Health Spending Account vs Salary Calculator
Medical costs paid through a health spending account are deductible to the corporation and tax-free to you, which beats earning salary and paying for them personally. Work out the real gap once the administration fee and the Ontario taxes on premiums are counted.
saved by the better route
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Paying Through a Health Spending Account
| Item | Basis | Amount |
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Paying Yourself Salary Instead
| Item | Basis | Amount |
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The Two Routes Side by Side
| Feature | Health Spending Account | Salary |
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Points That Decide This
What to Do Next
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Disclaimer: A health spending account is a form of private health services plan as defined in subsection 248(1) of the Income Tax Act. Employer contributions to such a plan are generally deductible to the employer as a business expense and are excluded from the employee’s income under subparagraph 6(1)(a)(i), provided the plan meets the requirements of a plan of insurance in respect of hospital, medical or similar expenses and the arrangement is genuinely in the employee’s capacity as an employee rather than as a shareholder. The Canada Revenue Agency has taken the position that a plan covering only a shareholder or shareholder’s family, with no arm’s length employees, may be examined to determine whether benefits are received in an employee capacity, and additional restrictions apply to unincorporated businesses. Amounts covered by a plan are not eligible for the medical expense tax credit, since the credit is available only for expenses not reimbursed. The medical expense tax credit is computed on eligible expenses exceeding the lesser of a prescribed annual amount and 3% of the individual’s net income, at the lowest federal and provincial rates combined. Ontario imposes retail sales tax on premiums for certain insurance and benefit plans and an insurance premium tax applies to insured plans; rates and their application depend on how the arrangement is structured. The administration fee, the tax rates, the medical credit rate and the credit threshold used in this calculator are defaults that should be replaced with your provider’s actual charges and the current published rates before being relied on. Employer CPP is modelled as a flat rate on the additional salary and does not reflect the annual maximum. This page is general information, not tax advice.
The Exclusion That Makes It Work
Employer-paid premiums to a private health services plan are excluded from the employee’s income. That single exclusion is what makes a health spending account efficient, and it is the same rule that makes group health and dental coverage a tax-free benefit for employees generally.
The corporation deducts what it pays. The employee receives the medical coverage without it appearing on a T4. Nothing is added to income, so nothing is taxed.
Compare that with the alternative. To pay a six thousand dollar dental bill personally, an owner at a forty-three per cent marginal rate needs roughly ten and a half thousand dollars of salary. The corporation has to earn and pay that salary, plus employer CPP on it. The gap between the two routes is not subtle.
The Medical Credit Is Weaker Than People Expect
The obvious objection is that medical expenses paid personally attract the medical expense tax credit. They do, but it is a modest offset for two reasons.
First, it is a credit at the lowest combined rate rather than a deduction at your marginal rate. Second, only expenses above a threshold count, being the lesser of a prescribed annual amount and three per cent of net income, so the first slice produces nothing at all.
| Route | Relief Obtained |
|---|---|
| Health spending account | Full corporate deduction, nothing taxable to the employee |
| Paid personally from salary | A credit at the lowest rate, on the excess over a threshold |
And the two cannot be combined. Expenses reimbursed through a plan are not eligible for the credit, because the credit is only available for costs you actually bore.
What the Costs Actually Are
A health spending account is not free. A third-party administrator processes the claims and charges a fee, typically a percentage of what is claimed, and Ontario applies tax to premiums for insurance and benefit plans on top.
Those costs are real and they should be in the comparison. They are also deductible to the corporation, so the after-tax drag is smaller than the headline figure, and on any meaningful level of claims they are comfortably outweighed by not paying personal tax on the money.
Where the numbers get closer is at very low claim levels. A few hundred dollars of expenses spread across administration fees and premium taxes can produce a thin margin, and the plan may not be worth the paperwork. The arrangement earns its keep once there is regular, predictable medical spending.
The Sole Shareholder Question
This is the part that needs care. The exclusion depends on the benefit being received in the capacity of an employee. Where a corporation has arm’s length employees covered by the same plan, that is straightforward.
Where the only people covered are the owner and their family, the arrangement can be examined to determine whether the benefit is really an employment benefit or a shareholder benefit. A shareholder benefit is taxable and the deduction can be denied, which reverses the entire advantage.
That does not mean an owner-managed corporation cannot have one. It means the arrangement should be set up deliberately, with the owner genuinely employed, reasonable remuneration, and terms comparable to what would be offered to an employee. It is not a document to download and file away.
Unincorporated businesses face separate restrictions. A sole proprietor or partner has limits on what can be deducted for coverage of themselves and their family, which do not apply in the same way to a corporation. The incorporated position is materially better.
What Qualifies as a Medical Expense
The plan can only cover expenses that would qualify for the medical expense tax credit. That list is wider than most people assume and includes dental work, prescription eyewear, physiotherapy, psychological services, orthodontics and prescription drugs, alongside many items people pay for without thinking of them as medical.
It does not include general wellness spending. Gym memberships, supplements and cosmetic procedures sit outside it, and a plan that reimburses them is not doing what it is supposed to do.
Where an HSA Sits Against Insurance
| Arrangement | How It Works | Suits |
|---|---|---|
| Health spending account | A fixed annual limit per person, claims reimbursed | Predictable spending, small groups |
| Traditional group insurance | Premiums paid, insurer bears the risk | Larger groups, catastrophic cover |
| Both together | Insurance for large events, HSA for the rest | Where both are affordable |
| Neither | Paid personally, medical credit claimed | Rarely the cheapest for a corporation |
An HSA does not insure against a catastrophic claim, because the limit is whatever the corporation sets. It is a tax-efficient way to fund expected costs rather than a substitute for insurance against unexpected ones.
What This Calculator Does Not Cover
- Whether your specific arrangement qualifies as a private health services plan
- The shareholder versus employee capacity question for an owner-only plan
- Unincorporated business limits on coverage for the proprietor and family
- The annual CPP maximum, which caps the employer contribution modelled here
- Provinces outside Ontario and their different taxes on premiums
- Which specific expenses qualify, which follows the medical expense credit list
Set it up properly or not at all, because a plan that fails the tests is worse than no plan. Our tax planning service covers whether an arrangement qualifies, how to structure it for an owner-managed corporation, and the reporting that goes with it.
Frequently Asked Questions
Common questions on health spending accounts for owner-managed corporations.
Related Calculators and Guides
More tools for owner-manager compensation.
Worth Setting Up, Worth Setting Up Correctly
Tell us what the corporation spends on medical costs, who it employs and how you are paid. We will confirm whether a plan qualifies in your circumstances, structure it so the employee capacity holds, and put the reporting in place.