Health spending accounts in Canada: can my corporation pay my medical bills?

Summary

A health spending account (or health care spending account) is an arrangement where your corporation pays your family’s medical and dental bills back to you, up to a fixed limit each year. You pay the dentist, send in the receipt, and your company reimburses you. Where the arrangement meets the conditions below, your company deducts its cost and you pay no federal personal income tax on the benefit. Quebec includes employer-paid health coverage in provincial taxable income, so the personal exemption there is federal only.¹

“Health spending account” has no meaning in Canadian tax law. What the Income Tax Act cares about is whether your arrangement is a private health services plan, and the CRA (the Canada Revenue Agency) sets four conditions for that:

1. Everything the plan covers is a medical or hospital expense, or a cost tied to one and incurred soon after (e.g. travel to treatment).
2. At least 90 cents of every dollar it pays out goes to an expense the medical expense tax credit covers, which is the credit you’d otherwise claim yourself.
3. Coverage reaches only the employee, their spouse or common-law partner, and household members related by blood, marriage or adoption.
4. The plan is in the nature of insurance, so nobody knows in advance whether or how much will be claimed.

A fifth condition sits outside the CRA’s list: the money has to reach you as an employee rather than as an owner. We’d want real employment duties, a salary with tax withheld and a T4 slip, the year-end employment form, as evidence of that role. Being the director who signs the cheques isn’t enough.

Where your corporation has an employee who isn’t related to you, and the plan covers that person on the same terms, we’d recommend running one, because it’s the cheapest way to buy routine family health care out of a company. Where you’re the only employee, the CRA has published statements pointing both ways. Treat a plan as an arguable claim the CRA could challenge rather than a settled rule, and keep the annual limit low enough that losing the deduction and paying tax on every dollar reimbursed wouldn’t hurt.

How the arrangement works

Nothing is actually held in an account anywhere, despite the name. Before a plan year starts, your corporation writes down an annual limit, meaning the most it will reimburse each covered person during that year. A plan year is the twelve months the plan covers, and we’d run it January to December even where your corporation’s fiscal year ends on another date, because the CRA measures the 90% test over the calendar year. You pay for treatment yourself, then send the receipt to a third-party administrator, i.e. an outside company that checks each claim against the plan’s terms.

Two rules in the Income Tax Act do the work. The first, subparagraph 6(1)(a)(i), says a benefit from your employer’s contributions to a private health services plan isn’t employment income.² The second, paragraph 18(1)(a), lets your corporation deduct what it paid, the same as rent or software.³ Outside Quebec, a qualifying $4,000 orthodontics bill is paid with corporate dollars never taxed in your hands. Paying it personally means taking the money out first, and if the next dollar of dividend income costs you 30 cents of tax, you’d draw about $5,700 to be left with $4,000. A qualifying plan saves roughly $1,700 of that, less the medical expense tax credit you would have claimed on the same bills yourself, and less the running costs below.

The 90% test is measured in dollars rather than in claim counts, over the calendar year, on what the plan actually paid to all employees, and the 90% is the CRA’s reading of the Act rather than a figure written into it.⁴ Reimburse too much that doesn’t qualify (e.g. vitamins or a cold remedy off the shelf) and the plan stops being a private health services plan for that whole year. Every dollar it paid then becomes taxable employment income, although a reasonable employment benefit can remain deductible to the corporation.⁵ A shareholder benefit has a different result, explained below. Where a corporation runs more than one benefit plan, each is tested on its own, so with one person covered there are no other employees’ eligible claims to dilute a bad one of yours.

The sole-shareholder problem

A 2019 CRA tax tip, which is a short consumer notice on its website rather than law, says corporations with as few as one employee can be eligible, shareholder employees included.⁶ Interpretation Bulletin IT-529 sits awkwardly beside it.⁷ A bulletin is an older CRA document explaining how the CRA reads the law, and the series has been formally retired, though the CRA still points readers to this one. Where the person claiming is both an employee and a shareholder, IT-529 presumes the benefit was conferred on them as a shareholder, unless the plan covers a group of employees on equal terms. The CRA has never said how many people make a group, and one unrelated employee alongside you is the realistic minimum.

Once you own the whole company, you set the annual limit, you decide whether the plan carries on, and you’ll predictably claim all of it. If the CRA decides you received the benefit as an owner rather than as an employee, it costs you twice. Subsection 15(1) adds everything the plan reimbursed you that year to your personal income at the rates that apply to salary, and your corporation loses its deduction on the same dollars.⁸

One fact changes the answer: whether a covered employee deals with you at arm’s length, meaning someone whose interests are genuinely separate from yours. Putting your spouse on payroll doesn’t give you an arm’s-length employee, because the Income Tax Act treats spouses, children, parents and siblings as non-arm’s-length whatever the working relationship looks like. Cover one unrelated employee under the same written plan, on your own limit or one scaled to salary by a formula you apply to yourself too, and pay their claims.

In our view, where you have an arm’s-length employee on payroll, put the plan in writing and run it. Where you’re the only employee, we’d often still proceed, but on your own reading of the risk rather than on the word of the administrator selling you the plan. Pay yourself a salary big enough that the plan reads as part of a real pay package, and file the T4. No dollar cap exists in the law, only a reasonableness test, so we’d keep the limit in the low thousands per family rather than the tens of thousands. Write the plan down before the year it covers begins: a page or two naming who is covered, each person’s limit, the expense categories and the start date. If you take only dividends, we’d establish the employment arrangement before starting a plan, because ownership alone doesn’t qualify you.

Running costs, and the parts that get missed

A plan can let one unused amount roll forward for up to twelve months, and you pick which when you write it: either an unspent limit rolls into next year (limit $3,000, claimed $1,000, so $5,000 available next year), or a bill the limit didn’t stretch to. Never both.⁷ Raising the limit part-way through the year because a bill has already landed removes the uncertainty the plan depends on, and the CRA can treat the plan as failing for that whole year, which again makes every dollar it paid taxable to you.

Some provinces also tax claims as though they were insurance premiums, adding a corporate cost separate from Quebec’s personal taxable benefit. Your corporation is the one registered and filing, even where the administrator calculates and bills the tax. Ontario charges 8% retail sales tax on the claims a company pays out of a benefits plan that holds no money in advance, which is what a health spending account is.⁹ A 2% Ontario insurance premium tax applies to the same claims and to the administration fee.¹⁰ Quebec’s tax on insurance premiums is 9%, rising to 9.975% for premiums paid after December 31, 2026, and on a plan holding no money the amount reimbursed on each claim counts as the premium.¹¹ The administrator’s own fee, a percentage of what you claim, sits on top of whatever your province takes, so ask for its full schedule before you sign.

An account covering dental also costs your household the Canadian Dental Care Plan, a federal programme for families with adjusted family net income under $90,000. The programme’s own eligibility rules name a health spending account covering dental as private coverage that disqualifies you.¹² A reimbursement outside a qualifying plan can still be deductible where it’s reasonable employment compensation rather than a shareholder benefit. It then goes on your T4 as a taxable benefit, with applicable payroll deductions, and you can claim eligible medical expenses personally.⁵

How often this changes

Once a year at minimum, because you have to set next year’s limit before that year starts anyway. Revisit sooner if you hire your first unrelated employee, or if you switch from salary to dividends, because each of those moves the answer rather than the arithmetic. Quebec owners have a rate change landing on January 1, 2027. Watch too for the CRA replacing the two retired documents this area rests on with a current one (called an income tax folio).

Closing thoughts

Health spending accounts get sold as a product, with a sign-up page and a fee schedule, which makes the decision feel like a choice of vendor. In practice it turns on how you’re paid and who else works for you, and both of those are usually settled long before anyone picks an administrator.

How we handle it

We look at a plan before it’s signed rather than after the first claim: whether you’re on payroll, whether anyone on staff deals with you at arm’s length, and what your province adds to each claim. If it goes ahead, we date the plan document and the directors’ resolution approving it ahead of the plan year. A directors’ resolution is a short signed record of the decision, which in a one-person company is a page you sign yourself. Then we handle the T4 reporting, the registration for your province’s tax on benefit plans, and the remittance on each claim. Every one of our service plans includes an annual review of how you take money out of the company, health costs included.