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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.
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Click on the topic headings below for more details
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Employee's View
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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.
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No Federal income tax
is payable, including any surtaxes |
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No Provincial income tax
is payable, including any surtaxes |
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CPP contributions
from both the employee and the employer are
not required |
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UIC contributions
from both the employee and the employer are
not required |
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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.
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Federally these include:
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Canada Child Tax Benefit
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National Child Benefit Supplement |
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GST/HST Tax Credit
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Social Benefit Repayments
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Spousal Non-Refundable Tax Credit
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Personal Amount Supplement
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Etc.
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In Ontario these include:
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Ontario Child Care Supplement For Working Families
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Ontario Tax Reduction
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Ontario Property and Sales Tax Credit
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Ontario Home Ownership Savings Plan (OHOSP) Tax Credit
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Etc.
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Employer's View
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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.
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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.
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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.
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| 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.
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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.
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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.
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GST and HST
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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.
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Summary
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Thus a
PHSP
such as one of
Bene-D-Duct's Self-Directed Benefit Plan
TM
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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.
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Medical Tax Credit
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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.
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Savings
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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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Self Directed Vs Insured Plan
