September 24, 2019

Tax tip – Warning: Buyer beware when it comes to Health Spending Accounts

Canada Revenue Agency (CRA) is cautioning business about Health Spending Accounts (HSA) tax schemes. In particular, they are warning people to be aware of invalid HSA deductions. Any business that is incorporated can offer this plan to their employees and shareholders so long as the latter also earns a T4 income. A sole proprietorship is not eligible for this type of plan because they don’t have any arm’s-length employees. If you’re unsure, be sure to get a second opinion from a tax professional.

Key Takeaways:

  • HSAs are self-insured health plans offered by employers for their employees who live in Canada. They provide a way for small businesses to provide tax-free health and dental benefits to their employees (and their employees’ family members).
  • Corporations with as few as one employee are eligible, as well as exclusively for shareholders in the company provided they are employees earning a T4 income.
  • Owners and their employees of unincorporated businesses or sole proprietors are also eligible if the owner has at least one arm’s-length employee.

“A valid HSA plan must conform to private health service plan rules set out in the Income Tax Act.”

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