At a round-table event sponsored by CALU (the Conference for Advanced Life Underwriting) in May 2022, the CRA has provided additional guidance on its interpretation of the Income Tax Act (ITA) with regard to HSAs offered to the benefit of a corporation’s sole shareholder/employee.
HSA Plan Eligibility
The issue at stake is whether the HSA qualifies as a Private Health Services Plan (PHSP) under the ITA, and whether the benefit is offered to the sole employee-shareholder in his capacity of employee or in his capacity of shareholder. In situations where the benefit is received by an employee-shareholder in his or her capacity as a shareholder, the full benefit would be taxed in the shareholder’s hands and the corporation would not be entitled to a deduction for any amount paid on behalf of the shareholder.
In the opinion of the CRA, in order to qualify as a plan of insurance, there must be a reasonable element of risk assumed by the employer; in its view, a self-insured HSA established for a sole employee-shareholder and family members would likely not constitute a plan in the nature of insurance and consequently, would not qualify as a PHSP. The complete discussion is reported in this document: CRA Views, Conference, 2022-0928901C6 -- 2022 CALU—Q10—Private health services plan.
Shareholders vs. Employees
The determination of whether a benefit is received by an employee-shareholder in his or her capacity as an employee or as a shareholder involves a finding of fact, which is documented in a previous CRA interpretation (CRA Views, Interpretation—external, 2010-0380551E5 -- Self-administered private health services plan)
The interpretation essentially states that a benefit will generally be considered to be received by an employee-shareholder in his or her capacity as an employee where the benefit is comparable in nature and quantum to benefits generally offered to employees who perform similar services and have similar responsibilities for other employers of a similar size, and the shareholder is actively engaged as an employee of the company and it is reasonable to conclude that the benefit has been provided as part of a reasonable employee remuneration package.
In order to give more substance to the PHSP offered to the employee, the corporation may want to provide an integrated benefit plan that includes an insured coverage such as Travel & Major Medical Insurance together with the HSA.
In any event, BeneFitsMyWay and its parent company AGA Benefit Solutions do not provide tax advice or opinions on each individual’s situation; we invite our clients to discuss this most recent interpretation with their own tax advisors and determine their course of action based on their own specific facts and circumstances.
