Buried deep inside Canada's Income Tax Act, there is a secret for a incorporated professionals and small businesses. This tax free plan has been used by thousands of in-the-know Canadian business owners for almost 20 years.
Let's take a look at what you've been missing:
Business Expense vs Personal Expense
Let's take a quick look at your income tax savings when you pay for an expense through your business as opposed to personally. Your marginal tax rate in Ontario with a salary of $100,000 is 43.41%. At this rate, for every $1.78 in salary, approximately $0.78 or 43.41% is paid to the federal and provincial government in personal income tax, leaving you with $1.00 after tax.
Assume the cost of your office rent is $1,000 a month. Paying for rent as a personal expense would cost your business approximately $1,780. You would earn $1,780, pay the government tax of $780 (43.41%), and then have $1,000 after tax to pay your rent.
Fortunately, you can deduct the cost of your rent and have your business pay for the expense. For every $1,000, you and your business will save approximately $780. Over the course of a year, the savings add up substantially.
How can I pay for personal medical expenses through my business?
According to a CRA Interpretation Bulletin IT339R2 and section 248(1) in Canada' Income Tax Act, a Private Health Services Plan, or more commonly referred to as a Health Spending Account, is a contract of insurance in respect of medical expenses. Essentially, it is a tax planning vehicle for you and your business.
To simplify, a Health Spending Account makes it so that all of your personal medical expenses (including your dependants) can be paid for... through your business. It turns after-tax personal medical expenses into before-tax business expenses. Carrying over the math from the rent example, you can save up to 43% for every dollar you spend on your personal medical expenses. For top earners in Canada with a marginal tax rate approaching 50%, the savings from this tax vehicle can be significant.
A Health Spending Account has been adopted by Canada's small business community as a viable and cost effective alternative to traditional insurance. With no premiums, 100% coverage, and an easy to use format, the Health Spending Account is truly one of Canada's best kept and underused tax secrets. To learn more, I recommend downloading one of the free guides below depending on your business type (incorporated one person business or small business with employees):
Download the FREE Beginner's Guide for incorporated one person business:
Download the FREE Beginner's Guide for a small business with employees: