Tax-Efficient Ways to Pay for Healthcare as a Business Owner in Canada

By Frontier Team•January 5, 2025•6 min read

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As an incorporated professional or business owner in Canada, you're likely paying for medical, dental, and vision expenses out of pocket with after-tax dollars. That's a missed opportunity. With the right structure, you can transform personal healthcare spending into a legitimate tax-deductible business expense while receiving reimbursements tax-free. The result? Significant savings on every healthcare dollar you spend.

The Challenge: Paying for Healthcare with After-Tax Dollars

When you pay for healthcare expenses personally, you're using income that's already been taxed. In many cases, incorporated professionals are paying themselves dividends or salary, both of which are subject to personal income tax. That means every dollar spent on prescriptions, dental work, or physiotherapy has already been reduced by 30-50% in taxes.

The traditional Medical Expense Tax Credit (METC) offers limited relief. You can only claim expenses that exceed 3% of your net income or $2,834 (for 2025), and the credit only returns a fraction of what you spent at the lowest tax bracket rate. For high-income earners, this barely makes a dent.

The Solution: Health Spending Accounts (HSAs)

A Health Spending Account—also known as a Private Health Services Plan (PHSP)—allows incorporated businesses to pay for healthcare expenses using pre-tax corporate dollars. This is one of the most powerful tax strategies available to Canadian business owners.

How It Works

Instead of paying yourself a higher salary to cover medical expenses, your corporation establishes an HSA. The business sets a health budget and reimburses eligible medical expenses as they occur. These reimbursements are:

  • 100% tax-deductible to the corporation as a business expense
  • Tax-free to you as the employee/owner (no T4 slip issued)
  • CRA-compliant when structured correctly

This transforms healthcare from an after-tax personal expense into a pre-tax business deduction, resulting in savings of 30-50% compared to paying out of pocket.

What's Covered

HSAs cover the same expenses as the Medical Expense Tax Credit, which includes virtually all legitimate healthcare costs:

  • Prescription medications and over-the-counter drugs (with prescription)
  • Dental care, including cleanings, fillings, crowns, and orthodontics
  • Vision care, including eye exams, glasses, contacts, and laser eye surgery
  • Paramedical services like physiotherapy, chiropractic, massage therapy, psychology, and acupuncture
  • Medical devices such as hearing aids, CPAP machines, orthopedic shoes, and wheelchairs
  • Health insurance premiums for private plans
  • Travel expenses when you need to travel over 40 km for medical treatment

The full list is extensive and covers dependents as well, making it ideal for professionals with families.

The Math: Real Tax Savings

Consider a consultant earning $150,000 annually through their corporation. Their family incurs $10,000 in medical expenses each year—dental work, prescriptions, physiotherapy, and eyeglasses.

Without an HSA (paying personally):

  • The consultant takes a $10,000 salary increase to cover expenses
  • After corporate and personal taxes, they need approximately $15,000–$17,000 in pre-tax corporate income
  • Effective cost: $15,000+

With an HSA:

  • The corporation pays $10,000 directly through the HSA
  • The corporation deducts the full $10,000
  • The consultant receives $10,000 tax-free
  • Effective cost: $10,000

That's $5,000–$7,000 in tax savings annually—money that stays in your pocket instead of going to the CRA.

Who Should Use an HSA?

Health Spending Accounts are ideal for:

  • Incorporated professionals: Consultants, accountants, lawyers, dentists, physicians, IT contractors, engineers, and realtors operating through a personal corporation
  • Solo business owners: Those with no arm's-length employees who want to maximize tax efficiency
  • Small businesses with employees: Companies that want to offer health benefits without the fixed costs of traditional insurance

If you're already incorporated for tax purposes and you have regular medical expenses, an HSA is a no-brainer.

How to Set Up an HSA

Setting up a Health Spending Account requires proper structure to remain CRA-compliant:

  1. Establish a written plan: Your business must have a formal PHSP plan document outlining coverage, eligible expenses, and administration
  2. Choose an administrator: Work with a provider who handles claims processing, CRA compliance, and documentation
  3. Set your budget: Decide how much your corporation will allocate annually (there's no mandated cap, but contributions should be reasonable)
  4. Submit claims: As expenses arise, submit receipts through your provider's system and receive tax-free reimbursements

At Frontier Health, we simplify this process with transparent pricing—$120/year + 8% per claim for incorporated individuals. Claims are processed within 24 hours through our app, and everything is structured to pass CRA scrutiny.

Other Tax Strategies for Healthcare

While HSAs are the most effective option for incorporated professionals, other strategies may complement your tax planning:

Income Splitting

If your spouse or adult children work in the business, paying them a reasonable salary allows them to use their own METC threshold, potentially maximizing the credit across multiple family members.

Registered Accounts

High Deductible Health Plans paired with savings in a Tax-Free Savings Account (TFSA) allow investment growth to cover future healthcare costs tax-free, though this doesn't provide the same upfront deduction as an HSA.

Timing Medical Expenses

For those still using the METC, clustering medical expenses into a single 12-month period can help you exceed the threshold and claim more on your personal return.

Common Mistakes to Avoid

Not documenting properly: The CRA requires receipts and invoices for all claims. Keep detailed records.

Claiming ineligible expenses: Cosmetic procedures, general wellness products, and gym memberships typically don't qualify unless prescribed for a specific medical condition.

Operating without a formal plan: Simply having your corporation pay your medical bills without a proper PHSP structure can result in those expenses being deemed a taxable shareholder benefit.

Ignoring provincial rules: While HSAs are tax-free in most provinces, Quebec has specific rules that may affect how contributions are taxed.

The Bottom Line

Paying for healthcare as a business owner doesn't have to mean sacrificing 30-50% of every dollar to taxes. A properly structured Health Spending Account transforms personal medical expenses into a deductible business expense and a tax-free benefit, keeping more money in your pocket where it belongs.

For incorporated professionals focused on tax optimization, an HSA is one of the simplest and most effective tools available. Instead of paying for prescriptions, dental work, and physiotherapy with after-tax personal dollars, use pre-tax corporate dollars and watch your savings compound year after year.

Ready to start saving? Learn more about Frontier Health and see how easy it is to set up your HSA today.

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