The Secret to Making the Most of Your Healthcare Dollars in Canada

Employer contributions to a Health Spending Account do not constitute a taxable benefit and all claims paid are tax-free benefits (except for Quebec residents). The HSA can help self-employed Canadians deal with health costs and assist companies in focusing their health-care spending on their workers.

Simply put, a Health Spending Account allows you to take your out-of-pocket, after-tax expenses and convert them into pre-tax expenses.

Let’s say you’ve quit a job where you had a generous health benefits package, including dental and eye care. You can’t take advantage of your previous group benefits plan but you can arrange to have money deducted from your earnings on a pre-tax basis by using a Health Spending Account.

But you must use a third-party to administer the benefit in order to take advantage of the tax-free status.

This is not an insurance plan — you still have to pay the dentist for your filling, but the money comes from pre-tax dollars.

The contributions can be used for a wide variety of medical issues, including such things as routine dental expenses, eye exams, glasses and dental bridgework. The money can also be used for things that aren’t typically covered in traditional health benefit plans, such as laser eye surgery.

In addition, if you elect to purchase traditional medical insurance, because you’re working for yourself and no longer part of a group plan, you can take the money in your account and use it to buy this insurance.

There is already a mechanism in place for Canadian taxpayers to get a tax credit for medical expenses called the Medical Expense Tax Credit. Only expenses in excess of the lesser of $2,208 or 3% of net income can be claimed for a 2015 tax return. The lowest tax rate is applied to the medical expenses to determine the amount of the tax credit.

However, it is more effective to use a Health Spending Account.

Let’s say you own an incorporated family business and you had a $2,000 medical bill. In this case, you may try to deduct the $2,000 medical bill from your 2015 tax return — but you would not meet the minimum threshold for the medical tax credit, so there’s no benefit to you.

On the other hand, if you had a Health Spending Account with a designated $3,000 claim limit, you would be able pay for this $2,000 medical bill using pre-tax dollars, effectively saving hundreds.

In addition, Health Spending Accounts permit for the opportunity to offer a more personalized level of employee health benefits. In other words, instead of paying a flat premium to an insurance company for a limited, set menu of benefits, a company pays in money to individual HSA accounts.

That means that an employee who has perfect eyesight and doesn’t need a vision-care option could instead opt to pay for a smoking cessation program.

Unlike traditional insurance, which is characterized by consistently increasing premiums that are driven by claims, with an HSA, you have budget certainty. You know exactly what your health plan is going to cost you as an employer. And by paying for expenses using pre-tax dollars, an HSA truly permits small businesses to stretch their healthcare dollars in Canada.