Deducting your premiums: PHSP vs a personal plan

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If you own a corporation, it can pay for health and dental costs through a private health services plan (PHSP), often set up as a Health Spending Account. The Canada Revenue Agency (CRA) says a corporation with as few as one employee can be eligible (CRA, 2019, archived), but it presumes an owner who controls the business receives benefits as a shareholder unless the facts show otherwise. If the plan qualifies and you receive the benefit as an employee, the coverage and reimbursements are generally not taxable on your federal return; in Quebec, the employer's contribution may be a taxable benefit for provincial income tax. A personal plan you buy yourself is paid with after-tax money. Unless you are self-employed and qualify to deduct the premiums, what you get back is limited to federal and provincial or territorial medical expense tax credits on costs above a threshold. For a sole proprietor with no arm's-length employees, the CRA does not treat a Health Spending Account as a PHSP at all, so amounts paid into it are not deductible.

This is general information, not tax advice. The rules were last checked against CRA, Income Tax Act, Revenu Québec, Ontario Ministry of Finance and Government of Canada pages in October 2026. Some CRA guidance cited here is archived and is labelled that way where it is used. Your accountant should confirm how the rules apply to you.

It is a plan defined in subsection 248(1) of the Income Tax Act: a contract of insurance for hospital expenses, medical expenses or a combination of them, or a medical care or hospital care insurance plan, or a combination of such plans (Income Tax Act, s. 248(1)). The label matters because several tax rules apply only to plans that meet it.

The CRA sets out the conditions (CRA):

• Its covered expenses must be medical expenses, connected expenses incurred within a reasonable time of a medical expense, or a combination of the two.
• The plan must be in the nature of insurance: an undertaking by one person to indemnify another, for agreed consideration, against a loss from an event whose occurrence is uncertain.
• It may cover only the employee, their spouse or common-law partner, and household members connected by blood, marriage or adoption.

A plan does not need an insurance contract behind it. A plan without one is treated as self-insured, and the CRA applies the same "all or substantially all" requirement to self-insured plans made up of Health Spending Accounts as to other self-insured plans (CRA). The CRA's list of expenses that count as eligible medical expenses is in its guide RC4065 (CRA RC4065), so compare a provider's list of covered items against it.

In a Health Spending Account, the employer allocates credits to each employee's account. The CRA's archived bulletin IT-529 (1998), which current CRA payroll guidance still refers to, says the employer is obliged to reimburse eligible costs up to the balance of credits left in the account (CRA IT-529, 1998, archived).

Premiums you pay yourself for a health, dental or hospitalization plan can be claimed as a medical expense, as long as 90% or more of the premiums are for eligible medical expenses (CRA RC4065). You can also claim the part of each bill the plan did not reimburse.

The claim only counts above a threshold. For the 2025 tax year (the return filed in spring 2026), your total for the federal credit is reduced by 3% of your net income or $2,834, whichever is less (CRA). Check that page for the figure that applies to the year you are filing. The credit is calculated on what remains, so it returns only part of the cost. Provincial and territorial returns have their own medical expense credits, and their thresholds vary by province or territory.

The corporation, as employer, funds the account and reimburses eligible expenses. The CRA has said that incorporated businesses, including shareholder employees, are eligible to take part in a Health Spending Account (CRA, 2019, archived).

When the plan qualifies, the benefit an employee gets from the employer's contributions is excluded from employment income under paragraph 6(1)(a) of the Income Tax Act (Income Tax Act, s. 6), and the CRA confirms there is no taxable benefit for those contributions (CRA T4130).

Two limits follow from this. An expense the account reimburses tax-free cannot also go on your medical expense claim, which covers only unreimbursed amounts unless the reimbursement was included in your income (CRA RC4065). And the account must stay a health account. IT-529 says that if you can withdraw or transfer money for anything other than another PHSP's premium, the account is not a PHSP and every amount paid out, including medical reimbursements, is included in income (CRA IT-529, 1998, archived).

When the facts point to you receiving it because you own shares rather than because you work for the company. In its folio on health and welfare trusts, Income Tax Folio S2-F1-C1, the CRA starts from a presumption that an employee-shareholder who can significantly influence business policy receives benefits as a shareholder, unless the facts show otherwise (CRA Income Tax Folio S2-F1-C1). An owner who runs the company will often fit that description.

The folio also sets out comparison questions. Is your coverage like what non-shareholder employees of similar-sized businesses receive? Is it like what other non-shareholder employees in your own business receive, in nature, amount and cost-sharing? A "no" to either may suggest shareholder capacity. These tests are written for health and welfare trusts, so ask your accountant how they apply to a Health Spending Account.

The consequence is significant. Under the folio, a benefit received as a shareholder is included in your income under subsection 15(1), and the corporation cannot deduct its contribution (CRA Income Tax Folio S2-F1-C1).

A Health Spending Account generally will not work for you. If the business is a sole proprietorship with no arm's-length employees, the CRA does not consider a Health Spending Account to be a PHSP, and amounts paid into it are not deductible business expenses (CRA, 2019, archived). The same notice warns that some insurance agents, brokers and financial planners market these accounts to exactly that group.

There is a separate route. You may be able to deduct premiums you pay for a PHSP that covers you, your spouse or common-law partner, or household members if you are actively engaged in the business on a regular and continuous basis, and either your net self-employment income is more than 50% of your total income or your income from other sources is $10,000 or less (CRA T4002). The guide also sets out which plans and premiums qualify, so check it against the plan you are considering.

The deduction is capped (Income Tax Act, s. 20.01). If you have a qualified employee with no coverage, you cannot deduct your own premiums, though you may be able to claim them as medical expenses (CRA T4002). Premiums you deduct cannot also be claimed as a medical expense (Income Tax Act, s. 118.2).

The federal rules apply everywhere, but provincial rules change the result.

• Quebec: an employer's contribution to a PHSP may be a taxable benefit for Quebec income tax, reported in box J of the RL-1 slip (Revenu Québec, as of October 2026).
• Ontario: 8% retail sales tax applies to premiums under group insurance and to certain contributions to funded benefit plans, and a plan holder that self-administers a funded or unfunded benefits plan without a third-party administrator must register for a vendor permit (Ontario Ministry of Finance, as of October 2026). That page does not settle every arrangement, so ask the provider how the tax applies to the plan you are considering.

Other provinces and territories may apply their own taxes or rules to benefit plans, so ask your accountant what applies where you live and work.

The household below is invented to show the mechanics, using 2025 tax-year federal rules. It is not a projection of anyone's tax.

Suppose an owner-manager in Ontario has net income of $90,000, and the household's eligible health costs for the year, premiums plus unreimbursed bills, are $3,000.

Personal plan. The household pays the $3,000 from after-tax income. At tax time the federal threshold is the lesser of $2,700 (3% of $90,000) and $2,834, so $2,700. Only $300 counts toward the federal credit.

Health Spending Account, employee capacity. The corporation reimburses the $3,000 of eligible costs, plus whatever administration fee the provider charges and any Ontario retail sales tax that applies (see above). If the CRA accepts that the benefit was received as an employee, none of the $3,000 is taxable to the owner.

Health Spending Account, shareholder capacity. If the CRA concludes the owner received the benefit as a shareholder, the $3,000 is added to the owner's income and the corporation cannot deduct it (CRA Income Tax Folio S2-F1-C1). Because the reimbursement was included in income, the owner may still be able to claim the expenses as medical expenses (CRA RC4065), but the corporation's deduction is lost.

The illustration leaves out two things. An account reimburses only up to its credits, which IT-529 describes as a ceiling on what can be claimed (CRA IT-529, 1998, archived), so a large unexpected cost above the balance is still yours. And if the account covers dental, the people it covers lose eligibility for the federal Canadian Dental Care Plan, even if the dental coverage is never used (Government of Canada, as of October 2026).

• Confirm your structure: incorporated, or a sole proprietor with or without arm's-length employees. The rules differ for each.
• Ask your accountant whether your coverage would pass the CRA's comparison tests for employee capacity.
• If you have arm's-length employees, check what coverage they get and whether yours matches it.
• Ask the provider whether the plan lets any money leave the account for non-medical uses.
• Ask how unused credits are handled, and whether any can be cashed out.
• If you are in Quebec or Ontario, ask how provincial tax applies to the plan.
• Before the account covers dental, check whether anyone in the family would otherwise qualify for the Canadian Dental Care Plan.
• Keep receipts for every reimbursed expense.

What a Health Spending Account can reimburse overlaps with, but is not the same as, what your provincial plan leaves to you. Our guide to what provincial plans leave uncovered maps those gaps by province.

HealthRate.ca is educational. It makes no insurance referrals and does not offer or arrange quotes.