Canadian Sole Proprietors Get The Short End On Health Spending


health spending accountCanadian sole proprietors might not know it yet but they have lost the benefit of the health spending account (otherwise called Health & Welfare Trust).

The ability to use these spending accounts as a vehicle to expense extended medical and dental expenses to your business gross income is coming under scrutiny by CRA when the benefits are for family members or those deemed by CRA for the benefit  of non-arms length employees/persons.

These accounts facilitated by CRA are government-run (for lack of a better term) program that allows individuals to tax deduct medical and dental expenses from their business income using these health spending accounts.

How Did It Work?

When you deposit money into you health spending account it was a tax deductible business expense, to be used specifically for medical and dental expenses.

Unfortunately, Revenue Canada has said this will no longer be allowed for sole proprietors dealing at non-arms length. I can only rationalize CRA’s reasoning is the sole proprietor and the business are the “same” when filing an income tax return.  All sole proprietors who have purchased health spending accounts and  not dealing at arm’s length will come under the scrutiny of CRA and may have future extended health and dental benefits through any health and welfare trusts disallowed.

How Come I Didn’t Know About It?

The companies and advisors offering this service have been notified by Revenue Canada and have subsequently been passing the message along to affected clients.

We have been notified by several companies warning us they will not accept new business after February 1, 2013.

Existing clients may have to complete some additional papers for their carrier to have their claims processed for 2012.  We receive regular updates but there are still some procedures not yet clarified by CRA. Always check with your accountant

What Are My Options?

You might have noticed several major insurance companies have bought extensive TV advertising offering their extended health and dental programs. Their products may have a place in some people’s planning but they do not fit the needs of many sole proprietors or small business owners.

There is a solution for the sole proprietor and small business owner that offers several choices of fully insured plans providing coverage for extended health, dental plans with orthodontics, short and long term disability, etc.  Some more extensive programs designed for the business owner include:

  • Group insurance to replace health spending account
  • Association plans suited for sole proprietors
  • Both options are pooled and will still work with one-person firms and sole proprietors

In my experience, these options seem to work much better than the health spending account anyways. As a sole proprietor, you are not out of options for extended coverage for health and dental. Go here to learn more about benefits that are compatible with one-person firms.

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