expense, saving $288 in taxes. $288 - $68.85 = $219 overall savings, or roughly 25% of the original medical expense. Taxpayers in higher tax brackets could see higher savings, up to 32% or so.

(I haven't talked about GST in the above example, which is also payable to the PHSP but varies depending on location. GST paid to the PHSP could be recovered as an input tax credit if a registrant, or claimed as part of the income tax deduction.)

Private Health Services Plans aren't health insurance – there are no regular premiums to pay, and you still need to pay for your medical expenses – but they are a great way to realize some tax savings on those expenses, in effect making them lower!

Related Websites

Cost Plus (Cost Efficient Benefit Plan)

Canada Revenue Agency:
IT339R2 Meaning of "private health services plan"
IT85R2 Health and Welfare trusts for employees
Eligible medical expenses

The information on this website, and the use of this website, are both provided without warranty of any kind. Income tax rules change every year and some information may be out of date. All readers wishing to take advantage of the information offered here should consult a qualified income tax preparer. In no event will Brad Howland, Howland Tax Services, or this website be liable for any damages, including lost profits, arising out of the information offered on this website, or the usage of this website. All material on this website Copyright © 2001-2024 by Howland Tax Services, Inc. Please contact us for permission to use this material in any form. Website designed and maintained by Brad Howland.