How to turn your medical expenses into a tax deductible business expense if you are self-employed in Canada

This article was originally written on January 15, 2019 and the information here may not be up to date anymore.
    Incorporated companies, sole proprietors with or without employees can use a Private Health Services Plan (PHSP) to convert personal medical expenses into tax deductible business expenses.  For the remainder of this article, we are going to talk about PHSPs for sole proprietors without any employees and will be using Brock Health as our insurance provider, because they have the best rates and I personally know independent contractors that use their services.
    Important Note: The rules do vary when you have employees and if you are incorporated.  If either of these apply to you, you should be talking to your accountant or directly with a PHSP Administrator such as Brock Health, which by the way, does wave their initial $100 set up fee when your accountant refers you to them.


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How to set up a Private Health Services Plan (PHSP)

First, find out if you qualify for a PHSP.  If you are sole proprietor, you must be continually and actively engaged in your business.  You will also need your self-employment for the current or previous year to be more than 50% of your total income or your income from all sources other than your self-employment is $10,000 or less for the current or previous year.
    Next you will need to select a provider.  We had the option to earn referral fees here, we decided not to, because we would be sending you to a less than optimal operator.  Brock Health and Cost Efficient Benefit Plan are the two best operators for PHSPs, but unfortunately for us, they do not pay referral commissions.  Both have a low, one time only, enrollment fee of $100.  The admin fee for claims is 5% (the lowest in the industry) for both operators.  To keep things simple, we recommend that you only have one PHSP provider, so that you don't accidently go over the annual claim limit.
    Once enrolled you can start submitting your medical claims.  You first pay for your medical expenses out of pocket, then you submit a claim along with the full cost of your medical expense + the 5% admin fee (there is also HST charged on the admin fee).  Next you will receive a payment equal to your medical expense.
    A PHSP can greatly reduce the true cost of your medical expenses.  For example; Gary is from Ontario, he has $1400 in personal medical expense throughout the year and he earns $97,000 annually.  He will pay his PHSP provider $1479.10 ($1400 for his medical expenses + ($1400 x 5% admin fee x 1.13 HST) = $1479.10).  He then gets to add $1479.10 to his business expenses, saving him ($1479.10 business expense x 43.41% tax bracket) - $79.10 admin fee = $562.98.  This changes his out of pocket personal medical costs from $1400 to $837.02.


Savings by Converting Your Medical Expenses into a Business Expense using a PHSP

Below we have a chart that has your annual medical expenses, your expected tax deduction and your true cost of your medical expenses based on your tax rate, when put through a PHSP.  Note: the tax deduction plus your true cost will not equal the medical expense amount.  That's because there is a 5% (plus HST) cost plus fee for the PHSP, which depending on your device, may or may not be listed below.  We used Ontario's 13% HST, which isn't the absolute highest, but a good benchmark.


Your Tax Bracket

Medical Expense Amount

Admin Fee plus HST at 13%

Tax Deduction

Your True Cost

25%

$100

$5.65

$26.41

$79.24

30%

$100

$5.65

$31.70

$73.96

35%

$100

$5.65

$36.98

$68.67

40%

$100

$5.65

$42.26

$63.39

45%

$100

$5.65

$47.54

$58.11

25%

$1200

$67.80

$316.95

$950.85

30%

$1200

$67.80

$380.34

$887.46

35%

$1200

$67.80

$443.73

$824.07

40%

$1200

$67.80

$507.12

$760.68

45%

$1200

$67.80

$570.51

$697.29


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Important Information for Private Health Services Plan (PHSP)

To get the information direct from Service Canada go to https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4002/t4002-5.html, then hold the "CTRL" and the "F" button.  Type in PHSP and that will take you to the "Premiums to a private health services plan (PHSP)" section.
    Here you will find out that you can deduct premiums paid to a private health services plan (PHSP) if you meet the following conditions:

(1) Your net income from self-employment (excluding losses and PHSP deductions) for the current or previous year is more than 50% of your total income;
or
Your income from sources other than self-employment is $10,000 or less for the current or previous year;

(2) You are actively engaged in your business on a regular and continuous basis;

(3) The premiums are paid to insure yourself or any member of your household.

    You cannot claim a deduction for PHSP premiums if another person deducted the amount or if anyone claimed the premiums as a medical expense.  For a sole proprietor, you should keep things simple by using an insurance company that specializes in PHSPs in order to ensure your premiums will be deductible.  Also note that all PHSP deduction limits and calculated limits must include all applicable taxes as part of the total dollar amount
    If you do not have any employees throughout the year, your PHSP deduction is restricted by an annual dollar limit.  The limit is a maximum of:

$1,500 for yourself,
$1,500 for your spouse and each household member that is 18 years of age or older at the start of the period that they were insured
$750 for each household member under the age of 18


    The maximum deduction is also limited by the number of days that person was insured, so it is wise to have the set up date set to January 1st.


Disclaimer

Here is a list https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/lines-330-331-eligible-medical-expenses-you-claim-on-your-tax-return.html#mdcl_xpns of medical expenses that the CRA will allow you to claim on your PHSP.
    Tax laws and rules change all the time.  It is your responsibility to ensure that you are doing your taxes correctly.  Very Important Note: a lot of this information will be helpful for small incorporated companies and sole proprietors with a small workforce, but this is strictly written for sole proprietors without any employees.  Different rules do apply when adding in employees.  Please contact an accountant or a PHSP administrator for more information.  We could write a twenty-page website about PHSPs, this is a condensed review on PHSPs and how they can benefit you.
    This article does not constitute legal tax advice and it is the responsibility of the reader to verify the information in the article.