Private Health Services Plan (PHSP) for Business Owners

A Private Health Services Plan, or PHSP, is the tax-efficient way for a Canadian business to pay for medical and dental expenses. The business deducts the cost. The people covered, including an owner who draws a salary from their own corporation, receive the reimbursement tax-free. The alternative, which most owner-operators default to, is paying the dentist out of personal income that has already been taxed.

The catch is that “PHSP” is a set of CRA conditions, not a product on a shelf. A group benefits policy can be a PHSP. A Health Spending Account can be a PHSP. A badly set-up reimbursement scheme that looks like either can fail the test and turn a deduction into a taxable benefit.

This guide is for incorporated owners, sole proprietors and partners in Ontario who want to know what qualifies, how the money flows, what it costs to run, and when a PHSP beats a group plan or a personal health plan. It’s general information, not tax advice; an accountant should sign off on your set-up.

What makes a plan a PHSP under CRA rules

The Income Tax Act defines a PHSP as a plan in the nature of insurance for hospital, medical or dental expenses. CRA’s administrative position adds the practical tests:

• Substantially all of the spending must be on eligible medical expenses. Since 2015, CRA’s position is that all or substantially all (generally taken to mean 90% or more) of the premiums or benefits paid under the plan must relate to expenses that qualify for the medical expense tax credit under section 118.2(2) of the Act. That list is long: prescription drugs, dental, vision, paramedical practitioners, medical devices, certain travel for treatment, and much more. Gym memberships, vitamins and cosmetic procedures generally don’t qualify.
• It must be a plan, not a one-off. There has to be an undertaking by the business to cover expenses, with terms set in advance. Reimbursing an employee’s dental bill because they asked nicely, with no plan document, doesn’t qualify.
• It must be in the nature of insurance. There’s an element of risk-sharing: the business commits to pay up to a limit whether or not claims come in.

When those conditions hold, two things follow. Contributions or premiums the business pays are a deductible business expense, and the benefits employees receive are excluded from their income under the employment-benefit rules. If the plan fails the conditions, the same amounts can become a taxable benefit to the employee, or a shareholder benefit to an owner.

The two ways to set up a PHSP

Insured group benefits

A traditional group health and dental policy from an insurer is a PHSP. The business pays the premium; the insurer pays claims according to the schedule of benefits. For a business with several employees who want predictable, comprehensive coverage, it remains the standard.

Self-insured Health Spending Account

An HSA-style PHSP replaces the insurer with an allocation. The business decides how much each employee (or class of employee) can claim in a year, say $2,500. The employee pays the dentist, submits the receipt to a third-party administrator, and the business reimburses it once eligibility is verified. Nothing is paid unless a claim is made. There’s no underwriting, no exclusions for pre-existing conditions, and the employee chooses what to spend the money on.

Our separate Health Spending Account guide goes deeper on HSA mechanics. The rest of this article focuses on the PHSP questions that come up for owners specifically.

How the money flows, step by step

For an incorporated owner with an HSA-style PHSP, a typical year looks like this:

1. The corporation adopts a written plan with a third-party administrator, setting an annual limit per employee class. The owner-employee is in a class.
2. The owner’s family has $1,800 in dental work and $600 in prescriptions during the year.
3. The owner submits receipts to the administrator.
4. The administrator verifies eligibility, and the corporation pays the $2,400 plus the administrator’s fee (and, in Ontario, applicable retail sales tax on the benefit amount and fee).
5. The corporation deducts the total as a business expense. The owner receives the $2,400 with no tax reported.

Compare that with the default: the owner pays $2,400 from salary or dividends that were taxed on the way out, so the corporation would have had to pay out considerably more for the family to have $2,400 in hand. The medical expense tax credit softens this a little, but it only applies above an income-based threshold and at the lowest tax rate, so it recovers a fraction of what a PHSP saves.

Sole proprietors and partners: the deduction has limits

Unincorporated businesses can also deduct PHSP premiums, but under a specific provision with conditions and caps. Generally, you qualify if:

• you’re actively engaged in the business, and
• either your income from self-employment is more than 50% of your total income for the year, or your income from other sources is $10,000 or less.

When the business has no arm’s-length employees enrolled in the plan (which describes most solo operators), the deduction is capped. The commonly cited limits are $1,500 per year for you, your spouse and each household member 18 or older, and $750 for each household member under 18, prorated by the number of days covered. If you do have arm’s-length employees on the plan, the limit is instead tied to what’s reasonable relative to the coverage they receive.

Amounts above the cap aren’t lost; they can generally be claimed as a personal medical expense for the tax credit instead. The two treatments can’t overlap on the same dollar.

In practice, a sole proprietor with modest family medical costs gets most of the benefit through this deduction, while one with high medical spending may find the caps limit the advantage. Incorporation opens up the fuller treatment, but that’s a decision for you and your accountant, not a reason to incorporate on its own.

The sole-shareholder question

This is where owners most often get into trouble. If a corporation’s only covered person is its owner, CRA may argue the benefit is received in the person’s capacity as a shareholder rather than as an employee. Shareholder benefits are taxable to the recipient and not deductible to the corporation, which is the worst of both worlds.

Practices that accountants generally recommend to support the “employee” characterization:

• A written plan document adopted by the corporation, in place before claims are made.
• The owner draws a salary (T4 income) from the corporation, evidencing an employment relationship.
• Reasonable limits. An annual allocation that’s proportionate to the owner’s role and compensation. A limit that looks like a device to pull money out of the corporation tax-free draws attention.
• Third-party administration, so eligibility is verified independently and there’s a claims record.
• If the corporation later hires employees, they’re included in the plan on terms that are defensible relative to the owner’s.

None of this is a guarantee, and CRA’s positions evolve. Ask your accountant how they want the plan structured before you sign anything.

What a PHSP costs to run

An insured group plan costs the premium, set by the insurer based on plan design, headcount, ages and the group’s claims history.

An HSA-style PHSP has no premium. The cost is the claims themselves plus the administrator’s fee, typically a small percentage of each claim, and sometimes a set-up or annual fee. Ontario’s retail sales tax generally applies to benefit amounts and fees under a self-insured plan, and the administrator normally collects it. Because nothing is paid until someone claims, a business with low medical usage can run a PHSP for very little.

This is why many owners choose an HSA-PHSP at small headcounts: it lets the business set a hard annual budget.

PHSP vs group benefits vs a personal plan

	HSA-style PHSP	Insured group plan (also a PHSP)	Personal health plan
Who pays	Business	Business (often shared with employees)	Individual, from after-tax income
Tax treatment	Deductible to business; tax-free to employee	Deductible to business; health & dental portion tax-free to employee	Premiums may qualify for medical expense tax credit; self-employed may deduct within limits
Underwriting	None	Usually none for small groups above a minimum size; some plans ask questions	Medical questions, or guaranteed acceptance with lower limits
Cost predictability	Claims only, up to the limit you set	Fixed premium, adjusted at renewal	Fixed premium
Coverage for a large claim	Capped at the allocation	Insured up to the plan maximums	Insured up to the plan maximums
Best for	Owner-operators and small teams with variable needs	Businesses wanting comprehensive, predictable benefits for a team	Individuals with no business, or as a base layer under an HSA

A common combination for an incorporated owner is a personal health and dental plan plus an HSA-PHSP. The personal plan covers big, unpredictable costs (an expensive ongoing drug, major dental), and the HSA reimburses the personal plan’s premium, which is itself an eligible medical expense, plus everything the plan doesn’t fully cover.

What a PHSP does not do

A PHSP is a tax wrapper for health and dental spending. It doesn’t replace the other protection an owner needs:

• It won’t replace your income if you can’t work. That’s disability insurance and, for owners, business overhead expense coverage; see disability insurance for business owners.
• It won’t pay a lump sum on a serious diagnosis. That’s critical illness insurance.
• It won’t fund a buy-sell agreement or protect the business against a partner’s death. See life insurance for business owners.

Common mistakes we see

• Reimbursing without a plan. Paying an owner’s dental bill from the corporate account with no plan document is not a PHSP. It’s a shareholder benefit waiting to be assessed.
• Covering non-eligible items. Gym memberships, supplements and cosmetic treatments can push the plan past the “substantially all” threshold and jeopardize the whole arrangement.
• Assuming any HSA product qualifies. Ask the administrator how the plan meets CRA’s conditions and get it in writing.
• Forgetting the sole-proprietor caps. Deducting $6,000 of premiums for a family of four with no employees will be reassessed.
• Missing the personal plan underneath. An HSA alone leaves a family exposed to a large drug or dental bill above the allocation.

If you’re weighing a PHSP against a straightforward personal plan, health and dental insurance for the self-employed in Ontario lays out the individual-plan side.

How Hayes can help

We work with Ontario business owners on the insured side of this picture: personal and small-group health and dental plans from 30+ Canadian insurers, and the disability, critical illness and life coverage a PHSP doesn’t touch. We can show you what an insured group plan would cost for your team, what a personal plan would cost as a base layer under an HSA, and where the two overlap. For the tax structure itself, we’ll work alongside your accountant rather than replace them. Our advice costs you nothing; insurers pay us.

Want to see what the insured layer would cost for your business? Get a free quote in about two minutes, no obligation.