When an IT contractor incorporates, one of the questions that comes up is what to do about health and dental coverage. Employment ended. Group benefits through an employer ended with it. The corporation is now the employer, and the question is whether the corporation can provide coverage and whether the cost is deductible.
The answer is yes, under specific conditions. The vehicle is a Private Health Services Plan, or PHSP. A PHSP allows a corporation to reimburse an employee for qualifying medical expenses and deduct those reimbursements as a business expense. The reimbursement is not a taxable benefit to the employee if the plan qualifies.
That last condition is what this guide covers. The tax treatment depends on the plan structure, not just the nature of the expense being reimbursed.
What CRA Considers a PHSP
The Income Tax Act defines “private health services plan” at a high level in subsection 248(1). CRA’s administrative position is set out in Interpretation Bulletin IT-339R2 and in its current payroll guidance. In practical terms, the plan must be in the nature of insurance and must cover hospital or medical care expenses that qualify under section 118.2(2) of the Income Tax Act.
There are two key elements from that definition. First, all or substantially all of the premiums or contributions under the PHSP must relate to eligible medical expenses. CRA generally treats “all or substantially all” as 90% or more. A plan that mixes health coverage with other benefits such as life insurance or disability insurance should separate the non-health portion, because only the qualifying health portion can receive PHSP treatment. Second, the expenses reimbursed must be medical expenses that qualify under section 118.2(2), or expenses closely connected to those qualifying medical expenses. If an expense type would not qualify under the medical expense rules, it normally should not be reimbursed through the PHSP.
CRA: Private health services plan premiums — employer-paid
What Qualifies as a Medical Expense Under the Plan
The list of qualifying expenses under section 118.2(2) is extensive. Common examples include prescription drugs recorded by a pharmacist, dental treatment and preventive care (excluding cosmetic procedures), vision care such as prescription glasses and laser eye surgery, paramedical services including physiotherapy, chiropractic care, massage therapy, and psychology where the practitioner qualifies under the medical expense rules for the province or territory, private hospital rooms and ambulance fees, and diagnostic tests and laboratory fees.
Some costs that feel like health expenses do not qualify: gym memberships, fitness trackers, vitamins without a prescription, and general wellness programs. The qualification turns on whether the expense fits the section 118.2(2) definition and whether the service was provided by a qualifying practitioner.
CRA: Medical expenses you can claim
How a PHSP Works Operationally
In a qualifying PHSP, the corporation undertakes to reimburse the employee for eligible medical expenses under a documented plan. The employee pays the expense out of pocket, submits documentation (receipts, practitioner notes where relevant), and is reimbursed under the plan terms. The corporation records the plan cost as a deductible business expense.
This is different from informal reimbursement. If a corporation simply pays or reimburses an owner’s medical bills outside a qualifying PHSP, the payment may be treated as a taxable employment benefit or shareholder benefit rather than a tax-free PHSP reimbursement.
There are two structural approaches: an insured plan through an insurance carrier, or a self-funded plan administered by a third party.
Insured plan: The corporation pays premiums to an insurance carrier. The carrier reimburses the employee directly for qualifying claims. The corporation deducts the premiums as a business expense. If the plan qualifies as a PHSP, the premiums paid by the employer are not a taxable benefit to the employee.
Administrative Services Only (ASO) or Health Spending Account (HSA): The corporation funds an account through a third-party administrator. When the employee submits a qualifying claim, the administrator reimburses from the account and charges the corporation for the claim amount plus an administrative fee. Both the claim and the fee are deductible. Unused amounts do not accumulate as income to the employee.
For a one-person incorporated IT contractor, the ASO or HSA approach is common. It avoids insurance premiums sized for a larger pool and allows the corporation to deduct only actual claims plus fees. The third-party administrator provides the administrative structure that supports the PHSP characterization.
The Sole Shareholder-Employee Question
The most common concern for incorporated IT contractors is whether a PHSP can exist when the shareholder and the sole employee are the same person.
CRA’s position, reflected in IT-339R2 and technical interpretations, is that a one-person PHSP can qualify if the plan is established in a genuine employment context. For an incorporated IT contractor who earns the corporation’s income through active service and draws a salary, the employment relationship is usually easier to support. A PHSP in that context can qualify.
The plan should be documented before claims are submitted: a written plan or policy establishing that the corporation will reimburse the employee for qualifying medical expenses, describing what is covered and how claims are submitted. The documentation does not need to be elaborate, but it should exist.
If the corporation has no other employees, the coverage terms apply only to the shareholder-employee. This is acceptable under CRA’s view for a genuinely small employer. The question of comparable treatment of other employees becomes relevant only if arm’s length employees are later hired.
A shareholder who takes only dividends, with no salary or other employment compensation, has a harder file to support because the benefit may look like it was received as a shareholder rather than as an employee. Contractors who take dividends only should address that structural question before a PHSP is established.
What the Corporation Deducts
The corporation deducts the amounts paid under the PHSP as a business expense: premiums paid to an insurer, claims reimbursed under a qualifying self-funded plan, and administration fees. The amounts are deductible under the general deduction provisions for business expenses, subject to the requirement that the expense is reasonable in the circumstances.
There is no prescribed annual dollar limit specific to PHSP reimbursements for a shareholder-employee. The amounts should be reasonable relative to what the corporation would pay for comparable coverage for an arm’s length employee in a similar role. A plan that reimburses amounts far outside a reasonable range for actual health expenses may attract scrutiny.
What the Employee Receives
Employer-paid premiums to a qualifying PHSP are not a taxable benefit to the employee and are not included in employment income. Reimbursements of qualifying medical expenses under a qualifying PHSP are also excluded from income.
CRA: Private health services plan premiums — employer-paid
This is the core tax consequence. The corporation deducts the cost, and the shareholder-employee receives health coverage without the reimbursed amount being included in income. The same amount, if paid as a dividend and then used to cover medical expenses out of pocket, would be taxed at the personal level before the expense is paid.
The shareholder-employee may also be able to claim out-of-pocket medical expenses not covered under the PHSP on their personal T1 under line 33099, provided those expenses are not reimbursed through any plan. The two do not conflict for amounts that are genuinely separate.
If Other Employees Are Added
When an incorporated IT contractor’s business grows to include arm’s length employees, the PHSP structure becomes more constrained. A plan providing significantly better coverage to the shareholder-employee than to other employees in comparable roles can raise the question of whether the extra benefit was received because of share ownership rather than employment.
The practical implication: if other employees are added, the plan terms applicable to the shareholder-employee should be comparable to what those employees receive, or the plan should document a basis for distinguishing employee classes that does not rest solely on shareholder status. The tax treatment of employer-paid health benefits for arm’s length employees is generally straightforward, but the structure of the overall plan affects how the shareholder-employee’s coverage is treated.
This is a future consideration for most one-person incorporated contractors. It becomes relevant when hiring begins and should be reviewed before that transition, not after.
Group Benefits Through Professional Associations
Some professional associations and industry groups offer group health and dental plans to members, including incorporated contractors. These are typically insured plans through a carrier, with premiums set by reference to a larger insured pool. The corporation can pay the premiums, and the same PHSP analysis applies federally: if the plan qualifies as a PHSP, the premiums are deductible and not a taxable benefit to the employee.
An association plan that includes benefits beyond health and dental, such as life insurance or accidental death coverage, does not qualify as a PHSP for the non-health portion. Premiums attributable to those components are treated differently for tax purposes. Contractors using an association plan should confirm whether the plan is structured in a way that permits the full premium to be treated as a qualifying PHSP contribution or whether only a portion qualifies.
Quebec Note
Quebec is the place where the federal shorthand can be misleading. A plan may be a qualifying PHSP federally, while Quebec may still require employer-paid private health or group insurance premiums to be treated as a provincial taxable benefit and reported on the RL-1. The federal T4 treatment and the Quebec RL-1 treatment should be checked separately.
For Quebec residents filing a TP-1, do not assume that a tax-free federal PHSP benefit is automatically tax-free for Quebec purposes. A Quebec-incorporated IT contractor should confirm the plan structure, payroll treatment, and year-end slip reporting with a CPA familiar with both CRA and Revenu Québec requirements before claims are processed.
What to Bring to a CPA Conversation
A CPA reviewing whether a PHSP makes sense for an incorporated IT contractor will typically want to know the current compensation structure, specifically whether the contractor is drawing a salary, what health and dental expenses have been incurred out of pocket in the past year or two, whether any coverage already exists through a spouse or partner’s employer plan, and whether the corporation has other employees or plans to hire.
The PHSP decision connects directly to the compensation structure. A contractor who pays themselves a salary and wants health coverage in a tax-efficient structure has a clear path through a qualifying PHSP. A contractor who pays dividends only needs to address the salary question first.
The plan should also be considered alongside the total compensation and benefits picture: salary level, CPP objectives, RRSP room, and the overall cost the corporation can reasonably support. Health and dental coverage through a PHSP is one component of a rational compensation structure for an incorporated IT contractor, not a standalone decision that can be made in isolation from how the rest of the compensation is structured.
Group insurance, life insurance, disability coverage, and wellness stipends each follow different rules than a PHSP. See Employee Benefits Beyond PHSP for how those pieces fit together.