The PHSP: The Most Underused Tax Strategy for Incorporated Owners

Among the tax strategies available to incorporated business owners, the Private Health Services Plan (PHSP) is one that consistently surprises people who learn about it for the first time — not because it is complicated, but because it is a straightforward, well-established provision that many eligible business owners have simply never been told about, and continue paying for health and dental expenses personally with after-tax dollars when a more tax-efficient option exists.

How a PHSP Works

A PHSP can take a couple of forms: an insured plan through an insurance provider (similar to a traditional employee health benefits plan, but potentially structured for a small number of employees including the owner), or a "cost-plus" arrangement, where the corporation reimburses eligible medical and dental expenses as they are incurred, typically administered through a third-party administrator who processes claims and ensures expenses meet eligibility criteria.

The cost-plus structure is particularly relevant for smaller corporations, including those where the owner is the only employee (or one of a small number) — it allows flexibility to pay for the specific medical and dental expenses the family actually incurs, rather than purchasing a standardized insurance product that may include coverage for services not relevant to the family’s situation.

What Expenses Qualify

Eligible expenses under a PHSP generally align with the expenses eligible for the medical expense tax credit on a personal tax return — a broad category that includes most dental work, prescription medications, vision care (eyewear, eye exams), physiotherapy, chiropractic care, psychological services, and many other health-related costs. The specific list is established by the CRA and administered consistently with the medical expense tax credit rules.

The Tax Advantage, Illustrated

Consider a family with $5,000 in eligible dental and health expenses in a year, paid personally. Without a PHSP, this $5,000 is paid with after-tax dollars — the individual needs to earn enough pre-tax income (through salary or dividends from the corporation, with associated personal tax) to have $5,000 left after tax to pay these expenses, though a portion may also be partially recovered through the medical expense tax credit on the personal return, subject to its own threshold and calculation.

With a PHSP, the corporation pays the $5,000 directly (plus an administration fee, in the case of a cost-plus arrangement), deducts it as a business expense, and the $5,000 of benefit is generally not a taxable benefit to the employee. The corporation’s deduction reduces corporate taxable income, and no personal tax is incurred on the value of the benefit — a more direct and complete tax benefit than relying on the personal medical expense tax credit alone.

Who Can Be Covered

A PHSP can cover the employee (including a shareholder-employee) and their eligible dependants — spouse and children, generally consistent with who would be considered dependants for medical expense tax credit purposes. For a small corporation where the owner and their spouse and children are the relevant family unit, this means the PHSP can effectively cover the family’s health and dental expenses as a whole.

Setting Up a PHSP

Setting up a PHSP, particularly a cost-plus arrangement, typically involves working with a provider who specializes in administering these plans — they handle the plan documentation, claims processing, and ensuring expenses submitted are eligible under CRA rules. The administration fee is generally a percentage of claims processed, which is itself a deductible expense to the corporation.

For corporations that also have non-owner employees, the PHSP needs to be offered in a way that does not discriminate in favour of shareholders — meaning the structure of the plan, and who is eligible for what level of benefit, needs to be considered if there are employees beyond the owner and their family. For owner-only corporations, this is less of a complicating factor.

PHSP vs. Personal Medical Expense Tax Credit: A Comparison

Aspect	Personal Medical Expense Tax Credit	PHSP
Who pays initially	Individual, with after-tax personal funds	Corporation, with pre-tax corporate funds
Tax recovery mechanism	Non-refundable credit, subject to a threshold (expenses must exceed a certain amount or percentage of income before the credit applies)	Corporation deducts as business expense; generally no taxable benefit to employee
Threshold considerations	Only expenses above the threshold generate a credit	No equivalent threshold — the corporation’s deduction applies to eligible expenses paid
Administration	Receipts kept and claimed on personal return	Claims submitted to plan administrator (for cost-plus arrangements), with an administration fee

Is It Worth the Administration Fee?

For a cost-plus PHSP, the administration fee (typically a percentage of claims processed, plus the value of the claims themselves) is itself a deductible corporate expense — meaning the "cost" of using the PHSP is also tax-advantaged, though it is still a real cost. For families with relatively modest annual health and dental expenses, it is worth confirming that the tax benefit of the PHSP structure exceeds the administration fee, though for most families with regular dental visits, prescriptions, or other recurring health expenses, this is typically the case — particularly relative to expenses that would otherwise fall below the medical expense tax credit threshold and generate no personal tax benefit at all.

A Provision Worth Asking About

The PHSP is well-established and not a "loophole" or aggressive strategy — it is a recognized employee benefit structure that happens to be particularly accessible and beneficial for owner-managed corporations. The reason it is often described as underused is less about any complexity in the provision itself, and more about the fact that it requires proactive setup — unlike salary or dividends, which are the "default" ways an owner thinks about taking money from a corporation, a PHSP is something that needs to be specifically established and is easy to overlook if no one raises it.