Accountant's Guide to HSAs

This guide is for accountants and tax advisors whose incorporated clients are considering a Private Health Services Plan (PHSP). It covers the tax rules, eligible expenses, plan safeguards and the risks to review before recommending a plan.

Frontier HSA administers a cost-plus health spending account. The employer funds eligible claims plus an administration fee and applicable taxes. The arrangement is designed to qualify as a PHSP as defined in ITA s.248(1).

Key points

• PHSP tax treatment depends on two separate tests. The plan must qualify as a PHSP, which includes being insurance in its terms and in practice. And the person must receive the benefit as an employee or officer, not as a shareholder.
• When both tests are met, the corporation can generally deduct eligible reimbursements, and the employee generally does not pay federal income tax on them.
• Plans where the sole shareholder is the only employee carry more risk. In 2022, CRA said such a plan would likely fail the insurance requirement.
• At least 90% of what a self-insured plan pays in a calendar year must generally be for expenses that qualify for the medical expense tax credit. Frontier's plans only cover expenses of that kind.
• Frontier serves incorporated businesses only. It does not enrol sole proprietors or serve Quebec residents.

Who is responsible for what

An approved claim does not establish that the plan qualifies, and it does not guarantee a tax deduction.

Sources: CRA's PHSP requirements and CRA's employee-or-shareholder test.

A qualifying PHSP can cost less than paying personal medical bills from dividends. The saving depends on tax rates, fees, applicable taxes, medical expense credits and the client's facts.

• For the corporation: eligible reimbursements are generally a deductible business expense, as long as the plan qualifies and the person receives the benefit as an employee. The cost must also pass the business-purpose and reasonableness tests. See IT-339R2, paragraph 9, ITA s.18(1)(a) and s.67.
• For the employee: PHSP benefits are generally not taxed as employment income for federal purposes. See ITA s.6(1)(a)(i).

A PHSP must be a form of insurance for medical or hospital expenses. The Income Tax Act defines it to include a contract of insurance for those expenses, or a medical care or hospital care insurance plan. See ITA s.248(1).

CRA's current guidance turns that definition into four conditions. A plan is a PHSP only if:

• it covers only medical and hospital expenses, and expenses connected with them;
• at least 90% of it relates to expenses that qualify for the medical expense tax credit (see the 90% test);
• it is in the nature of insurance; and
• it covers only the employee, their spouse or common-law partner, and household members related to them by blood, marriage or adoption.

Failing any one of them makes the benefits taxable to the employee. See CRA's PHSP guidance. The insurance condition is the one most often in doubt for a cost-plus plan, so this section and the next explain it.

The employer does not need to buy an insurance policy. In a cost-plus plan, the employer pays eligible claims and an administrator processes them for a fee. CRA accepts that an employer's binding promise, in the employment contract, to reimburse employees' medical expenses can be a PHSP. What the employee gives in return is their commitment under that contract, so no separate premium is needed. See IT-339R2, paragraphs 6–7.

Where is the insurance risk in a pay-as-you-go plan?

The employer does not have to deposit the annual limit upfront. It can pay each claim as it arrives, and CRA's archived IT-529 describes health spending accounts funded this way. What makes the plan insurance is the promise the employer makes before expenses arise, not when the money moves:

• The employer is bound in advance. Even when an account is only funded as claims come in, the employer is obliged to reimburse eligible expenses up to the remaining limit. What the employee can claim depends on the coverage in force when the expense is incurred. See IT-529, paragraph 15. A bill that is already known when coverage is set is not an uncertain event, so agreeing to pay it is not insurance. See IT-339R2, paragraph 3.
• The employee is protected against an unknown cost. The employer agrees to pay before anyone knows what the employee's eligible expenses will be, up to the limit. That uncertainty is one of the five elements of insurance. See IT-339R2, paragraph 3.
• The limit is a ceiling, not a balance. The annual limit caps what the employer can be asked to pay. The employee has no right to any unused amount and cannot withdraw it or move it to another benefit. If they could, the plan would not be a PHSP and every amount paid from it, including reimbursements, would be taxable. The only exception is moving credits to another PHSP, such as a dental plan. See IT-529, paragraphs 15 and 17.
• There must be a real chance the limit goes unused. If the employee is almost certain to be reimbursed for the full annual amount, the plan is not insurance and not a PHSP. A carry-forward of either unused amounts or expenses, but not both, for up to 12 months does not disqualify the plan on its own. See IT-529, paragraph 16.

Where this reasoning is weakest

• The owner controls both sides. When the only employee is also the sole shareholder, the person who benefits also controls the promise and could change it. CRA's 2022 view is that such a plan would likely fail the insurance requirement. See sole shareholder as the only employee.
• The limit matches known costs. If the limit is set to match bills already known, or family costs that are predictable every year, little real uncertainty may be left. See IT-529, paragraph 16 and 2022-0928901C6.

Plans stay on firmer ground when coverage and the limit are set before expenses arise, the limit is never raised to cover known bills, unused amounts expire, and nothing can be cashed out. These features support the insurance character of the plan, but they do not guarantee CRA will accept it.

Insurance risk is a separate question from whether an expense is eligible or whether the person is an employee. Passing one test does not satisfy the others.

CRA lists five elements every insurance plan must have. The table shows how each one applies to a cost-plus plan. Sources: CRA's current PHSP guidance and IT-339R2, paragraphs 3 and 7.

Potentially. An incorporated business owner may use Frontier HSA as a shareholder-employee when they actively work in the corporation's day-to-day operations and receive the benefit because of that employment, not simply because they own shares.

Dividends do not establish an employment relationship. Under Frontier's eligibility policy, a shareholder-employee who receives only dividends must provide other documentation supporting a genuine employment or officer role and have their corporate accountant confirm the arrangement.

These are Frontier's enrolment rules, also covered in our shareholder-employee FAQ.

The two tests a shareholder's benefit must pass

For tax purposes, what matters is not whether the shareholder gets a T4, but why they receive the benefit. A shareholder's PHSP benefit gets employee tax treatment only if both of these are true:

1. The plan qualifies as a PHSP. This test is about the plan, not the person. The plan must be insurance, as explained above.
2. The shareholder receives the benefit as an employee or officer. The benefit must be part of their pay for working in the business, not a perk of owning shares. This is decided on the facts.

If the second test fails, the shareholder is taxed on the benefit and the corporation cannot deduct it. See what happens if CRA rejects the plan.

A T4 salary is good evidence for the second test, but it is not the only evidence, and it says nothing about the first.

Records that show the shareholder works as an employee

Because the second test is decided on the facts, the corporation needs records showing that the shareholder really works in the business and that the benefit is part of their pay. Without a T4, these records are the main evidence. Frontier requires them, along with the accountant's confirmation, for shareholders paid only in dividends. Keep them consistent with what the person actually does:

• Duties. A description of the person's actual responsibilities and work for the operating corporation.
• Employment documents. An employment agreement, officer appointment, board resolution or corporate minutes that set out the PHSP as part of the person's pay, not as a return on shares.
• A limit in line with a comparable employee. Benefits much richer than an employee in a similar role would get suggest the benefit comes from owning shares. For a sole shareholder who is the only employee, CRA presumes a shareholder benefit unless non-shareholder employees with similar duties, at a company of similar size, get similar benefits. See 2014-0521301E5. Set and record the limit in advance, and do not raise it to cover a larger claim.

CRA guidance on shareholder benefits

• CRA's shareholder-benefit guidance explains how to tell whether a benefit is received as an employee or as a shareholder.
• Technical interpretation 9815645 says a health plan that covers shareholders but not other employees is presumed to be a shareholder benefit. Equivalent coverage for all employees, including shareholders, is normally an employment benefit. Where every employee is a shareholder, the plan can still be an employment benefit if it is part of reasonable pay.
• IT-529, paragraph 26 applies the same presumption to flexible benefit programs. It is rebutted only if the shareholder is one of a group of participating employees and the same rules apply equally to all of them.
• 2014-0521301E5 treats the insurance and shareholder-benefit questions separately, and sets out the comparable-employee test described above.

The result depends on the facts and on the plan meeting the other PHSP requirements. The corporation's accountant should review the client's circumstances and record their conclusions on eligibility and the plan limit. This guide is general information and cannot make that decision for a particular client.

A cost-plus plan depends on the employer committing to pay uncertain future medical expenses. When the only employee is also the sole shareholder, the person who receives the benefit also controls the company that promises to pay it.

CRA's concern is that the owner can change or cancel that promise, and that the family's claims will likely use the full annual limit. CRA may then see the plan as a way to pay personal medical bills through the corporation, without the corporation taking on the insurance risk a PHSP requires.

Having only one employee is not automatically disqualifying. CRA has said a plan for one employee who deals at arm's length with the employer may qualify, depending on whether the company is contractually obliged to pay and the other facts. See 2016-0633741C6, CRA's answer at the May 3, 2016 CALU roundtable.

How could a sole-owner pay-as-you-go plan qualify?

Paying claims as they arise does not, by itself, stop a sole-owner plan from qualifying. The corporation does not generally need to deposit the annual limit upfront, but it must commit to the coverage before expenses arise. In 2006, CRA said a sole shareholder-employee can have a PHSP, including a health spending account kept as a notional balance. See 2005-0163771E5 (March 14, 2006) and IT-529, paragraph 15. CRA's 2022 view above is less favourable, so read the two together.

Each point below has to hold. The list sets out what to assess; CRA has not approved it as a checklist for sole-owner plans.

1. The owner receives the benefit as an employee. CRA presumes a sole shareholder-employee receives it as a shareholder. To show otherwise, the owner should be actively working in the business, and the coverage and limit should be reasonable for an arm's-length employee doing similar work. Record their actual duties and why the limit fits. See 2005-0163771E5.
2. The corporation is bound in advance. Coverage and a reasonable limit are set before expenses arise, and the employment and plan terms oblige the corporation to pay. Frontier enforces the timing: its app does not accept a coverage start date in the past, for the plan or for an individual employee, and it rejects any claim for an expense incurred before the member's coverage started. The limit should not be raised to match bills already known. CRA has said that a plan the employer can end at any time, without notice, raises doubt about whether it is insurance, so terms that stop the owner changing the limit mid-year or cancelling without notice make the promise more credible. A signed form or a software restriction does not, on its own, create the obligation. See IT-339R2, paragraph 7 and CRA's 2022 response.
3. Some of the limit may go unused. Unused coverage expires under clear rules and is never paid out in cash. If the family's predictable costs will use the full limit anyway, a fixed cap leaves little real risk, and CRA's concern remains. See IT-529, paragraphs 16–17.
4. Claims are paid within a reasonable time. Paying as claims arrive changes when the money moves, not what the corporation owes. If claims go unpaid, the obligation is hard to show and the plan risks losing PHSP status. Frontier expects each claim to be funded within 30 days. See funding claims on time and IT-529, paragraph 15.
5. The tax result depends on all of the above. If the plan is a PHSP and the owner receives the benefit as an employee, eligible reimbursements are generally not federal employment income. See ITA s.6(1)(a)(i). The corporation can deduct them only if they also meet the business-purpose and reasonableness tests.

Example: a consultant with $5,000 of annual coverage

Suppose a consultant is their corporation's only shareholder and employee. Before January 1, the corporation establishes $5,000 of coverage for the coming year, with no rollover. Assume the limit is reasonable compensation for the work and the expenses below are eligible. The amount is an illustration, not a CRA-approved limit.

• Coverage starts. The corporation is bound to cover eligible expenses up to $5,000. It does not deposit $5,000 with Frontier.
• A $600 claim arrives in March. The corporation funds the approved claim, the administration fee and applicable taxes. The employee has $4,400 of coverage left. That is coverage still available, not money held in an account.
• Eligible claims total $1,800 for the year. The corporation pays those claims plus fees and taxes. The unused $3,200 expires under the plan's rules and cannot be cashed out. Expenses incurred during the year can still be claimed until the submission deadline.

The example shows how pay-as-you-go funding works. It does not show that the plan qualifies; that still depends on the points above. Suppose instead the family already expected $10,000 of eligible expenses that year. The $5,000 limit would almost certainly be used in full, so the corporation would take on little real risk. Blocking limit increases would not change that, and neither would a payment deadline. What counts is how uncertain the expenses were when the corporation made the promise, not whether the limit happened to be used up in a given year. See IT-529, paragraph 16 and CRA's 2022 response.

Assess the client's actual plan terms and how the plan operates in practice. If the insurance question is still unresolved, get specialist tax advice before relying on tax-free treatment.

What happens if CRA rejects the plan?

The result depends on which of the two tests fails: whether the plan is a PHSP, or whether the benefit is received as an employee. The second test matters more to the corporation, because it decides whether the cost stays deductible. Check both the personal and the corporate tax consequences.

Classes decide which employees get which annual limit. They matter for tax because CRA looks at whether shareholders get better benefits than other employees doing similar work.

Frontier's class rules

Under Frontier's Service Agreement (sections 2.2 and 2.5), employers must:

• define classes using objective criteria, such as job classification, role or seniority;
• treat everyone in the same class equally; and
• change an individual's coverage only when a material change in role or responsibilities moves them to a different class.

How shareholders are treated compared with other employees matters for tax. CRA presumes that a health plan covering shareholders, but not employees who are not shareholders, is a shareholder benefit. When equivalent coverage goes to all employees, it is normally an employment benefit. See CRA interpretation 9815645. IT-529 takes the same approach for flexible benefit programs: the presumption falls away only when the same rules apply equally to every participating employee. See IT-529, paragraph 26. Treating everyone in a class equally helps, but if the owner's class is much richer than everyone else's, the class structure itself can point to a shareholder benefit.

When can the corporation deduct the cost?

Every business expense must pass two general tests, and PHSP costs are no exception:

• Business purpose. A corporation can only deduct money it spends to earn income from its business. A health plan passes this test the same way salary does: it is part of what the corporation pays people for their work. If the benefit is really provided because the person owns shares, it is not spent to earn business income. The corporation then cannot deduct it, and the shareholder is taxed on it as a shareholder benefit. This is why the employee test for shareholders matters to the corporation as well as the individual. See ITA s.18(1)(a), s.15(1) and 2014-0521301E5.
• Reasonableness. CRA only lets the corporation deduct an amount that is reasonable. If the plan pays someone far more than a comparable employee would get, the excess is not deductible. Compare the person's total pay, including health benefits, with pay for similar work, and keep that comparison on file. See ITA s.67.

Why Frontier caps class limits

Frontier enforces two limits when a class is created or updated. CRA does not set these numbers, and no CRA source names a safe limit or ratio. They are Frontier safeguards, designed around the tests above:

• No class limit above $15,000 a year. This is in line with limits commonly used by Canadian health spending account providers. It keeps class limits in a range that is easier to support as reasonable compensation.
• The highest class limit can be no more than 10 times the lowest. The ratio limits how much richer one class, such as the owner's, can be than the rest. A large gap between shareholders and other employees is what CRA treats as a sign of a shareholder benefit. The 10× figure is a Frontier choice that rules out the most lopsided plans; a smaller gap can still be too wide for the client's facts. Classes with a $0 limit are not counted, so the ratio does not stop a plan from leaving some employees with no coverage. Check who is left out.

A limit that Frontier accepts is not automatically reasonable under s.67, and it does not resolve the insurance question. Confirm each class's limit and covered expenses for the client's facts.

Generally, the expenses that qualify for the medical expense tax credit (METC). They are listed in ITA s.118.2(2) and CRA's RC4065 medical expense guide. Our eligible expenses page has examples.

Tax eligibility alone does not guarantee reimbursement. Frontier also checks the member's coverage, available benefits and submission deadline before approving a claim.

Commonly eligible expenses

• Dental services, excluding purely cosmetic procedures
• Eye exams by an authorized practitioner, and prescribed eyeglasses or contact lenses to correct vision
• Eligible prescription drugs, subject to the prescription and pharmacist-record rules
• Physiotherapy, chiropractic, massage and mental health services from an authorized medical practitioner in the relevant jurisdiction. The service name alone does not establish eligibility.
• Eligible fertility procedures, subject to the rules for the specific treatment and payment
• Specified medical devices and equipment, subject to any prescription and other conditions for the item

Eligible only if specific conditions are met

A prescription or receipt alone does not make these expenses eligible:

• Travel for medical care. Transportation generally requires travel of at least 40 km one way, and meals and accommodation at least 80 km. Substantially equivalent services must not be available nearby, the route must be reasonably direct, and the travel must be reasonable. CRA sets further conditions, so keep supporting records.
• Supplements and vitamins. Ordinary over-the-counter products are generally ineligible, even when prescribed and recorded by a pharmacist. Exceptions such as prescribed vitamin B12 for pernicious anaemia have their own criteria.
• Home modifications. The work must be for a person who lacks normal physical development or has a severe and prolonged mobility impairment, and must help them get into, move around or function in the home. It must not normally increase the home's value or be work that people without the impairment would normally do. Medical necessity alone is not enough.
• Health plan premiums. Premiums paid to a qualifying PHSP can be eligible, subject to the member's coverage and as long as they are not reimbursed twice. If a policy also covers ineligible insurance, get a breakdown.

Common ineligible expenses

• Purely cosmetic procedures (medical or reconstructive procedures may qualify)
• Gym memberships
• Ordinary over-the-counter vitamins, supplements and drugs, even if prescribed, unless a specific exception applies
• Life insurance and income replacement insurance premiums

Sources: RC4065, “Common medical expenses you cannot claim”. Insurance premiums count as medical expenses only when they are paid to a PHSP, so life and income replacement premiums do not qualify. See ITA s.118.2(2)(q) and Folio S1-F1-C1, paragraph 1.133.

The “all or substantially all” test: 90% of payments must be eligible

In a self-insured plan, at least 90% of the benefits paid in a calendar year must generally be for METC-eligible expenses. If the plan falls short, it can stop being a PHSP and its benefits can become taxable. See CRA's PHSP guidance.

• The test looks at actual payments across all employees in the plan, not at allocated limits. Each account is not tested on its own unless it is legally a separate plan.
• Every ineligible payment counts toward the 10%, including payments made by mistake.
• The other 10% is not room for wellness spending. Coverage must still be limited to medical or hospital expenses and permitted connected expenses.
• Insured plans apply the test to premiums paid in the calendar year instead.

How Frontier keeps plans within the test: A Frontier plan only reimburses expenses that qualify for the METC under s.118.2(2). Employers can narrow what a class covers, but cannot add expenses outside the METC. Frontier reviews each claim against that standard before it is paid. See Frontier's Service Agreement, sections 1.5 and 10.1. This is designed to keep every payment eligible, so the plan stays well within the 90% test. Review errors are still possible, and approval confirms only that a claim meets the plan's rules. It does not establish that the plan qualifies as a PHSP.

Two provincial issues come up: which practitioners qualify, and Quebec's separate tax and drug-coverage rules.

Practitioner eligibility varies by province

A practitioner's services qualify only if that practitioner is authorized to practise in the province or territory where the service is provided. A professional title alone does not establish eligibility in every province. See CRA's province-by-province practitioner table and Folio S1-F1-C1, paragraphs 1.20–1.23.

Quebec: separate tax and drug-coverage rules

Frontier does not serve Quebec residents, as stated in our privacy policy. That is Frontier's availability policy; PHSPs are not prohibited in Quebec. For clients with Quebec employees, note the following:

• Federal tax. A qualifying PHSP provided as an employment benefit keeps its federal tax treatment.
• Quebec tax. For Quebec income tax, employer-paid PHSP coverage is generally a taxable benefit. The employer calculates its value and reports it in boxes A and J of the employee's RL-1 slip, and in box G where it applies. See Revenu Québec's PHSP benefit rules and the RL-1 guide, section 5.12 (box J).
• Drug coverage. Quebec residents must have prescription drug coverage, but not necessarily through RAMQ's public plan. Residents under 65 who have access to a qualifying private plan generally must join it, and public-plan eligibility depends on their circumstances. Do not assume an HSA meets this obligation. See RAMQ's prescription drug insurance guidance.

1. Submission. The member submits the receipt and any required supporting documents. The receipt should show the payment's purpose, date, patient and provider. See Folio S1-F1-C1, paragraph 1.147.
2. Review. Frontier checks the receipt, expense eligibility, membership, available benefits and submission deadline. It can request more evidence, and can deny, adjust or suspend a claim with incomplete or inconsistent information. Reimbursement is limited to the member's available coverage.
3. Funding and reimbursement. The corporation funds the approved claim, the 8% administration fee and applicable taxes. Frontier reimburses the member once it has approved the claim and received the employer's payment.
4. Reporting. Frontier provides an Annual Summary report of reimbursements, fees and taxes, with a CSV export for reconciliation.

Funding claims on time

The employer must pay eligible claims within a reasonable time. A health spending account is a PHSP only if the employer is obliged to reimburse eligible expenses up to the limit, even when it funds the account only as claims come in. If claims go unpaid, or are paid only when the owner chooses, that obligation is hard to show and the plan risks losing PHSP status. Reimbursements from a plan that is not a PHSP are taxable to the employee. See IT-529, paragraphs 14–15 and IT-339R2, paragraphs 6–7.

The CRA guidance cited here does not set a specific deadline. Frontier expects employers to fund each eligible claim within 30 days of its submission, which keeps payment timely. See section 2.3 of the Service Agreement.

Claim audits

Frontier audits a random sample of claims and reviews suspected fraud or abuse, under section 12 of its Service Agreement. Reimbursement is paused while a claim is under audit. Frontier may ask for proof of payment, itemized receipts, prescriptions, or statements showing what another insurer paid. It may also contact the provider to verify the service, date, amount paid and practitioner credentials.

These checks confirm that a claim follows the plan's rules. They do not establish that the plan is insurance or that the member receives benefits as an employee.

Frontier checks service dates and submission deadlines against the member's coverage. These rules come from Frontier's Service Agreement (sections 2.2, 8 and 9). Confirm the client's plan dates and coverage terms for each expense.

• Expense date. The expense must be incurred while the member has coverage. The terms in effect on that date apply.
• Submission deadline. Claims must be submitted within 60 calendar days after the plan year ends.
• Optional rollover. If rollover is enabled and the plan renews, unused entitlement carries into the next plan year and expires after 12 months. Rollover does not extend the submission deadline for an earlier expense.
• When coverage ends. A 60-calendar-day run-out period applies to expenses incurred on or before the termination date, and the employer remains responsible for eligible claims. The run-out does not apply when coverage is terminated for cause, such as fraud or material misrepresentation.

Unused entitlement is not the employee's money. It expires under these rules and cannot be cashed out. The employer pays claims, fees and taxes, not the unused allowance.

CRA guidance: a plan may carry forward either unused amounts or unclaimed expenses, but not both, for up to 12 months, and that feature alone does not disqualify it. The guidance does not set a universal deadline for submitting claims. Expiry and the ban on cash withdrawals support the plan's insurance character, but do not establish PHSP status on their own. See IT-529, paragraphs 16–17.

What Frontier's Annual Summary includes

The Annual Summary report shows the company's total reimbursements, fees and taxes, and the number of claims. Administrators can export it as a CSV for reconciliation. It does not include employee names, receipt details or expense categories, so confirm which supporting documents the client needs before filing.

Documents to keep on file

The exact documents depend on the client's facts:

• Plan terms, class limits, coverage schedule and dated amendments
• Employment or officer documents and corporate minutes that establish the health benefit
• Evidence of 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, receipts, reimbursement records and proof of payment for the amounts claimed

Reconciling and retaining records

• Reconcile with the ledger. Match claims, fees, taxes and payments to the corporate ledger.
• Deduct actual costs, not the allowance. The corporation deducts what it actually owes or pays. An unused annual allowance is not an expense, so it is not deductible. Base the timing and amount of deductions on the employer's actual obligations and accounting method. See IT-529, paragraph 25.
• Avoid double claims. A member generally cannot claim the METC on their personal return for expenses the plan already reimbursed tax-free. Identify the unreimbursed eligible portion and prevent duplicate claims across insurers, the HSA and personal tax returns. See Folio S1-F1-C1, paragraph 1.16.
• Retain records. Keep business records for at least six years after the end of the last tax year they relate to, or longer where CRA requires. Using an administrator does not transfer this responsibility. Arrange access to supporting records with appropriate privacy controls, request copies from Frontier when needed, and keep access after the plan ends. See CRA's recordkeeping guidance.

Not through Frontier. Frontier HSA serves incorporated businesses only and does not enrol sole proprietors, as stated in our eligibility FAQ.

Self-employed people can still deduct PHSP costs in some cases. An individual who works in their business regularly and continuously may deduct qualifying PHSP premiums, contributions or other consideration, subject to income tests, coverage conditions and deduction limits. See ITA s.20.01.

That deduction does not extend to every HSA. CRA does not consider an HSA for a sole proprietor with no arm's-length employees to be a PHSP, so its costs are not deductible. See CRA's 2019 HSA warning (archived). A self-employed client's accountant should assess these rules and whether another PHSP suits the client.

Legislation sets the rules. CRA publications explain how CRA interprets them, but they do not have the force of law. Archived bulletins are labelled below; read them alongside current CRA guidance and the later interpretations cited in this guide.

Income Tax Act

• s.248(1): definition of “private health services plan”
• s.118.2: medical expense tax credit and eligible medical expenses, including PHSP premiums under s.118.2(2)(q)
• s.6(1)(a)(i): PHSP benefits excluded from employment income
• s.15(1): taxable shareholder benefits
• s.18(1)(a): expenses must be incurred to earn business income
• s.67: only reasonable expenses are deductible
• s.20.01: PHSP premium deduction for qualifying self-employed individuals, subject to statutory conditions and limits

Current CRA guidance

• Medical expenses, including payments from a PHSP: the four PHSP conditions, the 90% test for insured and self-insured plans, and T4 reporting of taxable medical benefits
• Shareholder benefits: whether a benefit is received as an employee or a shareholder, and why shareholder benefits are not deductible
• Income Tax Folio S1-F1-C1, Medical expense tax credit: paragraphs 1.16 (reimbursed expenses), 1.20–1.23 (practitioners), 1.94 (home changes), 1.118 (devices), 1.123 (drugs), 1.133 (PHSP premiums) and 1.147 (receipts)
• RC4065, Medical expenses: CRA's guide to eligible and ineligible medical expenses
• Authorized medical practitioners by province or territory
• RC188, Keeping records: the six-year retention rule
• Rates used in the tax example: corporation tax rates, Alberta tax rates and GST/HST rates

Archived CRA publications

CRA no longer updates these, but they remain the most detailed CRA statements on how cost-plus plans and health spending accounts work.

• IT-339R2, Meaning of private health services plan (August 8, 1989): the five elements of insurance (paragraph 3), cost-plus plans (paragraph 6), employer reimbursement plans (paragraph 7) and employer deductibility (paragraph 9)
• IT-529, Flexible employee benefit programs (February 20, 1998): pay-as-you-go obligations, insurance risk, carry-forward and cash withdrawals (paragraphs 14–17), employer deductions (paragraph 25) and benefits to shareholders (paragraph 26)
• Buyer beware when it comes to health spending accounts (April 2019): HSAs for sole proprietors without arm's-length employees. Its comment that one-employee corporations can be eligible predates CRA's 2022 response below.

CRA interpretations on shareholders and single-employee plans

CRA does not publish these documents itself; the links go to third-party copies. Each carries CRA's caution that it may not reflect CRA's current position. They are interpretive guidance, not advance rulings on a client's arrangement.

• 2005-0163771E5 (March 14, 2006): employment benefits and notional accounts for a sole shareholder-employee; read alongside the later insurance concerns below
• 2022-0928901C6 (May 3, 2022, CALU roundtable question 10): an HSA for a sole shareholder-employee and family would likely not be insurance
• 2016-0633741C6 (May 3, 2016, CALU roundtable question 6): a plan for a sole employee who deals at arm's length with the employer may qualify
• 2014-0521301E5 (June 25, 2014, technical interpretation): insurance and shareholder-benefit issues in a sole-owner cost-plus plan, and the comparable-employee test
• 9815645 (July 27, 1998, technical interpretation): when PHSP coverage for employee-shareholders is a shareholder benefit, including where all employees are shareholders

Quebec sources

• Revenu Québec, Contributions to a group insurance plan (including a PHSP): PHSP coverage as a taxable benefit and the RL-1 boxes
• Revenu Québec, Guide to filing the RL-1 slip: box J (section 5.12)
• RAMQ, Prescription drug insurance: the obligation to have drug coverage

Frontier documents

• Frontier HSA Service Agreement, version 2.4: eligible claims (section 1.5), class rules (sections 2.2 and 2.5), the administration fee (section 3.1), run-out (section 8), rollover (section 9), class coverage (section 10) and claim audits (section 12)