1. Tax treatment of Health Spending Accounts The general thrust of Paragraph 6 (1) of the Income Tax Act is to include in employment income the value of all benefits received or enjoyed in respect of an employee’s employment. However, there are a number of specific exceptions, many of which can be described as benefits relating to the health and welfare of the employee such as registered pension funds or plans, deferred profit sharing plans, supplementary unemployment benefit plans, the standby charge for the use of an employer’s automobile, employee benefit plans and employee trusts. Canada Revenue Agency’s Interpretation Bulletin IT-85R2 describes the specific characteristics of a Health and Welfare Trust. These mandatory characteristics are as follows: a) The funds of the trust cannot revert to the employer or be used for any purpose other than providing health and welfare benefits for which the contributions are made; b) The employer’s contributions must not exceed the amounts required to provide these benefits; c) The employer’s contributions cannot be made on a voluntary or gratuitous basis. They must be enforceable by the trustees should the employer decide not to make the payments required; d) The trustee or trustees must be able to act independently of the employer. The employer must not have control over the use of the funds meaning that the beneficiaries of the trust must have direct claim against the trustees and not through the employer. The Health Spending Account (HSA) is a specific form of a Health and Welfare Trust set up by an incorporated employer exclusively for the purpose of covering Health and Dental Care expenses of his employees. Where the above requirements are met, the contributions to the HSA made by an employer using the accrual method of computing income, are deductible as business expense in the year in which the legal obligation to make the contributions arose. The employees do not receive or enjoy a taxable benefit at the time the employer makes a contribution to the HSA. The benefits paid by the trustee to the employees from the HSA at the time of claim for health and dental expenses are also not subject to tax. The unspent funds by an employee can be carried forward indefinitely and can be used even after the employee lives the employer who have set up the HSA.
2. Health and dental expenses covered through an HSA As mentioned above, the Health Spending Account is a type of Health and Welfare Trust. Unlike all Employee Group Benefits Plans available on the Canadian market which represent insurance plans, the HSA does not have annual limits for every type of medical expense (dental, hospital, vision, practitioners etc.), does not have deductibles, does not have co-insurance and most importantly does not limit the types of medical expenses covered. The HSA provides every employee with a specific amount of money (there’s no maximum) per year that is available to cover all types of health and dental expenses, including all types of dental work (crowns, bridges, braces etc.), glasses and contact lenses, fertility drugs, cosmetic surgeries, hair transplants, laser eye surgeries, experimental drugs and treatments, nursing home or attendant care and many others. The only requirements are:
The treatment must be performed by a Licensed Medical Practitioner in the respective province, and
The drugs must be prescribed by a Licensed Medical Practitioner and dispensed by a Licensed Pharmacist or a Licensed Medical Practitioner.
The unspent money is carried forward indefinitely and can be used even after the employee lives the job, as mentioned above.
In summary the Health Spending Account is a perfectly legal way to cover your and your dependants’ medical expenses with before tax money if the account is properly set up according to the requirements of the Income Tax Act and Regulations. You can set up the Health Spending Account of your corporation by clicking “Contact” on the navigation bar on the left. Please pick “Health Spending Account” from the drop-down list, choose the most convenient for you way to be contacted (telephone, fax or email). You may even suggest convenient time for an appointment in the field left for “Questions, comments or feedback”.
Health and Welfare Trusts as Employee Health Services Plans