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Tax Effective Health Care For Business Owners

Health and Welfare Trusts are described in Interpretation Bulletin 85-R2, and specifically allowed by virtue of ITA 110 (8)(a).

Though they may be known by different names, in essence, a health and welfare trust comprises a trust agreement and a written contract between an employer and an employee. The purpose of the trust would be to enable an employer to provide certain agreed to health and dental benefits to their employees and themselves on a tax-free basis. The employer is entitled to a deduction for the full amount of expenses paid out to the employee. Plus the covered expenses must qualify as "medical expenses" as defined under subsection 118.2(2) of the Income Tax Act, which includes many items not covered by traditional medical and dental insurance coverage, and none of the restrictions on spending. Plans might even call for payments made on account of an employee's "wellness", which can be more loosely defined to include things such as fitness memberships and the like excluded or restricted elsewhere under the income tax act.

It is important to note that benefits cannot substantially differ for shareholder employees and non shareholder employees, and that payments must fall within the scope of the agreement, and be reasonable in the circumstances. Employer size does not matter and sole proprietors or unincorporated business owners are also eligible provided they have at least one qualified employee. Incorporated companies are permitted to set their own reasonable maximum annual limits, but non-incorporated businesses have a federally imposed maximum annual limit of $1,500 for an owner-manager employee, plus $1,500 for their spouse and $750 per child. If the unincorporated business employs non-owner employees, then the limit for the owner is the greater of the aforementioned limitation or the limit provided to his employees.

And another warning, where a non eligible payment is made, the entire plan will be disqualified resulting in severe tax repercussions. Note too that to qualify for treatment as a Health and Welfare Trust, the funds of the Trust cannot revert to the employer, the employer’s contributions must not exceed the amounts required to provide the benefits, and the employer contributions must be mandatory and enforceable by an independent trustee.

This Health and Welfare Trust allows the owner employee to write off 100 percent of their medical expenses by submitting their medical expenses to the plan trustee, who reimburses them out of the Trust funds that are fully funded and expenses by their own company. The plan administration fees is also deductible by the employer. The major benefit is 100 percent deductibility of personal health care that is scheduled as deductible by Canada Revenue Agency via a Health and Welfare Trust. This can have a significant advantage over a limited expenditure, premium based plan and the means tested personal medical tax credit and other tax provisions available on personal tax income tax returns.

When the plan is set up, and annually, the employer and employee contract with a trustee to cover a specific dollar amount per plan year for certain defined medical expenses of an employee and their dependents. The employer promises to reimburse the cost of such claims. Small business owners take on the roles of employer and employee separately in a plan and act through the trustee who administers the trust agreement and the plan for a fee.

Trustees should be experienced in the Health and Welfare trust business, so find out how long firms have been in existence, and how many plans they have set up and under administration, and whether and how their business is regulated, and whether their business is audited. You would want to understand the claims process and how best to design your plan to your own circumstances, such an foreseen increase in orthodontic bills.

If you are interested in setting one up, consult your financial advisors. With some care in planning and use, these trusts are a solid provider of necessary health benefits at a reasonable cost


© 2015 John B Voorpostel
CPA, CA, CMB
iaccountant.ca
 


 
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