Tax deductions for businesses for Health Insurance benefits in Canada

Some employer groups may not qualify for for traditional employee group health coverage and may wish to pay for one or more individual extended health care plans as an alternative. E.g. the business is too small, or not yet incorporated, or simply not ready for the cost of a traditional employee group benefits plan.

If the company pays the premiums for employees who are not shareholders (or related to shareholders), the premiums are deductible by the company and do not constitute a taxable benefit to the employee. The exception is Quebec, where individual extended health care plan premium is a taxable benefit in the hands of the employee.

In the case of shareholders, Revenue Canada may determine the premium is a taxable shareholder benefit rather than a non-taxable employee benefit. This would be based on the facts of each individual case. For example, if there were several non-shareholder employees with similar coverage it would likely be an employee benefit. Conversely, if the only employees covered were also shareholders, it would probably be considered a shareholder benefit.

Deductions for self-employed

Self-employed people are allowed a deduction for business purposes of amounts paid for their own individual extended health care plan premiums, provided the following provisions are met:

• They're actively engaged alone or as a partner in their business (i.e. unincorporated)
• Self-employment is their primary source of income in the current year or income from other sources does not exceed $10,000.
• Equivalent coverage is extended to all permanent full-time arm's length employees
• A plan that would qualify as a private health services plan is set up with an insurer or trustee in the business of operating such a plan where arm's length employees make up 50% or more of the employee group covered, there is no limit on the amount deductible.

Otherwise, the amount deductible is limited to $1,500 for the individual, $1,500 for their spouse and $750 for each child.

An arm's length employee is one that is not a family member and has no controlling interest in the business.

Q&A about tax deductions

If a self-employed person pays premiums for a spouse and children, are those deductible as well?

Yes, provided the conditions are met.

Can the premiums be included in the person's medical expense tax credit?

Where a tax deduction is claimed, no amount paid for premiums will be eligible for the medical expense tax credit.

How restrictive are the dollar limits on non-arm's length employees?

The limits ($1,500 for the individual, $1,500 for their spouse and $750 for each child) are reasonable. Most people's premiums would not reach the limit, and therefore won't be affected.

Scenarios

Scenario 1:

Meet Emily, who runs a bakery with her partner, Daniel, who is also her spouse. They have 5 employees, out of which 3 are Emily's children. In addition to that, they have 2 children at home. The bakery operates as an unincorporated business. Emily decides to purchase the same comprehensive health care plan for herself, her 2 kids at home, and all 5 of their employees. Now, the question arises: Does Emily qualify for a tax deduction? And if so, what is the maximum limit? How does it apply to her children at home?

Answer: Emily is indeed eligible for a tax deduction; however, the deduction will be limited to the cost of providing equivalent coverage to employees who are not related to her or Daniel (i.e., not family members). The maximum limit for the deduction is $1,500 per person for Emily, Daniel, and their adult children, while it is $750 per child for their minor children. For instance, if the cost of providing coverage to a non-related employee is $500, then the deduction limit per person would be $500.

Scenario 2:

Let's consider the case of Mark, who works part-time as a barista at a local coffee shop. In addition to his barista endeavors, Mark is self-employed and runs a photography business, which is not incorporated. Last year, Mark earned $20,000 from his part-time job as a barista and $15,000 from his photography business. As Mark has no employees, the question arises: Is he eligible for a tax deduction?

Answer: Unfortunately, Mark does not qualify for the tax deduction. The reason being that the income earned from other sources (his part-time job), totaling $20,000, exceeds the limit of $10,000 set for eligibility.

Scenario 3:

Let's consider the case of Sarah, who owns an unincorporated gardening services company with 7 employees. Sarah decides to provide individual extended health care plans for both her employees and herself. She opts for a basic drug plan for her employees and chooses an enhanced plan that includes drug and dental coverage for herself, her spouse, and their children. Now, the question arises: Are the premiums paid by Sarah and her family tax deductible?

Answer: Unfortunately, the premiums are not tax deductible since Sarah does not provide equivalent coverage to her employees. In order for premiums to be eligible for deduction, it is necessary to offer comparable coverage to all employees.