Tax deductions for businesses
Some employer groups may be too small to qualify for group health coverage and may wish to pay for one or more Personal Health Insurance (PHI) plans as an alternative.
If the company pays the premiums for employees who are not shareholders (or related to shareholders), the premiums are deductible by the company and do not constitute a taxable benefit to the employee, except in Quebec, where PHI premium is a taxable benefit in the hands of the employee.
In the case of shareholders, Revenue Canada may determine the premium is a taxable shareholder benefit rather than a non-taxable employee benefit. This would be based on the facts of each individual case. For example, if there were several non-shareholder employees with similar coverage it would likely be an employee benefit. Conversely, if the only employees covered were also shareholders, it would probably be considered a shareholder benefit.
Deductions for self-employed
Self-employed people are allowed a deduction for business purposes of amounts paid for their own PHI premiums, provided the following provisions are met.
- They're actively engaged alone or as a partner in their business (i.e. unincorporated)
- Self-employment is their primary source of income in the current year or income from other sources does not exceed $10,000.
- Equivalent coverage is extended to all permanent full-time arm's length employees
- A plan that would qualify as a private health services plan is set up with an insurer or trustee in the business of operating such a plan where arm's length employees make up 50% or more of the employee group covered, there is no limit on the amount deductible.
Otherwise, the amount deductible is limited to $1,500 for the individual, $1,500 for their spouse and $750 for each child.
An arm's length employee is one that is not a family member and has no controlling interest in the business.
Q&A about tax deductions
If a self-employed person pays premiums for a spouse and children, are those deductible as well?
Yes, provided the conditions are met.
Can the premiums be included in the person's medical expense tax credit?
Where a tax deduction is claimed, no amount paid for premiums will be eligible for the medical expense tax credit.
How restrictive are the dollar limits on non-arm's length employees?
These limits are very reasonable. Based on our experience, the average premium for PHI is $1,020. Most people's premiums would not reach the limit, and therefore it won't affect them.
Susan runs a restaurant with her partner, who is her husband. They have 5 employees, 3 of which are her children. She has another 2 kids at home. The business is unincorporated. She purchases the same PHI plan for herself ($ 950 in premium), her 2 kids at home and all 5 of the employees. Does she qualify for the tax deduction? If so, is there a maximum? What about for the kids at home?
Answer: Susan is eligible for a deduction but it would be limited to the cost of equivalent coverage for non-related employees with a maximum of $1,500 for herself, her husband and adult children and $750 for each of her minor children - so if the non-related employee cost is $500, then the limit is $500 per person.
Ken works part-time for a children's toy store as a clown. However, he is also self-employed with a picture-framing business (not incorporated). He made $ 20,000 in his day job, and $ 15,000 in his framing business. He has no employees. Is he eligible for the tax deduction?
Answer: No, Ken will not qualify since his income from other sources is in excess of $10,000.
Lisa owns an unincorporated landscaping company with 9 employees. She decides to purchase PHI for her employees and herself. She purchases the basic drug plan for her employees, and the enhanced combination plan with drug and dental for herself, her spouse and her children. Are hers and her family's premiums tax deductible?
Answer: No, the premiums are not deductible since equivalent coverage is not provided for her employees.