HSA for Sole Proprietors with Employees in Canada
If you run an unincorporated business in Canada, you've probably heard that sole proprietors can't get a Health Spending Account. That's only half the story. Sole proprietors without arm's-length employees can't qualify. But if you have at least one arm's-length employee, the door opens -- for them and for you.
The CRA Rule That Changes Everything
The CRA requires that an HSA function as a genuine employee benefit -- not just a way for a business owner to write off personal expenses. For incorporated businesses, the legal separation between owner and corporation satisfies this automatically. For sole proprietors, there is no such separation -- unless you employ someone at arm's length.
Once you have at least one arm's-length employee, the CRA recognizes your plan as legitimate. You can cover your employees and yourself under the same HSA. For more background, see our guide for sole proprietors.
What Does "Arm's-Length" Mean?
An arm's-length employee is someone with no family relationship to you. Your spouse, your children, your siblings, your parents -- none of them count.
If your only help is your spouse doing the bookkeeping, that won't qualify you. But hiring even one part-time employee who is not a family member meets the requirement.
The Equal Benefit Rule
Here is the catch. You can't give yourself generous coverage and offer your employees less. The CRA requires that your benefit limit cannot exceed what you offer to your lowest-paid employee. If you want $3,000 in annual coverage, your employees must get at least $3,000 too.
There's also a cap. If fewer than 50% of your employees are arm's-length, coverage is limited to $1,500 per adult and $750 per child per year -- a maximum of $4,500 for a family of four.
The Alternative: Incorporate
If these restrictions feel too tight, incorporating your business removes the arm's-length requirement entirely. An incorporated owner who pays themselves T4 salary qualifies immediately -- no employees needed, no equal-benefit rules, and higher contribution limits.
How to Set Up Your HSA
If you meet the arm's-length requirement, here are the steps:
- Confirm the income test. Either 50% or more of your income must come from the sole proprietorship, or your income from all other sources must be less than $10,000.
- Verify your arm's-length employees. At least one person on your payroll must have no family relationship to you.
- Choose a benefit limit. Your limit can't exceed what you give your lowest-paid employee.
- Sign up with a CRA-compliant provider. Frontier Health handles plan documentation, claims processing, and reporting so you can focus on your business.
For a full walkthrough, see our step-by-step setup guide.
The Bottom Line
Arm's-length employees are the key that unlocks HSA eligibility for sole proprietors in Canada. The rules are stricter than for incorporated businesses, but the tax savings are real. Every dollar reimbursed is a deductible business expense, and your employees receive it tax-free.
Ready to get started? Sign up with Frontier Health and turn your health expenses into tax savings.
Related Reading
- save on employee health benefits -- Cut your benefits costs