Health spending account: tax free to an owner only as an employee

When is a health spending account tax free to the owner manager?

Yes. As of October 2026, an owner manager can use a corporate health spending account tax free, but only as an employee. Employer contributions to a private health services plan (PHSP) are excluded from employment income by subparagraph 6(1)(a)(i) laws-lois.justice.gc.ca, and the CRA confirms they aren't a taxable benefit when the plan meets every PHSP condition canada.ca. The catch for owners is capacity: a benefit received as a shareholder falls under 15(1) instead, and then the corporation gets no deduction canada.ca.

A shareholder benefit is included in income at its full value, and a reimbursement treated that way gets no dividend tax credit either, because 15(1) isn't a dividend laws-lois.justice.gc.ca. The full rules are on the shareholder benefit page.

What makes a health spending account a private health services plan?

The Income Tax Act defines a PHSP as a contract of insurance for hospital or medical expenses, or a medical care or hospital care insurance plan, excluding provincial health plans laws-lois.justice.gc.ca. The CRA applies four conditions canada.ca:

• Every expense covered is a medical or hospital expense, or a connected expense incurred within a reasonable time after one.
• All or substantially all (90% or more) relates to expenses eligible for the medical expense tax credit.
• The plan is in the nature of insurance: an undertaking to indemnify someone, for agreed consideration, against a loss from an uncertain event.
• Coverage is limited to the employee, their spouse or common law partner, and household members related to them by blood, marriage or adoption.

For a plan backed by an insurance contract, the 90% test looks at premiums paid in the calendar year. A typical health spending account has no insurance contract behind it, so the test looks at benefits paid to all employees that year, and how employees allocated their ceiling doesn't matter canada.ca.

The insurance element is where spending accounts fail. In the archived IT-529, the CRA says there must be a reasonable element of risk, and a carry forward of either the unused balance or eligible expenses (not both) for up to 12 months is acceptable. If an employee can withdraw the balance or move it to something like a group RRSP, the account is not a PHSP and every reimbursement becomes income under 6(1)(a) canada.ca.

How does the CRA decide between employee and shareholder capacity?

It's a question of fact, and the CRA's audit manual lists private health care plans among typical shareholder benefits. An auditor weighs these factors canada.ca:

• Was the benefit offered to all employees, or to one category of them, or to shareholders only?
• What level of control do the shares represent?
• How does the benefit compare with the person's remuneration and shareholdings?
• How important are the services the person provides as an employee?

The auditor reviews employment contracts, shareholder agreements, board minutes and the corporation's benefits policy canada.ca. So put the plan in writing, offer it to arm's length staff in the same class on the same terms, and pay the owner a salary the benefit can sit beside. An owner who is the only person covered has the weakest file, because nothing distinguishes the plan from a shareholder perk.

Does a small corporation's plan pass the 90% test?

Your client's corporation has three people on payroll: Dana, the sole shareholder, and two arm's length employees, Ali and Beth. Each has a $2,500 annual limit in a health spending account run by an administrator, with no insurance contract behind it. All three get a salary. Benefits paid in 2026:

The test: $6,200 ÷ $6,500 = 95.4%, above 90%, so the plan passes for 2026. The corporation deducts the $6,500 of claims plus the administrator's fee, nothing goes in box 14 of any T4, and Dana's $2,400 is tax free because she gets the same plan as Ali and Beth on the same terms.

Change one fact: Ali and Beth leave, and Dana is the only person covered. The plan still passes 90%, but it is now offered to the shareholder only, the first factor on the CRA's list. If the CRA treats the $2,400 as a shareholder benefit, Dana adds $2,400 to her income and the corporation loses the $2,400 deduction.

How much can a sole proprietor deduct under section 20.01?

An unincorporated owner deducts PHSP premiums from business income under 20.01, not as a medical expense. Your client must be actively engaged in the business on a regular and continuous basis, and in the year or the year before, business income must be more than 50% of total income, or total income must not exceed $10,000 plus that business income. The contract must be with an insurer, a PHSP administrator, or a qualifying professional body or union laws-lois.justice.gc.ca.

With no arm's length full time employees in the picture, the annual cap is (days covered ÷ 365) × ($1,500 for each of the owner, the spouse and household members 18 or older, plus $750 for each household member under 18) laws-lois.justice.gc.ca.

Maya runs a sole proprietorship with no employees and covers herself, her spouse and two children under 18 for all of 2026. Her cap is (365 ÷ 365) × (2 × $1,500 + 2 × $750) = $4,500. If she pays $5,200, she deducts $4,500 on her business statement.

The $700 above the cap isn't lost: 20.01(2) only stops the same dollar being both deducted and claimed as a medical expense laws-lois.justice.gc.ca, and PHSP premiums are an eligible medical expense canada.ca. Once the business has arm's length full time employees making up at least half of the people covered, the cap changes to the cost of the equivalent coverage given to those employees.

Why is a health spending account taxable in Quebec?

For Quebec income tax, the employer's contributions to a group insurance plan, PHSP included, are a taxable benefit to the employee. Report the value in boxes A and J of the RL-1, and possibly box G revenuquebec.ca. The federal T4 still shows no benefit.

For a spending account with no insurance contract, the value of each employee's coverage is the benefits paid in the year to everyone with the same coverage, plus third party administration expenses, both prorated by days of coverage and including related tax, minus what the employee paid in revenuquebec.ca. For a Quebec owner manager, the plan saves federal tax but not Quebec tax.