Health Spending Accounts for Incorporated Professionals: A Smarter Way to Pay Medical Expenses?

Some of the best financial planning isn’t about making more money.

Sometimes, it’s about becoming more efficient with money you’re already going to spend.

A Health Spending Account (HSA) is a good example.

I use an HSA within my own incorporated business, and it’s also a strategy I discuss with incorporated clients when it fits their circumstances.

The appeal is relatively straightforward: medical, dental, vision and other eligible health expenses are a fact of life. For an incorporated professional, however, how those expenses are funded can matter almost as much as the expense itself.

When medical expenses are paid personally, the money generally has to reach you personally first. Depending on how you compensate yourself and your particular tax circumstances, that can mean extracting corporate dollars and paying personal tax before using the remaining money to pay the bill.

A properly structured HSA may provide another way to approach that expense.

Same dentist. Same prescription. Same pair of glasses.

Potentially a much more efficient way to pay the bill.

What Is a Health Spending Account?

A Canadian Health Spending Account — also commonly called a Health Care Spending Account (HCSA) — is an arrangement through which a business can provide reimbursement for eligible medical expenses.

For incorporated businesses, this can allow the corporation to fund qualifying health benefits for employees, including qualifying shareholder-employees, rather than requiring those expenses to be paid entirely with personal after-tax dollars.

There’s an important technical distinction here.

An HSA isn’t its own special category of the Income Tax Act. To receive the intended tax treatment, the arrangement generally needs to qualify as a Private Health Services Plan (PHSP).

CRA specifically recognizes self-insured plans containing Health Care Spending Accounts within its PHSP guidance. Under the current rules, generally 90% or more of the relevant premiums or benefits — depending on whether the plan is insured or self-insured — must relate to expenses eligible for the Medical Expense Tax Credit.

Think of it this way:

PHSP = the tax framework

HSA/HCSA = the health-spending arrangement operating within that framework

That’s an important distinction because simply calling something a “Health Spending Account” doesn’t automatically make it compliant.

How Can an HSA Work for an Incorporated Professional?

Let’s use a simple example.

Suppose an incorporated professional expects to spend $5,000 this year on eligible family health expenses — perhaps dental work, prescription medication, vision care and other qualifying medical costs.

Paying personally

The professional pays those expenses from their personal bank account.

If additional money needs to be taken from the corporation to cover those costs, sufficient corporate funds have to be extracted to leave the required amount available personally after considering the applicable personal tax consequences.

Using a properly structured HSA

Instead, the corporation establishes an HSA that meets the applicable PHSP requirements.

Eligible expenses are submitted through the plan and reimbursed according to its terms.

The medical treatment hasn’t changed.

The professional hasn’t suddenly discovered a cheaper dentist.

What changed is the structure used to fund the expense.

And for an incorporated professional, that can be an important planning distinction.

Good planning isn’t always about reducing the cost of something. Sometimes it’s about reducing the cost of the dollars used to pay for it.

What Medical Expenses Can an HSA Cover?

The range can be broader than many business owners expect.

Depending on the expense and the circumstances, qualifying costs can include items such as:

Dental care — including many routine and restorative dental expenses and orthodontic work.

Prescription drugs — where the medication meets CRA’s eligibility requirements.

Vision care — including qualifying services and expenses provided by recognized practitioners.

Physiotherapy and other eligible practitioners — subject to CRA requirements and provincial recognition of the practitioner.

Medical devices and equipment — certain qualifying devices and supplies may also be eligible.

There are many additional categories, and the rules can vary depending on the particular expense. CRA maintains the authoritative list of expenses that may qualify for the Medical Expense Tax Credit.

CRA’s current list of eligible medical expenses

The important point is that an HSA doesn’t transform an otherwise personal expense into an eligible medical expense simply because the corporation pays for it.

The underlying expense still has to satisfy the applicable rules.

Incorporated vs. Unincorporated: An Important Difference

This is an area where terminology can become confusing.

CRA specifically states that incorporated businesses, including shareholder-employees and other corporate employees, can be eligible to participate in an HSA. A corporation with as few as one employee may also qualify.

The situation is different for sole proprietors.

CRA has specifically warned about HSA arrangements marketed to sole proprietors with no arm’s-length employees. CRA says those arrangements do not qualify as PHSPs merely because additional insurance products are added to them, and amounts paid to such an account are not deductible business expenses on that basis.

That’s one reason generic statements like “Every business owner should have an HSA” deserve some skepticism.

Business structure matters.

What About Shareholder-Employees?

This is another area where proper planning matters.

Many incorporated professionals are simultaneously:

• shareholders of their corporation,
• employees of the corporation, and
• the people receiving the health benefit.

That doesn’t automatically prevent an HSA from being used. CRA expressly recognizes that shareholder-employees can participate.

But the distinction between receiving something as an employee and receiving it because you’re a shareholder can be important throughout Canadian tax planning.

That’s why I don’t view an HSA as a do-it-yourself tax trick.

The plan should be properly established, the benefits should be reasonable in the circumstances, expenses should actually qualify, and the arrangement should be coordinated with the client’s accountant or tax professional where appropriate.

An HSA Isn’t an Investment Account

This one is worth emphasizing because Canadians increasingly encounter information online about American Health Savings Accounts, which operate very differently.

A Canadian HSA/HCSA of the type we’re discussing here is primarily a health-benefit and expense-reimbursement arrangement.

We’re not talking about opening an investment account, buying securities inside it and allowing the balance to compound for decades.

That’s a different concept.

For our purposes, the objective is much simpler:

Use an appropriate corporate structure to fund eligible health expenses more efficiently.

So, Who Should Consider Looking at an HSA?

An HSA may be worth discussing when an incorporated professional or business owner:

• regularly incurs meaningful medical, dental or vision expenses;
• doesn’t have sufficient traditional employer health coverage;
• has a spouse or family with recurring eligible medical expenses;
• is already paying those costs personally with after-tax dollars; or
• wants to examine whether the corporation can provide health benefits more efficiently.

It isn’t automatically the right answer.

Administration fees matter. The amount of expected medical spending matters. Corporate and personal tax circumstances matter. Existing insurance coverage matters.

But for the right incorporated professional, the conversation is certainly worth having.

The Bigger Planning Lesson

I like Health Spending Accounts because they illustrate something much larger about financial planning.

People often assume better financial planning means finding:

another investment, another insurance policy, another account, or another product.

Sometimes it does.

But sometimes the opportunity is already sitting right in front of you.

You’re already going to the dentist.

You’re already buying the prescription.

Your child already needs braces.

You’re already paying for glasses.

The better question may simply be:

“Am I paying for this in the most efficient way available to me?”

For incorporated professionals, that’s the kind of question comprehensive planning should continually ask.

Because building wealth isn’t only about what you earn.

It’s also about how thoughtfully you structure the financial decisions you’re already making.

Thinking About an HSA for Your Corporation?

At Delta Creek Financial Advisors, we work with business owners and incorporated professionals to look beyond individual products and consider how investment, insurance, retirement, corporate and estate-planning decisions fit together.

A Health Spending Account can be one relatively simple piece of that much larger picture.

This article is provided for general information only and should not be considered tax, legal or accounting advice. Individual circumstances vary. Tax and corporate planning decisions should be reviewed with the appropriate professional advisors.