Steve R. owns a small incorporated IT consulting company and he asked us if he is HSA eligible if he is currently the sole employee (and owner) and he has taken used both income (T4) and dividends (T5) as a means of drawing out income from his company (based on his accountant’s recommendations).
Answer: The key is being able to demonstrate that the Health Spending Account is a benefit that you obtain by virtue of working in the company — not by virtue of being a shareholder. In other words, that you are doing substantially all the duties of an employee, and that the kind of benefit to which your company entitles you here, is reasonable and quite commensurate with the type of benefit you would be receiving, were you doing the same job as you are today but as an employee of another company.
It is largely the distinction between whether you are “working in the business” (just like an employee) and can thus have the benefit tax-free; vs being a silent/passive shareholder *not* working in the business at all (ie not being like an employee at all), vs being somewhere between the two (in which case it becomes important to establish to what extent you are “like an employee”).
The industry broadly considers that having a T4 or T4-like income is a good way to demonstrate to CRA that you are working “as an employee” of your own company, and hence that you are receiving the benefit as an employee and NOT because you are a shareholder. (CRA in various of their programmes, including e.g. in SR&ED, will often use the existence of T661s, ie that “your tax is being withheld by the company and remitted on your behalf to CRA” as a quick proxy check for “being an employee”). If you are only working infrequently, then the portion of your income paid on T4 helps to set the yardstick of “to what extent” you are employee.
On the other hand, we are not aware of any written rule or interpretation that absolutely requires there to be T4-like income, as most companies will also declare a dividend (T5) as a tax efficient means of drawing income from a corporation.
Thus, we do not consider it the case that *not* having a T4 income at all, means that you are automatically regarded as “not an employee” and hence disqualified. CRA has never published a full set of precise guidelines — they always look individually on a case-by-case basis and at the circumstances as a whole, so if you have other ways in which you can demonstrate that you are de-facto working as an employee in your company, then CRA will take those into account.
So as long as you have sufficient documentation to prove the “employee-like” nature of what you are doing. As always, you should discuss your situation with your accountant as they are often the ones who recommend allocation of income. As everyone knows CRA audits do occur from time-to-time. We have been involved in situations where a company is audited and our adjudicator (National HealthClaim) has needed to provide an explanatory letter. To date, we have not had a single case where CRA has not accepted this.
If your accountant requires information regarding the legal interpretation of the HSA structures, please review the information on our site at:
If more information is required we will be happy to provide your accountant with the opinion letter that was issued by one of the top international accounting firms to our adjudicator National HealthClaim. This cites the specific CRA interpretation bulletins and discusses compliance criteria. if more information is required simply have your accountant contact us directly at that time and we will correspond it directly with him/her.
The PreTax Health Team