Accountant's Guide to HSAs

This guide is designed for licensed tax professionals — accountants, CPAs, and tax advisors — who advise incorporated clients on the use of Private Health Services Plans (PHSPs) as a tax-efficient employee benefit.

Frontier HSA is structured as a cost-plus PHSP under ITA s.248(1), administered at arm's length. The plan reimburses CRA-recognized medical expenses and is designed to comply with all applicable provisions of the Income Tax Act, including IT-339R2 and related CRA technical interpretations.

The division of responsibilities is clear: Frontier administers claims and ensures plan compliance, while tax professionals assess the suitability of the plan for their clients' specific circumstances.

PHSPs are one of the most tax-efficient ways for incorporated businesses to cover health expenses. Compared to paying out-of-pocket via dividends, the savings are substantial.

When the arrangement qualifies as a PHSP and the benefit is provided in the individual's capacity as an employee, eligible reimbursements are generally deductible to the corporation as a business expense. For the employee, benefits received under a PHSP are generally excluded from employment income under subparagraph 6(1)(a)(i) of the ITA.

A Private Health Services Plan is defined under ITA s.248(1) as a contract of insurance for hospital or medical expenses, or any plan established to cover such expenses, provided it meets certain structural requirements.

Frontier HSA operates as a cost-plus arrangement as described in IT-339R2. Under this structure, the employer reimburses actual medical expenses incurred by the employee, plus an administration fee. This is distinct from traditional insurance in that there are no premiums paid in advance — costs are incurred only when claims are submitted.

The plan reimburses only CRA-recognized medical expenses as defined under ITA s.118.2 and further outlined in CRA guide RC4065. This ensures all reimbursements qualify for the tax treatment described above.

Frontier administers claims, ensures plan compliance, and provides CRA-ready documentation. The tax professional assesses whether a PHSP is suitable for the client's specific tax situation and corporate structure.

For a cost-plus arrangement to qualify as a PHSP, it must satisfy the "nature of insurance" requirement per IT-339R2, paragraph 6. Frontier HSA incorporates five structural elements to meet this requirement:

For a shareholder who receives a PHSP benefit, the central issue is capacity: was the benefit received because the individual was an employee or officer, or because the individual owned shares? That determination is a question of fact.

Frontier uses shareholder-employee as shorthand for a shareholder who actively performs genuine, day-to-day duties for the corporation as an employee or officer. Documents should record a relationship that exists in practice; they do not create one after the fact. The following facts should be documented:

• Active duties — Records should describe the shareholder-employee's actual responsibilities and work for the operating corporation.
• Employment documentation — An employment agreement, officer appointment, board resolution, or corporate minutes should establish the PHSP as part of employment compensation rather than a return on shares.
• Reasonable and fair plan limit — Benefits should be supportable by reference to the compensation and benefits a comparable employee would receive in a similar role. The limit should be set in advance, documented, and upheld rather than increased in response to a larger claim.

PHSP benefits must be offered on a non-discriminatory basis within employee classes. Classes must be based on legitimate employment criteria — not shareholding status.

Valid classification criteria include:

• Full-time vs. part-time status
• Length of service
• Job function or department
• Management vs. non-management

The following are Frontier plan rules, not statutory limits under the ITA:

Eligible expenses are determined by ITA s.118.2 and CRA guide RC4065. Frontier reviews every claim against these criteria. For a complete list of covered expenses, see our eligible expenses page.

Standard Categories

• Dental care (exams, cleanings, procedures)
• Vision care (eye exams, prescription glasses, contacts)
• Prescription medications
• Physiotherapy, chiropractic, massage therapy
• Mental health services (psychologist, counselling)
• Fertility treatments
• Medical devices and equipment

Enhanced Documentation Items

Certain expenses require additional documentation to confirm eligibility:

• Travel for medical care — Must be to obtain medical services not available locally. Requires documentation of distance and medical necessity.
• Supplements and vitamins — Must be prescribed by a medical practitioner and recorded by a pharmacist.
• Home modifications — Must be medically necessary and prescribed by a medical practitioner.

Ineligible Items

• Cosmetic procedures (unless medically necessary)
• Gym memberships and fitness equipment
• Over-the-counter products without a prescription
• Insurance premiums

PHSPs are available to incorporated businesses in all Canadian provinces and territories, but two provincial considerations affect plan administration:

Frontier HSA follows a structured claim process designed for compliance and efficiency:

1. Submission — The plan member submits a photo of the receipt via the Frontier app or web portal. Required documentation includes: provider name, date of service, description of service, amount paid, and patient name.
2. Review — Each claim is reviewed against ITA s.118.2 eligibility criteria. Frontier applies a conservative interpretation policy, meaning borderline claims are flagged for additional documentation rather than automatically approved.
3. Approval & Reimbursement — Approved claims are reimbursed via EFT within 24 hours. The corporation is invoiced for the claim amount plus the administration fee.
4. Documentation — All claims, receipts, and approval records are retained by Frontier for audit support.

Plan members must submit claims within 12 months after the end of the benefit year for eligible expenses incurred during that benefit year. This carry-forward/grace period aligns with CRA guidance in IT-529, paragraph 16, which permits a plan to carry forward either unused allocation or eligible expenses (but not both) for up to 12 months without disqualifying the arrangement as a PHSP.

Unused entitlement expires at the end of that period and cannot be cashed out or transferred (other than as a premium to another PHSP, if applicable). Because Frontier operates on a pay-as-you-go basis, the corporation is only invoiced when claims are submitted — there is no pre-funded pool. Each plan member is allocated an annual benefit entitlement, and any unused portion expires. The corporation never pays for unclaimed amounts, but the employee permanently loses the right to claim against them.

This expiry provision helps evidence the reasonable element of risk required for a plan to qualify as a PHSP under ITA s.248(1). CRA notes that where there is little risk an employee will not eventually be reimbursed for the full annual allocation, the arrangement may fail to meet the "nature of insurance" test described in IT-339R2, paragraph 3. Employees have no inherent right to the balance of credits in the account, and if an employee can withdraw or transfer amounts from the plan (except to pay a premium to another PHSP), the arrangement will not qualify as a PHSP and reimbursements become taxable employment benefits.

What Frontier Retains

• All submitted receipts and claim documentation
• Claim review and approval records
• Plan terms and employee class definitions
• Reimbursement and invoicing records

What Frontier Provides

• Annual summary of claims by employee
• CRA-compliant reporting documentation
• Audit support documentation upon request

What Clients Must Retain

• Corporate minutes establishing the PHSP
• Employment agreements referencing health benefits
• Evidence supporting the employment or officer relationship — T4 slips where applicable; otherwise, records of actual duties, an employment agreement or officer appointment, corporate resolutions or minutes, and Frontier's required accountant confirmation
• Invoices from Frontier for corporate tax deduction purposes

Frontier HSA currently serves incorporated businesses and does not enrol sole proprietors.

That product boundary is different from the tax rules. ITA s.20.01 may permit an individual who is actively engaged in a business on a regular and continuous basis to deduct qualifying PHSP premiums, contributions, or other consideration, subject to the income tests, coverage conditions, and deduction limits in that section. A self-employed client should have their accountant assess those rules and whether another PHSP is suitable for their circumstances.

The following legislation, CRA publications, and interpretation bulletins are referenced throughout this guide.