Should I be incorporated to take advantage of a Health Spending Account?
Some providers will tell you “no” — but the REAL answer is: Yes: to take advantage of a Health Spending Account you MUST be an incorporated company – from a single owner company on up to a large corporation. This includes any incorporated company in Canada with the exception of the province of Quebec, which has separate legislation governing the taxation of health benefits.
What about Sole Proprietors?
Although some health providers say it is possible for an unincorporated company to subscribe to a Health Spending Account, this is not consistent with the CRA criteria for an HSA. Most of the more reputable health care providers no longer support the practice of offering HSAs to unincorporated companies.
The CRA is clear. A sole proprietorship cannot legitimately subscribe to a Health Spending Account. The CRA lays out various criteria for a plan to qualify as a PHSP. One such rule is that the plan must be a “plan or contract of insurance”. This has a very specific definition: there must be one party that indemnifies another party against loss in respect of an event, the happening of which is uncertain.
In an incorporated company, it is the corporation which indemnifies the employee(s). Even if its only a single-person company, the employee and the company are two different entities or legal persons.
It is not possible for a Sole Proprietor to qualify under this rule, since a Sole Proprietor (wearing the hat of “business owner”) cannot indemnify him/herself wearing the hat of employee; since they are legally the same person!
For example, if Fred H is a sole proprietor then Fred H cannot indemnify himself against loss in respect of medical events, the happening of which is uncertain.
On the other hand, if Fred H is the sole employee and owner of “Fred H Consulting Inc”, then it is quite possible for “Fred H Consulting Inc” to indemnify Fred H, since the company and the employee are two separate persons.
The confusion probably arises because the PHSP rules explicitly refers to Sole Proprietors, and states that PHSPs are available to sole proprietors provided that all the other rules apply. Clearly this cannot apply in the case of a Health Spending Account; however, Health Spending Accounts are only one type of PHSP. Notice, for example, that a sole proprietor (unincorporated company) can subscribe to a traditional monthly health benefits program (e.g., Blue Cross), as there can then be a contract of indemnity or insurance between the sole proprietor and the insurer (e.g. Blue Cross).
These same limitations do not exist with incorporated businesses. A corporation is a separate entity which can indemnify an employee-owner.
Besides, in addition to the obvious Health Spending Account benefits you obtain by incorporating, there are numerous other benefits you can realize from incorporation. If you are not already incorporated we encourage you to download and read one of our Free Reports entitled “8 Ways to Reduce Your Taxes 30% or More,” where we identify 7 compelling reasons to incorporate.
At PreTax Health, we were determined that our plan should be as compliant to CRA rules as possible; so a lot of money was spent on having a Top 5 international consulting company go through our operational procedures and the CRA rules with a fine tooth comb.
This clearly showed that Health Spending Accounts cannot be provided to Sole Proprietors. We’re saddened that there remain providers who offer Health Spending Accounts to Sole Proprietors, ignoring the potential tax consequences to which they are exposing them.