Tax Aspects

   
Private Health Services Plan (PHSP) (often called employee drug and dental benefit plans) are taxed very favourably. The tax aspects can be viewed from several different angles.

Click on the topic headings below for more details

Employee's View
Employer's View
GST and HST
Summary
Medical Tax Credit
Savings
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Employee's View

The benefit cheques received by employees are tax free and are not treated as income.   The following lists the benefits of receiving a benefit cheque versus receiving the same amount as a salary or business income.

small businesses No Federal income tax  is payable, including any surtaxes
small businesses No Provincial income tax is payable, including any surtaxes
small businesses CPP contributions from both the employee and the employer are not required
small businesses UIC contributions from both the employee and the employer are not required
small businesses The Net Income of the employee is lowered thereby increasing the amount payable from a number of income-tested federal and provincial support programs.  The programs below usually have a calculation that reduces the amount payable by a percentage of the person's (and sometimes spouse's) Net Income.   The amount of reduction is sometimes called a claw-back.  Lowering one's income through a PHSP has the effect of making the claw-back smaller and thus the support payment larger.

  Federally these include:
  small businesses   Canada Child Tax Benefit
  small businesses   National Child Benefit Supplement
  small businesses   GST/HST Tax Credit
  small businesses   Social Benefit Repayments
  small businesses   Spousal Non-Refundable Tax Credit
  small businesses   Personal Amount Supplement
  small businesses   Etc.
 
  In Ontario these include:
  small businesses   Ontario Child Care Supplement For Working Families
  small businesses   Ontario Tax Reduction
  small businesses   Ontario Property and Sales Tax Credit
  small businesses   Ontario Home Ownership Savings Plan (OHOSP) Tax Credit
  small businesses   Etc.


 
Employer's View

If the employer is a corporation, then it can deduct the contributions from its income in the same way that salary can be deducted.   Thus the corporation is in the identical income tax position regardless of whether the contributions are paid to Bene-D-Duct to fund the PHSP , or paid to the employee as salary.

If the employer is a proprietor, then the proprietor can deduct the contributions to Bene-D-Duct from his/her income.   This is true even though the benefit cheques are received tax free.

There is no limit to the amount of deductible Contributions for corporations, or for proprietorships with at least half of the eligible employees at arm's length to the proprietor (e.g. a close relative would not be at arm's length). At proprietorships where more than half of the eligible employees (including the proprietor) are not at arm's length to the proprietor then the maximum Contribution that can be deducted each year is $1,500 per employee plus $1,500 per spouse plus $750 per child. For example, a family with a spouse and two children would add $4,500 to the maximum deductible limit.


Employers With Employees in Ontario
In Ontario the Retail Sales Tax of 8% applies to the contributions to employee benefit plan including PHSPs . The other provinces do not apply a non-refundable sales tax to benefit plans other than Quebec where this plan is not offered.

Also the Ontario government applies a Premium Tax on "Uninsured Benefits Arrangement" upon corporations.  Proprietorships are not affected by this tax since they do not file an Ontario Corporations Tax Return.  The Self-Directed Benefit Plan TM   is an "Uninsured Benefit Arrangement". The tax level is 2% of contributions.

Case Study #1 included in this web site demonstrates the effect of 8% Ontario Retail Sales Tax and the 2% Ontario Premium Tax on Corporations.  Their impact reduces, by a relatively small portion, the tax savings generated by the removal of income tax, CPP, UIC, and claw-back of government support programs.


 
GST and HST

Merely the administration fees charged by Bene-D-Duct attracts the 7% GST or the 15% HST in Atlantic Canada. Both taxes can be claimed by taxable businesses as an Input Tax Credit when you file your GST or HST tax return. Therefore this tax has no ultimate impact on the total taxes paid by most businesses and little impact on those that do not charge GST/HST.


 
Summary

Thus a PHSP such as one of Bene-D-Duct's Self-Directed Benefit Plan TM , is one of the few employee perks that attract no income tax! Yet it still provides a tax deduction for the employer . Even a pension plan or an RRSP contribution merely defers income tax until the employee receives the retirement benefits.

The tax savings ranges from between 30% and 55% for most people.

In Ontario the savings are diluted by the 8% RST and for corporations by the 2% Premium Tax.


 
Medical Tax Credit

The government provides a tax credit for individuals who spend in excess of $1,686 or 3% of your own or your spouse's Net Income during the year on medical expenses. The credit is based only on the excess amount and is equal to the tax payable on this excess at the lowest tax rate even if you are paying tax at the highest tax rate. There is no credit or savings deducted from your CPP premiums and your claw-backs remain just as high.

If you do not expect to spend more than 3% of your Net Income on medical and dental bills then this section will be of no interest to you, and your savings are based on the previous paragraphs.

All of our Self-Directed PHSP customers save a good percentage of their medical expenses up to the 3% tax credit limit.

Many of our customers save an additional amount on their expenditures in excess of the 3% limit than they would have saved using the government's tax credit.   They keep saving because they are in the second or third or fourth tax bracket, or in a lower tax bracket but are receiving child benefits that are subject to claw-back and have to pay 9.4% for CPP premiums, or they live outside of Ontario or Quebec and avoid the provincial sales tax.


Some of our customers save less on their expenditures in excess of the 3% limit than what the government's tax credit is worth. However they remain customers because the small difference in savings on the excess does not offset the larger savings made with the Self-Directed Benefit Plan TM  up to the 3% limit.


 
Savings

With tax rates, tax credits, CPP and UIC premiums, government benefit entitlement rules all depending upon your Net Income (and your spouse's income), and Ontario's sales tax and corporate premium tax, etc., it is hard to describe every situation.

Have a look at our Calculators or our Case Studies and see if they help you to understand your particular situation and your expected savings. Send us an e-mail or phone us if you wish to ask questions.

However, if you are uncertain at all, or have a complex business structure or tax situation, it it best to consult with your own tax advisor to confirm your eligibility and potential tax savings from Bene-D-Duct's Self-Directed Benefit Plan TM .  Your tax advisor will want to refer to Section 20.01 of the Income Tax Act if you are a proprietor. He or she will also want to refer to IT 339 R2.
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