Health Spending Accounts

Volume No. 19-09

Author: Peter Weissman FCPA, FCA, TEP
Editor: Matthew Cho CPA, CA, TEP

In 2008 we published a tax tip regarding the use of Health and Welfare Trusts (“HWTs”) to fund uninsured medical expenses. 

HWTs must conform to the Private Health Service Plan rules in the Income Tax Act as well as CRA administrative rules. In theory, a HWT allows a company to deduct payments to fund the HWT and the shareholder/employee is not taxable on eligible medical expenses reimbursed to him or her by the HWT.

In the context of incorporated companies, assessing practice seems to have allowed HWTs for wholly owned, single employee corporations such as professional corporations.  Even in an April 2019 Press Release the CRA acknowledged that a HWT can be used by a corporation with one employee even if the employee is the only shareholder. 

“Incorporated businesses, including shareholder employees and all other corporate employees are eligible to participate in an HWT.  Corporations with as few as one employee can be eligible as well.  However, the HWT cannot be solely for shareholders unless the shareholders are also employees earning a T4 income”­­­

This statement implies that a single employee corporate HWT will be effective if the shareholder also earns employment income from the company.  However, the press release uses the term “can be eligible” rather than “is eligible”. 

Single employee HWTs (and perhaps others) have always involved risk of double taxation. In particular, there has always been a risk that the corporate deduction may be denied by the CRA to the extent it is considered to be more than a reasonable amount and assess a shareholder benefit for the same amount. 

We have not seen any CRA audits of HWTs but this “audit holiday” may be over. We have learned that the CRA is beginning to review HWTs for these issues. One arm’s length HWT administrator has advised its clients that it has

“become aware of a number of CRA audits relating to healthcare plans established by professionals and other small and medium sized family run business corporations”.

This same administrator is now requiring its plan holders to sign indemnities in the event that plan holders are reassessed by the CRA. 

Ironically, this apparent increase in audit activity has begun just as the sun is setting on the use of HWTs.  In its 2018 Federal Budget, the government announced that, after 2020, the CRA will no longer abide by its administrative position regarding HWTs for those created on or prior to February 27, 2018.  The withdrawal of the administrative rules was immediate for HWTs created after February 27, 2018.

In May 2019, draft legislation to implement these changes and detailing the process for converting existing HWTs into Employee Life and Health Trusts (“ELHTs”) was released.  ELHTs are more formal HWTs that were legislated in 2010 and do not include single employee HWTs.

If you have an HWT, a Cadesky Tax representative would be happy to discuss any related issues with you.


TAX TIP is provided as a free service to clients and friends of Cadesky Tax.

The material provided in Tax Tip is believed to be accurate and reliable as of the date of posting. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Cadesky Tax cannot accept any liability for the tax consequences that may result from acting based on the contents hereof.