A Health Spending Account for small business is being used by tens of thousands of Canadian business owners across Canada.
Here's what you need to know about Canada's best kept tax secret.
1. What is a Health Spending Account for small business?
A Health Spending Account is a financial planning tool for a small business owner in Canada to pay for their medical expenses. As an alternative to traditional health insurance or paying for medical expenses out of pocket, the HSA converts after tax medical expenses into a before tax business expense.
2. How does a Health Spending Account for small business save money?
There are three ways for a small business owner to pay for medical expenses: through a traditional health insurance plan, out of pocket (with no plan), or through an HSA.
The HSA is often viewed as the most cost effective option for several reasons. First, it does not have an expensive monthly premium. Second, there are no deductibles. Third, medical expenses are paid for through the business as opposed to personally (therefore greatly reducing the amount of tax you pay on your medical expenses).
Below is an example of a savings comparison between an out of pocket and business medical expense.
Choice 1 – Out of Pocket: After Tax Medical Expense
The medical expense could represent a year's worth of uncovered expenses that has been paid for by you, personally, with out of pocket after tax dollars. After tax dollar is the amount remaining after personal income tax is paid. In this example’s tax bracket, the company will distribute $7,120 (before tax), with 43% reserved to pay income tax ($3,120).
To explain in detail, each $1 you spend on medical expenses requires your company to pay you approximately $1.78 before tax. 43% (or 78 cents) is paid in tax to Canada Revenue Agency in the form of provincial and federal taxes.
Choice 2 – HSA: Before Tax Medical Expense
In this case, the medical expense is paid through your corporation as a before tax business expense. Effectively, you are able to write off 100% of your medical expense through your corporation. Value is created by keeping the additional 43% tax inside your corporation.
The cost of the Health Spending HSA will vary by provider. In this example the yearly (total) cost of the HSA is $499.
3. What kind of kind of medical expenses are eligible with a Health Spending Account for small business?
There are over 124 eligible medical expenses. Each expense receives 100% coverage. Medical expenses range from services performed by practitioners such as Chiropractors and Orthodontists to specific expenses including diabetic supplies and MRIs.