Information About Aquilian Benefits For Accountants

The Key Concept of a Private Health Services Plan (“PHSP”)

In most business transactions, Canada Revenue Agency expects taxation to be triggered at some point. Nevertheless, in the case of a PHSP, however, both the recipient (employee) and the employer (PHSP Planholder) escape taxation under the PHSP enabling legislation detailed below.

Under a PHSP, health care expenses become classed as tax-free medical plan reimbursements and not as a taxable benefits to the employee (except in Quebec).

All expenses incurred for the operation of a PHSP become tax-deductible to the business.

The Coverage

The expenses eligible for reimbursement are exactly those eligible for the personal Medical Expense Tax Credit (METC). The eligible expenses are quite broad and compare extremely well with ordinary employer health insurance. Additionally they are 100% tax-deductible and escape the personal tax threshold for the METC.

Our comprehensive list of eligible expense is found here.

The Benefit

If the cost of operating the PHSP is less than the employee’s personal tax savings, then an overall tax saving is achieved. This is particularly beneficial to one-person businesses where the benefit is obvious, significantly large, and immediate.

The saving with Aquilian Benefits is created by eliminating any use of the Medical Expense Tax Credit (“METC”) on the employee’s personal tax return and instead deducting 100% of all costs from business income.

The METC, when you must use it, is calculated first by disallowing the portion of eligible medical expenses that is less than the lesser of a specified threshold (Federal 2023 $2,635) and 3% of the individual’s net income for the year. Any remaining eligible expenses are multiplied by the lowest tax rate percentage for the year to determine the medical expense tax credit.

This means that you get no credit for the first $2,635 of 2023 medical expenses and if your expenses do exceed that amount, you get a credit of only about 20 cents per dollar, even if you are paying tax at the higher rates applied to higher income levels.

The Aquilian Benefits Plan puts all this tax back into your hands.

The Caveats

As always with Canada Revenue Agency, the reasonableness of the deduction claimed is very important. The planholder’s accountant is the best person to provide this advice. When no “arm’s-length” individuals are employed by the business the plan holder should be especially prudent. For self-employed sole proprietorships or unincorporated partnerships, there are annual restrictions on the dollar value of the deduction. See Subsection 20.01 of the Income Tax Act of Canada for details. These restrictions are relaxed if “arm’s-length” employees are included in the firm.

The Key Pieces of Legislation

The Private Health Services Plan (PHSP) offered by Aquilian Benefits Corporation is structured to qualify as a “private health service plan” as defined in Subsection 248(1) of the Income Tax Act of Canada.

The enabling legislation for a PHSP is discussed in the Canada Revenue Agency (“CRA”) Interpretation Bulletin IT 339R2. The Aquilian Benefits PHSP operates as a “cost plus” plan.

Incorporated businesses have had deductibility of health benefit plans for some time, but this was extended to self-employed sole proprietorships in 1998 with some restrictions. These restrictions are discussed in the Canada Budget Notes from 1998 and in Subsection 20.01 of the Income Tax Act of Canada. Do not believe anyone who tells you that the self-employed can’t use a PHSP!

The discussion of eligibility for claiming a specific health expense is discussed in the CRA Income Tax Folio S1-F1-C1: Medical Expense Tax Credit.

The tax free operation of a Private Health Services Plan (PHSP) for planholders and covered employees is specifically explained in CRA IT-85R2.

Some excellent information and examples for claiming PHSP expenses are provided by CRA in the T4002 Business and Professional Income Guide. The specific discussion of PHSP deductions can be found under line 9270 – Other Expenses.


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