David Imrie

It takes a lot to run a small business in Canada, especially when it comes to attracting top-quality employees. The trick to more success with attraction, retention, and a lower turnover rate is to ensure your employees are fairly compensated for their work. According to an ADP Canada survey, 66% of employees who are ready to leave their employers state “more compensation” as their motive. 


If you are a small business owner researching alternative options for offering exceptional health benefits, chances are you’ve heard of health spending accounts (HSA). If not, the equation is simple: you choose to contribute premiums to an account for employees to spend on health benefits. The Canada Revenue Agency (CRA) recognizes this HSA as a tax-free Private Health Services Plan (PHSP).


Sounds all well and good, you might be thinking.But what else is required to set up an HSA for your small business in Canada? Pardon the pun, but we’ve got you covered with this blog. Read on for a step-by-step guide to access tax-free benefits.

Contract of Insurance

You must choose an amount that you as a small business owner are willing and able to contribute towards health benefits for your employees. Let’s say a limit of $2000 is what you know you can handle. This amount will be what CRA calls the contract of insurance for the HSA. A small business in Canada can access tax-deductible benefits via qualification as PHSP.


The contract of insurance lasts for a year and is binding according to the promise that you will pay up to the maximum value you have set into an employee’s account. If you only set up a contract of insurance for you, the employer, CRA rules this as a taxable shareholder benefit instead.


What you are doing by setting up an HSA is subsidizing your health plan dollars. But it’s important to note that having an HSA also means your premium rate is fixed. Besides low administrative fees ($0.10 for each premium dollar versus $0.35 retained by traditional insurance, saving you $0.25 on each dollar), your HSA is no longer subject to premium price hikes.

How Employees Receive Coverage

Let’s assume that you have your contract of insurance in effect and you haven’t insured for non-eligible recipients. If employees spend their health plan dollars on eligible medical expenses, also known as CRA’s Medical Expense Tax Credits (METC), they receive full coverage so long as it’s within the limit of the contract of insurance. There’s no employee out-of-pocket dollars spent that aren’t covered.


An employee’s spouse, common law partner, as well as their children and other dependents, are also eligible for HSA coverage. This is a significant point of PHSP coverage, as it allows for spousal benefits to be combined to maximize the amount of coverage they get. There no longer needs to be any disputes over whether an employee’s family can get adequate coverage.

Small Conditions for Large Benefits

There is no catch to setting up an HSA for your small business in Canada, but there are several administrative issues you should be aware of. One you are already aware of: HSAs work via a contract of insurance for a year.


The other conditions make sure your employees are clear on what the contract of insurance provides and what it doesn’t. Employees cannot claim medical expenses that they’ve paid prior to set up of an HSA, for instance.

Employees also cannot receive cash considerations for unclaimed HSA credits. If you are renewing your contract of insurance the next year, they will have the same maximum value available to them once again.


The best part of setting up an HSA is that there are no invisible strings attached. You simply follow your contract of insurance and your small business is all set!


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David Imrie

Dr. David Imrie founded RHSA Canada in 2009. Dr. Imrie is a medical doctor and former health insurance professional who has a passion for helping small businesses reduce their healthcare costs. As an executive in the insurance industry, he was shocked to find that so many common healthcare services are covered only partially by most insured plans, when employees were entitled to 100% coverage for all prescription drugs, dental services, and other healthcare expenses. Since leaving the insurance industry in 2001, Dr. Imrie committed to using newer technology to develop a better alternative program for small business health benefits.
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