Physicians often assume that paying for health and dental expenses through their professional corporation is a straightforward way to obtain a tax deduction. In practice, the issue is more nuanced. The Income Tax Act and the Canada Revenue Agency (CRA) place careful limits on when these arrangements are deductible and when they are simply viewed as personal expenses or shareholder benefits.

The distinction matters. When structured properly, these plans can be both deductible to the corporation and non-taxable to the physician. When structured incorrectly, the deduction may be denied and the amount included in personal income.

This article outlines the key considerations and how to structure these arrangements properly.

The Starting Point: Deductibility Is Not Automatic

The general rule is simple: an expense is only deductible if it is incurred to earn income.

Health and dental costs are, by their nature, personal. The only reason they become deductible is because they are structured as part of a legitimate compensation arrangement – specifically, through a qualifying Private Health Services Plan (PHSP).

Without that structure, the CRA will generally view the payment as a personal expense paid by the corporation, which is not deductible.

What Is a PHSP – and Why It Matters

A PHSP is the gateway to deductibility.

When properly established:

• The corporation can deduct the cost
• The physician (as an employee) is not taxed on the benefit

However, the plan must meet specific criteria:

• It must be in the nature of insurance (not simply reimbursement)
• It must cover eligible medical expenses
• It must be provided by virtue of employment, not ownership

This last point is where most issues arise in professional corporations.

The Core Issue: Employee vs. Shareholder

Where a physician is both shareholder and employee, as is almost always the case, the CRA looks closely at why the benefit is being provided.

If the benefit is received:

• As an employee: deductible to the corporation
• As a shareholder: not deductible, and taxable to the individual

A key risk factor is when the plan is provided only to one individual, particularly where that individual controls the corporation.

In those cases, the CRA often presumes the benefit is a shareholder benefit unless the facts clearly support otherwise.

Does It Matter If No One Else Is Covered?

Yes, this is often decisive.

Where a plan is:

• Available to all employees, it is much easier to support that it is employment-related
• Only available to the physician, it becomes much more difficult to defend

That does not mean it is impossible, but it must be carefully structured and reasonable in the circumstances.

A Common Misunderstanding

Some physicians take the view that:

“If I report it as a taxable benefit, the corporation can deduct it.”

This is not correct.

Including an amount in income does not, by itself, make the expense deductible. The underlying test, whether the expense was incurred to earn income, still applies.

Practical Structuring: What Works in Practice

The difference between a compliant structure and a problematic one is often found in the details. Below are examples drawn from typical client situations.

1. Corporation with Staff

A physician with clinic staff implements:

• A written PHSP policy
• Coverage for all full-time employees
• A reasonable annual limit per employee
• Administration through a third-party provider 

Result:
The plan is clearly employment-based. The corporation deducts the expense, and employees are not taxed.

 

2. Corporation with Only the Physician

This is the most sensitive scenario.

A defensible structure would include:

• A written employment agreement referencing the PHSP
• A standalone PHSP policy, clearly outlining eligibility, coverage limits, and claims procedures
• Benefits set at a reasonable level, comparable to what other physicians receive in similar roles
• Use of a third-party administrator
• Clear documentation that the benefit is part of compensation, not a distribution of profits 

Result:
While still subject to scrutiny, this approach helps support the position that the benefit is employment-related rather than a shareholder benefit.

3. Sole Proprietor with Staff

A sole proprietor physician offers a PHSP:

• To arm’s length employees
• On consistent terms
• With proper documentation and administration 

Result:
The expense is generally deductible as part of employee compensation.

4. Sole Proprietor with No Employees

In this case, the rules are more restrictive.

A deduction may still be available under specific provisions, but:

• It is limited
• It must meet strict criteria
• It cannot simply be a reimbursement of personal expenses

Strengthening Your Position: Proper Documentation and Governance

One of the most effective and frequently overlooked steps in supporting deductibility is the formal documentation of the plan within the professional corporation itself.

In practice, this should include:

• A standalone written PHSP policy, clearly outlining:
  • Eligibility (e.g., full-time employees)
  • Coverage limits
  • Types of qualifying expenses
  • Claims procedures
• Formal approval of the plan by the corporation, with this approval documented in the minute book
• Evidence that the plan reflects market-based coverage levels, including benchmarking against plans offered by hospitals, clinics, or comparable medical practices
• A process for periodic review and updates, ensuring that coverage remains current, reasonable, and aligned with industry norms

These steps are not merely administrative.

They reinforce that the plan is a deliberate component of compensation, rather than an informal reimbursement of personal expenses. They also help demonstrate that the benefit is reasonable and consistent with what would be offered in an arm’s length employment setting which is an important consideration when the physician is also the shareholder.

Where this level of structure and documentation is absent, the CRA is more likely to view the arrangement as a shareholder benefit, particularly where the physician is the only participant in the plan.

What the CRA Is Looking For

Across all scenarios, the CRA is effectively asking:

• Would this benefit be provided to an arm’s length employee?
• Is the amount reasonable?
• Is the plan a genuine insurance-type arrangement?
• Is the benefit tied to employment, or to ownership?

If the answers support an employment relationship, the deduction is generally available.

If not, the arrangement risks being recharacterized as a shareholder benefit.

Key Takeaways for Physicians

• A deduction is not achieved simply by paying medical expenses through a corporation
• The plan must qualify as a PHSP
• The benefit must be provided in your capacity as an employee
• Limiting coverage to one individual significantly increases scrutiny
• Proper documentation, governance, and periodic review are essential

A Final Word

These arrangements are often implemented with good intentions but without sufficient attention to structure. The difference between a compliant plan and a reassessed one is rarely obvious at first glance but it is almost always clear in hindsight.

If you are considering implementing or reviewing a health and dental plan within your practice, it is worth addressing the structure at the outset.

 

About Tucker Professional Corporation

Tucker Professional Corporation works primarily with medical residents, fellows and physicians across Canada. We assist clients with the tax and financial questions that arise during the transition to practice.

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Disclaimer:
Disclaimer: This article is for general information purposes only and should not be relied upon as professional advice. Readers should consult qualified professionals before making decisions.