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09.07.17

Recognizing Strategies that Work for Business Owners

With the Liberal Government’s present focus on making life harder for business owners, it may seem like the benefits of owning and running a small business are diminished.  With this in mind, we felt it important to re-visit some of the positive strategies that being self-employed and/or incorporated can bring which are not currently in Bill’s cross hairs…

Staying Healthy Costs Money

Regardless of your employment status, political leaning, or the ice hockey team that you follow, health care expenses are a given. With our population aging, health care costs rising and reductions in state provided medical cover, Canadians are carrying an ever increasing healthcare expense burden.  For these reasons, it is crucial to make full use of opportunities to reduce the impact healthcare costs have on personal and corporate financial planning.

Typically, one pays for the medical expenses they incur from after tax income.  Let’s take the semi-annual trip to the dentist as an example. Each time you go to the dentist, you pay the bill as you leave. If you are lucky enough to be covered by your own or a partner’s plan, the provider takes care of some of the cost, up to a maximum.  The main points are that not everything is covered and when you do pay, it is with after tax dollars.  

If you are self-employed or own an active incorporated business, you do not always have to pay yourself first in order to cover healthcare expenses with after tax income. Healthcare expenses can be deducted as costs to a business where Health and Welfare Trusts (HWT) and Personal Health Services Plans (PHSP) are utilized. These tried and tested vehicles help business owners to manage their family’s healthcare expenses more tax efficiently.

Health and Welfare Trusts (HWT) 

HWT’s can be set up by incorporated individuals, business owners and professionals and are sanctioned by the Canada Revenue Agency. These employee ‘bank accounts’ are 100% tax deductible to the corporation and not considered a taxable benefit to the employee or shareholder. They are used exclusively to finance the health and dental expenses of the business owner, employees and their family members.

Personal Health Services Plans (PHSP)

For sole proprietors and unincorporated businesses, PHSP’s are sanctioned by the Canada Revenue Agency as a legitimate way to write off health and dental expenses. The PHSP lets small businesses deduct 100% of qualified healthcare expenses from their taxable business income, subject to plan limits.

What expenses are covered?

Whilst a HWT / PHSP administrator determines the eligibility of healthcare expenses, here are some of the expenses that are covered: All dental and prescribed medical expenses, orthodontics, crowns, laser eye surgery, eyeglasses, prescription drugs, infertility treatments, MRI, RMT, physiotherapy, supplements, school fees for children with unique learning differences.

What is the impact for my family and business?

On the business front, less funds are used to pay the gross taxable income needed to meet healthcare expenses that arise personally. The impact for your business is that more earnings can be retained in the business, to be used in the business.

On the personal end, the savings generated to through greater expense and tax efficiency can be devoted towards financial planning, for example, decreasing debt, saving for retirement, creating a legacy, philanthropy or maybe, just having some fun.

The impact of using a PHSP or HWT for a family of four over 30 years can be significant. Efficiencies typically run into many $10,000’s.  Here is an example of the impact of a $14,000 procedure:

Patient A (No HWT)

Patient B (HWT)

Marginal tax bracket, 46%

Yes

Yes

Cost of procedure (pre-tax)

$26,880

$0

Cost of procedure

$14,000

$14,000

Medical tax credit

$1,964

$0

Corporate deduction

$0

$15,400

Taxes paid to CRA

$10,916

$0

Savings

$0

$9,516

What do I do?

If you are self-employed or incorporated, do you have a PHSP or HWT?  If yes, well done. Take care to ensure your administrator is working with you to identify all possible deductible medical expenses.

If you are self-employed or incorporated and do not have a PHSP or HWT, it is likely to be a no-brainer to get one.  Talk to VELA Wealth and your accountant.

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