Canada Revenue Agency (CRA) is warning Canadians to be on the lookout for tax schemes involving Health Spending Accounts (HSAs).

CRA says it’s noticed several businesses improperly claiming deductions related to HSAs when in fact some contravene the Income Tax Act. There are times when taxpayers are being deceived by being promised to reduce the taxes they owe promising large deductions or tax-free income.

HSAs are self-insured health plans arranged by employers for their employees residing in Canada. They provide a way that small businesses can provide tax-free health and dental benefits to their employees (and their employees’ family members). This makes the HSA appear to be an extremely attractive and cost‑effective way of getting and providing health and dental benefits.

However, a valid HSA plan must conform to private health service plan rules set out in the Income Tax Act.

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

In the case of unincorporated businesses or sole proprietors, the owner and their employees are also eligible if the owner has at least one arm’s-length employee.

CRA says the problem is that some insurance agents/brokers and financial planners are marketing HSAs to businesses operating as sole proprietorships that have no arm’s-length employees. Participants are told that they will be onside with meeting the Income Tax Act rules for private health services plans if they purchase additional types of insurance. 

However, if the business is a sole proprietorship with no arm’s-length employees, the CRA does not consider an HSA to be a private health services plan and any costs incurred for amounts paid to this account are not deductible business expenses.

If confused, the CRA encourages all Canadians to seek an independent second opinion from a reputable tax professional on important tax matters.