How to Deduct Health Expenses Through Your Corporation in Canada
The best way to deduct health expenses through your corporation in Canada is by setting up a Health Spending Account, also known as a Private Health Services Plan (PHSP). With an HSA, your corporation reimburses eligible medical expenses like dental, vision, prescriptions, and physiotherapy. The reimbursement is 100% tax-deductible for the corporation and 100% tax-free for the employee. No other method gives you both of those benefits at the same time.
But an HSA is not the only option people try. Here is how the three main approaches compare.
Option 1: Claim the Medical Expense Tax Credit (METC)
The METC is a personal tax credit you can claim on your individual return for out-of-pocket medical expenses. The problem is that you can only claim the portion of your expenses that exceeds the lesser of 3% of your net income or $2,759 (2025 threshold). For most incorporated business owners, this means a big chunk of your health spending gets you nothing back at tax time.
On top of that, the METC is a non-refundable credit. It reduces the tax you owe, but it does not give you a refund if your taxes are already low. And since the expense comes from after-tax personal dollars, you are paying full personal income tax before you even get to the credit calculation. For anything more than minor expenses, the METC is not a great deal.
Option 2: Get Group Health Insurance
Group insurance is the traditional route. Your corporation pays monthly premiums, and employees get coverage for a defined set of benefits. The premiums are tax-deductible for the business, which is good. But there are real drawbacks for small businesses.
First, premiums are due every month whether anyone uses the plan or not. Most small businesses end up paying for coverage that goes unused. Second, premiums increase at renewal -- often significantly -- even if claims were low. Third, in most provinces, the premium your corporation pays creates a taxable benefit for the employee. So while the business gets a deduction, the employee pays personal tax on the value of the coverage they receive.
For businesses with fewer than five employees, group insurance is often expensive relative to what it actually covers.
Option 3: Set Up a Health Spending Account (Best Option)
An HSA gives your corporation a way to reimburse health expenses that is fully deductible and fully tax-free. Here is how it works:
- Your corporation sets up an HSA through a third-party administrator.
- You choose a monthly budget per employee (there are no mandatory minimums).
- When an employee has a medical expense, they submit the receipt.
- The administrator reviews the claim and your corporation reimburses the employee.
- The reimbursement is deducted as a business expense on your corporate tax return.
The employee receives the money tax-free. It does not appear as taxable income on their T4. And unlike group insurance, you only pay when someone actually has a health expense. No premiums, no wasted coverage.
Tax Savings Example
Say you want to cover $5,000 in health expenses for yourself through your corporation.
Without an HSA (paying personally): You need to earn roughly $8,000 to $9,000 in pre-tax salary or dividends to have $5,000 left after personal income tax. And if you claim the METC, you might recover a few hundred dollars at best.
With an HSA: Your corporation pays $5,000 directly. It deducts the full $5,000 as a business expense, reducing corporate taxable income. You receive the $5,000 tax-free. Total cost to get $5,000 in health coverage: $5,000.
The difference is significant, especially when you add it up year after year.
One Important Requirement: T4 Salary
To use an HSA through your corporation, the person receiving benefits must be on payroll and receive a T4. If you pay yourself exclusively through dividends with no salary, your HSA reimbursements may not qualify as tax-free benefits under the Income Tax Act. You do not need to pay yourself a large salary -- even a modest T4 amount can satisfy this requirement. Check with your accountant to make sure your compensation structure supports an HSA.
The Easiest Way to Set This Up
You do not need to figure out CRA compliance, plan administration, or claims processing on your own. Frontier Health is a pay-as-you-go Health Spending Account built for Canadian small businesses. There are no setup fees, no monthly premiums, and no long-term contracts. Submit a receipt, get reimbursed by e-transfer within 48 hours, and your corporation gets the full tax deduction. It is the simplest way to turn health expenses into a legitimate business deduction.