Beginners Guide to Health Spending Accounts in Canada – For Self-Employed & Incorporated Individuals (2024)

Introduction

As a business owner, understanding the available options for addressing health and dental expenses for yourself and your family can be daunting. In Canada, one valuable option for those who are incorporated is the Health Spending Account (HSA).

If you’re self-employed and incorporated, a Health Spending Account (HSA) is an excellent way to reduce the cost for you, your family’s share of their Health and Dental expenses to a meaningful degree.

This guide is designed to introduce you to the basics of HSAs in Canada, helping you understand how they can benefit you.

Note: This guide assumes you do not have arms-length employees. If you do have arms-length employees click here to view a similar guide for a business with employees.

What is a Health Spending Account (HSA)?

In short, an HSA enables you to treat what would otherwise be personal health and dental expenses as legitimate business expenses.

A Health Spending Account (HSA) is a type of tax-advantaged account available in Canada that allows incorporated individuals to pay for a wide range of health and dental expenses.

In 'legal' terms, a Health Spending Account (HSA) is a contract agreement between an employer (a corporation) and an employee. This agreement outlines that the employer will cover the employee's health and dental expenses through reimbursement. In the case of an incorporated individual (business owner), the corporation itself takes on the role of the employer, with the business owner serving as the employee. It’s common to also have a spouse also working in the business as an employee.

Contributions made to an HSA are treated as a business expense (just as you would treat the cost of things like office supplies, internet, business meals etc.) and for that reason are tax-deductible, reducing your business's taxable income.

Additionally, the funds used for eligible health and dental expenses are received tax-free. Thus, with an HSA, you are paying for the exact same health and dental expense, however you are paying with corporate pre-tax dollars as opposed to personal after-tax dollars.

Why Have a Health Spending Account?

In addition to being a cost-effective way to pay for health and dental expenses it fosters a happier, healthier, and more productive you because these benefits are oriented around health.

How Does an HSA Work?

The steps to use an HSA are as follows:

1. Pay for your health/dental expense personally (e.g. using a personal credit card)
2. Submit your claim (securely and privately using either your mobile device or using a PC)
3. Send funding for the expense from your corporation (i.e. funding comes from your business bank account), inclusive of any admin fees the HSA provider charges.
4. HSA provider processes the claim, and reimburses you by depositing the processed claim(s) into your personal bank account.

Example

Let’s illustrate how a Health Spending Account (HSA) works using an example:

Step 1: Say you go and visit the dentist for a routine teeth cleaning. The visit might cost you $200. You pay the $200 personally using a personal credit card.

Step 2: You would subsequently submit your $200 expense to the HSA Provider. You can submit the expense conveniently and securely either by taking a photo of the receipt using a mobile app, or online using a secure web portal.

Step 3: Concurrent with submitting your expense, your corporation provides funding for $220 (i.e. $200 + a 10% HSA admin fee). These funds must come from your corporate bank account and go to the HSA Provider. These payments can be made easily and conveniently using online banking.

Step 4: The HSA Provider reviews your expense to ensure it is compliant with CRA guidelines. Assuming that the expense is compliant, the HSA Provider will then deposit (credit) $200 into your personal bank account.

Once this process has completed, you will have successfully been reimbursed personally (tax-free) and paid for the expense corporately (business expense).

Why is this valuable and how does it save you money?

To help illustrate, let’s compare the two ways one might pay for the $200 dental expense. One can either pay personally out-of-pocket or pay using an HSA.

Paying Personally (i.e. no HSA):

Say you didn’t have an HSA setup and chose to simply pay the $200 dental expense out-of-pocket instead.

Whenever you pay any expense personally, you are spending after-tax dollars.

If we assume you live in Alberta, and pay the top-marginal tax rate (48%), it means that in order to have $200 (after-tax) in your pocket that you can spend at the dentist, you must first earn $384.61 before-tax.

Put another way; if you earn $384.61 of income you are left with $200 after paying the income tax.

So, when you paid $200 personally at the dentist, it is in fact costing you $384.61 before-tax in this illustrative example.

Paying Using an HSA:

By contrast, if you use an HSA to pay for the same $200 expense, your corporation will only require $220.

This means an immediate savings of $164.61 (i.e. $384.61 - $220 = $164.61) on your $200 dental expense, or about 43% in percentage terms.

It is the same $200 dental expense, but paid for in two very different ways, the result being that one way (using an HSA) is substantially less expensive than the alternative (paying out-of-pocket personally).

What if you have Health and/or Dental insurance already?

A Health Spending Account works well independently of an insurance plan but is also complimentary.

Let’s illustrate how a Health Spending Account (HSA) works in conjunction with your insurance plan using an example:

Step 1: Say you go and visit the dentist for a routine teeth cleaning. The visit might cost you $200. Your dentist’s office submits the expense to your insurance company for reimbursement. The insurance company reimburses some percentage (percentage will vary depending on your plan), and you pay the balance out-of-pocket. Let’s say the insurance company reimburses 80% of your $200 dental expense – this leaves you with $40 that you must pay out-of-pocket (i.e. the balance of 20%).

Step 2: You would then submit your $40 expense to the HSA Provider. You can submit the expense conveniently and securely either by taking a photo of the receipt using a mobile app, or online using a secure web portal.

Step 3: Concurrent with submitting your expense, your corporation provides funding for $44 (i.e. $40 + a 10% fee). These funds must come from your corporate bank account and go to the HSA Provider. Again, these payments can be made easily and conveniently using online banking.

Step 4: The HSA Provider reviews your expense to ensure it is compliant with CRA guidelines. Assuming that the expense is compliant, the HSA Provider will then deposit (credit) $40 into your personal bank account.

In short, if you have insurance and an HSA you would submit the expense to your insurance first, and to the HSA second.

HSA’s can be used for you and your family, as well as for employees where applicable and their family members as well - so it can serve as an excellent employee benefit for attracting and retaining your employees.

Eligible Expenses

HSAs cover a broad spectrum of medical expenses that may not be fully covered by standard health insurance plans. This includes, but is not limited to, prescription drugs, dental services, vision specialists and prescription eyewear, and medical treatments provided by licensed health care practitioners (e.g. physiotherapy & massage). The Canada Revenue Agency (CRA) provides a comprehensive list of eligible expenses for HSAs.

Learn more about eligible expenses

A high-quality and reputable HSA provider will perform regular auditing on claims to ensure that any expenses submitted are compliant with the CRA guidelines.

Who is Eligible for an HSA?

HSAs are available to self-employed individuals as well as companies with employees. For employers, offering an HSA can be a way to provide flexible benefits to employees while also enjoying tax advantages.

Here we're focusing on a Self-Employed Individual. Typical scenario in this case is a small business owner who has an active corporation and works for themselves. They may have a spouse that works in the business with them. The business owner may or may not have dependent children.

The basic criteria as set out by CRA are as follows:

1. An incorporated business
2. You pay yourself some (or all) of your income as T4 income

How Much Can I Claim Per Year?

CRA guidelines essentially suggest contribution limits must be “reasonable”, but it is left open to interpretation as to what reasonable means.

As of this writing, the HSA industry in Canada generally has converged on $15,000 per year as being a reasonable upper limit. This amount is pooled for the family, meaning that any one family member could claim the fully amount if needed/desired. “Family” includes your nuclear family; meaning you, your spouse (if you have one), and dependent children (if you have any).

Note: Your spouse may be added as an employee (if they are receiving T4 income from the business). By adding your spouse as an employee, you can effectively raise the annual limit for your family to $30,000 (i.e. $15,000 each for the business owner and their spouse respectively).

If you wished to go above the $15,000 per year suggested limit, then it would be advisable to have a legitimate and justifiable reason for doing so. E.g. A family member requires a particular prescription medication for which the cost would necessitate a higher limit.

‍Should I Speak With My Accountant

You may wish to speak with your accountant to see if a Health Spending Account is appropriate for you and your business, and that your method of receiving income (i.e. Dividends or T4 income) meet the criteria as set out by CRA.

Conclusion & Next Steps

Health Spending Accounts offer a flexible and tax-efficient way to manage healthcare expenses in Canada. Whether you're self-employed or an employer looking to enhance your benefits package, HSAs can provide significant financial advantages.

Contact Garrett Agencies and an advisor will be happy assist you in setting up an HSA for your business.