Health Spending Account Rules in Canada (2025): What Employers Must Know
Whether you’re a corporation or a sole proprietor, understanding Health Spending Account (HSA) — also known as Private Health Services Plan (PHSP) — regulations are essential. Here’s your up-to-date guide.
What Is a Health Spending Account (HSA) / PHSP?
An HSA (PHSP) is a CRA-approved setup allowing employers to reimburse employees for healthcare expenses tax-free. Employers deduct these reimbursements as business expenses.
Who Is Eligible to Offer an HSA?
| Business Type | Eligible? | Notes |
|---|---|---|
| Incorporated (with employees) | Yes | Owners and employees receive same tax treatment. |
| Unincorporated / Sole Proprietor with arm’s-length employees | Yes | Allowed if there’s a genuine employment relationship. |
| Unincorporated / Sole Proprietor without arm’s-length employees | No | CRA disallows this, treating benefits as taxable. Government of Canada |
Contribution Limits & the “Reasonable Basis” Rule
There is no CRA-defined maximum contribution, but employer contributions must be reasonable. A common guideline—used by many providers, including Coastal HSA—is to keep it under 25% of an employee’s gross annual salary.
Tax Treatment & CRA Compliance
- Reimbursements under a valid HSA are non-taxable to employees and fully deductible for employers.
- Ensure your HSA is structured as a genuine PHSP. Failing this may result in taxable benefits.
Eligible vs Ineligible Expenses
HSAs reimburse expenses that qualify under CRA’s medical expense criteria—including dental, paramedical, prescription drugs, and equipment. Cosmetic procedures, over-the-counter items without prescription, and non-medical items are excluded.
Administration Requirements & Provider Use
- The Plan Admin for the organization must add and remove employees.
- Expect administrative fees (commonly ~ 8 – 10% of claims), which are also deductible.
2025 Updates at a Glance
- 2024 survey indicates 40% of Canadian employers now offer HSAs—a 10% increase since 2017. Canadian Payroll Services
- The HSA limit of 25% of salary guideline remains best-practice, not statutory.
- Always check CRA’s official site for rule changes post-2025.
Practical Example: Small Business Case Study
Example:
- Incorporated with two full-time employees
- Annual allocation: $2,500 per employee
- Employer funds claims as needed + only 6% admin fee at Coastal HSA
- Employees submit CRA-eligible expenses; reimbursements are tax-free
Simple, flexible, cost-effective.
