The PHSP: The Most Underused Tax Strategy for Incorporated Owners

Of all the tax strategies available to incorporated business owners in Canada, the Private Health Services Plan — commonly known as a PHSP — may be the most underused. Many business owners pay thousands of dollars annually in medical, dental, and vision expenses out of pocket with after-tax personal dollars, without realizing their corporation could pay these same expenses with pre-tax corporate dollars.

How a PHSP Works

A PHSP is an arrangement — either an insured plan or a self-administered cost-plus plan — under which your corporation reimburses you (and your family, if covered) for eligible medical and dental expenses as defined by the Income Tax Act.

The corporation pays the expense (or reimburses you for it), deducts the cost as a business expense, and the amount is not a taxable benefit to you personally. Compare this to paying the same expense personally: you would pay with after-tax dollars, and only the portion of medical expenses exceeding a threshold (the lesser of 3% of net income or a set dollar amount) is even eligible for the medical expense tax credit — and that credit is worth far less than a full deduction.

What Expenses Qualify

Eligible medical expenses under a PHSP follow the same list used for the medical expense tax credit — a broad category that includes:

• Dental care (cleanings, fillings, orthodontics, implants)
• Vision care (eye exams, glasses, contact lenses, laser eye surgery)
• Prescription medications
• Physiotherapy, chiropractic, massage therapy (with appropriate prescriptions where required)
• Psychologist and counselling services
• Fertility treatments
• Travel medical insurance
• Premiums for private health and dental insurance
• Medical devices and equipment

For a family with orthodontic work, vision correction, or ongoing therapy expenses, the annual total can easily reach $5,000–$15,000 — all of which can flow through a PHSP rather than your personal after-tax income.

Two Ways to Set Up a PHSP

Insured Plan

A traditional group health and dental insurance plan, where the corporation pays premiums. This is straightforward but may include coverage you do not need and premiums that do not scale precisely to your actual expenses.

Cost-Plus Plan (Self-Administered)

A cost-plus PHSP reimburses actual medical expenses as they are incurred, administered through a third-party administrator who ensures CRA compliance. You submit receipts, the administrator verifies eligibility, and the corporation reimburses the expense plus a small administration fee (“cost-plus” the fee).

Cost-plus plans are popular with small incorporated businesses because they are flexible — you only pay for expenses actually incurred, with no minimum premiums or unused coverage.

The Math: A Simple Example

Suppose your family has $6,000 in annual medical and dental expenses — orthodontics for a child, new glasses, and a dental crown.

Without PHSP	With PHSP
Pay $6,000 personally with after-tax dollars	Corporation pays $6,000 (plus small admin fee) directly
At a 43% marginal rate, you needed to earn approximately $10,500 pre-tax to have $6,000 after tax	Corporation deducts $6,000+ as a business expense — reducing corporate taxable income
Possible small medical expense tax credit on amount above the 3% threshold	No personal tax consequence — the benefit is entirely tax-free to you

The savings come from avoiding the need to extract personal income (via salary or dividends, both of which are taxed) just to pay for expenses that the corporation can pay directly and deduct.

Who Can Be Covered

A PHSP can cover you, your spouse, and your dependent children — the same definition of “family” used for the medical expense tax credit. If you have family members working in the business in a genuine capacity, they may also be eligible for coverage through the plan.

Important Rules and Limitations

• Must be a genuine plan. CRA requires that a PHSP be a legitimate insurance-like arrangement — not simply a mechanism to reimburse personal expenses on an ad hoc basis. Using a recognized third-party administrator for cost-plus plans helps ensure compliance.
• All employees must have access (with some exceptions). If you have employees, CRA generally expects that a health plan be available to employees on a reasonable basis — though the level of coverage can differ between shareholder-employees and other employees in some structures. This is an area requiring careful design with your accountant.
• Reasonable expectation of profit. The corporation must be a genuine operating business — PHSPs are not typically appropriate for purely passive investment corporations with no employees.
• Quebec has different rules. Quebec applies provincial sales tax to PHSP premiums and has somewhat different treatment — not directly relevant for Alberta-based businesses but worth noting if you have operations spanning provinces.

Setting One Up

Setting up a cost-plus PHSP typically involves:

1. Engaging a third-party PHSP administrator (several Canadian companies specialize in this for small corporations)
2. Establishing the plan with appropriate documentation
3. Submitting eligible expense receipts as they occur throughout the year
4. The administrator verifies eligibility and processes reimbursement from the corporation
5. Your accountant ensures the expense is properly recorded as a deductible corporate expense

Setup costs are typically modest — often a small annual or per-transaction fee from the administrator — and are far outweighed by the tax savings for most families with even moderate medical and dental expenses.