For an owner-manager of a small business, buying health insurance might not be practical. It can be expensive, and you might even spend less yearly on health care than the cost of insurance. In addition, the inflexibility of health insurance products is an issue. You might not use any of the amounts allocated to the chiropractor or psychologist, leaving you with excess coverage in those areas and too little in another.
There are alternatives. This update focuses on one in particular which is quite valuable to the owner-manager as both flexible and tax-efficient.
Since 1986 the Canada Revenue Agency (the “CRA”) has allowed companies to set up what is called a “health and welfare trust” (“HWT”). These are creatures of CRA policy and the rules around them are not found in the Income Tax Act (the “ITA”).
The idea behind the HWT is to turn after-tax personal medical expenses for you and other employees into deductions for your company. Paying these expenses before tax is a significant benefit that can save money for you and your company.
There is already some personal tax relief for medical expenses, in the form of the medical expense tax credit (the “METC”), but this relief is limited. This bulletin does not discuss the METC in detail but, in brief, the credit is small (15%) and qualifying expenses for you and your family must meet a certain threshold for the relief to activate.
The health and welfare trust
The benefits provided under the HWT policy are broader and are discussed below.
The first step is to approach a HWT company or an insurance specialist who can advise you on your options. There are a number of HWT companies, with start-up fees ranging from $100 to $250 and ongoing fees of between 5-10% of all expenses submitted to the HWT.
After your company signs an agency agreement with the HWT company, it will set up a HWT on your company’s behalf. The terms of this trust will require your company to fund the trust based on an actuarial estimate of the medical expenses required for the year. From there, employees submit medical expense receipts to the trust, the HWT company reviews the receipts to make sure they qualify, and then the trust pays back the employee for the expense, up to a reasonable coverage limit which the directors of your company will decide on. Your company will be required to pay a percentage of each expense to the HWT company, based on the fee negotiated.
Tax benefits and flexibility
There are tax benefits to these trusts on two levels.
First, all contributions to the trust, including the fees paid to the HWT company as a portion of your employees’ expenses, are deductible to your company, so long as they meet all ITA requirements.
Second, when the trust reimburses the employee for the expenses, this reimbursement is not taxable to the employee, so long as the expenses qualify for such treatment.
In addition to the tax benefits, this option allows you to provide a pool of money to your employees (and to yourself, if you are employed by your company) for medical expenses not limited by the arbitrary categories mandated under medical insurance. If the limit for reimbursement is $2,000 and you want $2,000 in massages, then be prepared for an especially relaxing year.
The use of a health and welfare trust can provide significant benefits, both to you as the owner-manager of your company, and to your employees. However, there are a number of requirements a trust must meet in order to qualify under CRA guidance. As a result, care should be taken to ensure that the HWT company you are dealing with is providing you appropriate advice.
If you wish to discuss the benefits of such trusts in greater detail, or desire tax advice on other matters from a planning or risk management perspective, please feel free to contact the author at firstname.lastname@example.org.