A year's worth of dental costs in Ontario can easily reach into the thousands. Several rounds of check ups for your family, a crown, and a few major procedures will leave your pocket book feeling light. As a small business owner, most insurance plans offer sparse coverage with the majority of the costs coming right out of your pocket.
Thankfully, you have an option that can greatly reduce your dental costs. Introducing the Health Spending Account.
Let's use an example of an incorporated business owner in Ontario. She pays herself a salary of $100,000 and has a personal tax rate of 43%. In the upcoming year, she expects to spend $4,000 on her family's dental costs. She has no plan of insurance in place. 100% of the cost is going to be paid out of pocket.
In the diagram below, we see a savings comparison between paying for the dental costs out of pocket versus using a Health Spending Account.
Choice 1 - Out of pocket: After Tax
With no plan of insurance (remember it's not so easy to find a dental plan for a one person company), the dental cost is paid for out of pocket with after tax dollars. After tax dollars is the amount left over after personal income tax is paid. In her tax bracket, the company will have to pay out $7,120 (before tax), with 43% of that amount being reserved to pay her income tax ($3,120).
In other words, each dollar she spends on her dental costs require the company to pay her $1.78. 78 cents (43%) of this pay goes to Canada Revenue Agency in the form of provincial and federal taxes. The true cost for a $1 of dental work is therefore $1.78 when you factor in the additional cost of taxes. Scary, isn't it?
Choice 2 - Health Spending Account: Before Tax
By using a Health Spending Account, she is able to write off 100% of her dental costs through her corporation. The after tax expense from choice 1 now becomes a before tax expense. Instead of paying an additional 43% on every dollar she spends on dental, a flat rate annual fee is paid to the provider of her Health Spending Account.
In our example, her company will save approximately 40% on every dollar she spends. The higher the tax bracket (the top tax bracket in Ontario for 2013 was $49.53%), the more she saves. For top earners in Ontario, this means you can cut your dental costs in half. In every tax bracket, you will save money by paying for your dental costs through your company, as a before tax expense, with a Health Spending Account.
