Here is a fantastic article about health spending accounts from the Canadian Government.
Warning: Buyer beware when it comes to Health Spending Accounts
The Canada Revenue Agency (CRA) is always on the lookout for tax schemes and opportunities to warn Canadians about them. Lately, the CRA has noticed several businesses improperly claiming deductions related to Health Spending Accounts (HSA), and it wants to alert potential participants about this scheme.
What are tax schemes?
Tax schemes are plans and arrangements that contravene the Income Tax Act and deceive taxpayers by promising to reduce the taxes they owe. For example, these schemes may promise large deductions or tax-free income.
What are HSAs?
HSAs are self-insured health plans arranged by employers for their employees residing in Canada. They provide a way that small businesses can provide tax-free health and dental benefits to their employees (and their employees’ family members). This makes the HSA appear to be an extremely attractive and cost‑effective way of getting and providing health and dental benefits.
However, a valid HSA plan must conform to private health service plan rules set out in the Income Tax Act. The information below clarifies the rules on what are acceptable Health Spending Accounts.
What HSAs are acceptable
Incorporated businesses, including shareholder employees and all other corporate employees, are eligible to participate in an HSA. Corporations with as few as one employee can be eligible as well. However, the HSA cannot be solely for shareholders unless the shareholders are also employees earning a T4 income.
In the case of unincorporated businesses or sole proprietors, the owner and their employees are also eligible if the owner has at least one arm’s-length employee.
What HSAs are not acceptable?
Some insurance agents/brokers and financial planners are marketing HSAs to businesses operating as sole proprietorships that have no arm’s-length employees. Participants are told that they will be onside with meeting the Income Tax Act rules for private health services plans if they purchase additional types of insurance.
Bottom Line:
If the business is a sole proprietorship with no arm’s-length employees, the CRA does not consider an HSA to be a private health services plan and any costs incurred for amounts paid to this account are not deductible business expenses.
What can you do?
The CRA encourages all Canadians to seek an independent second opinion from a reputable tax professional on important tax matters.
If you suspect tax evasion, you can report it online at Canada.ca/taxes-leads or by contacting the Informant Leads Centre line at 1-866-809-6841. Steps will be taken to protect your identity, although you may provide information anonymously.
In addition, the CRA continues to encourage taxpayers to come forward and correct their tax affairs through the Voluntary Disclosures Program (VDP): Canada.ca/taxes-voluntary-disclosures.
For more information about misleading statements and myths about Canada’s tax laws, resources are available online at the CRA website: Debunking tax myths.
For more information on tax schemes, please go to Canada.ca/tax-schemes.
I have a choice to contribute money to a HSA or take the cash and pay tax on it. Expenses that exceed my group plan may be paid out of the HSA. Can I also use the same expenses that are not covered under HSA and claim them on my tax return?
Hi Sheila,
That is not an easy question to answer without allot more information that shouldn’t be made public …. i don’t know the details of your benefit plan nor your income situation to make a judgment call …i would speak to your financial planner to answer that question or at least the benefits broker….
good luck!
Really it is great to possess health spending account to enjoy benefit of tax deduction on expenses related to medical issue from dental to eye glasses. Rather than taking cash as salary and pay tax on it, it is better to make investment in health spending account and get health insurance and save tax on some medical expenses in future. I want to know what are the other expenses coming in the bracket of the HSA.
Hi Ryan,
Thanks for your comments. The beauty of this type of account is that the money is used for a wide variety of medical needs. I could fill up this page with a list. Here is a great little site that outlines how to claim and what kinds of services are covered: HSA.
Claudio
Hey Claudio thanks for sharing the link. Thats really a amazing site to gain some knowledge about how to claim HSA. Looking forward for more articles on HSA.
Thank you Ryan! I will be working on more soon!
I’m gone to convey my little brother, that he should also pay a visit this website on regular basis to
get updated from most up-to-date news update.
Health Spending Accounts for self employed sole proprietors (without arms-length employees) are absolutely not allowed by CRA, and can get owners in substantial financial difficulty if audited by CRA.
thanks for your comments!