Can self-employed Canadians deduct health expenses? Yes — here's how

If you're self-employed in Canada, you're probably used to paying for dental cleanings, prescriptions, glasses, and therapy out of pocket. What you might not realize is that there's a completely legal, CRA-recognized way to deduct 100% of those expenses through your business.

It's called a Private Health Services Plan (PHSP), and it's been part of the Income Tax Act for decades. Most self-employed Canadians have never heard of it — but once you understand how it works, you'll wonder why your accountant never mentioned it.

The short answer

Yes, self-employed Canadians can deduct health expenses. The mechanism is a PHSP — a CRA-compliant plan that lets you reimburse yourself (and your family) for eligible medical expenses as a business deduction.

This isn't a tax loophole or grey area. PHSPs are explicitly defined in subsection 248(1) of the Income Tax Act, and the CRA has issued detailed guidance in Interpretation Bulletin IT-339R2.

Who qualifies?

You qualify if you earn self-employment income in Canada. That includes:

• Sole proprietors — freelancers, consultants, contractors, gig workers
• Incorporated professionals — anyone operating through a Canadian corporation
• Partners — members of a partnership

If you file a T2125 (business income) or pay yourself from a corporation, you're eligible.

What expenses can you deduct?

The list is extensive — over 80 categories of CRA-eligible medical expenses. The most common ones include:

• Dental (cleanings, fillings, crowns, orthodontics)
• Prescriptions (any prescription medication)
• Vision (eye exams, glasses, contacts, laser surgery)
• Therapy and mental health (psychologist, counsellor, psychotherapist)
• Physiotherapy, chiropractic, massage therapy
• Fertility treatments
• Medical travel and accommodations
• Hospital stays and ambulance services
• Hearing aids, orthotics, prosthetics

The rule is straightforward: if it qualifies under section 118.2 of the Income Tax Act as a medical expense, it's eligible under a PHSP.

The 3% personal tax credit vs. a PHSP

Most Canadians claim medical expenses on their personal tax return using Line 33099 or 33199. But there's a catch: the CRA only gives you a non-refundable tax credit on the amount that exceeds the lesser of 3% of your net income or a fixed threshold (approximately $2,759 for 2025).

That means if you earn $100,000 and have $4,000 in medical expenses, you can only claim a credit on $1,000 ($4,000 minus $3,000). And it's a credit, not a deduction — so it's worth roughly 15% federally.

With a PHSP, the math is completely different. Your business deducts the full $4,000 as an expense. If your marginal tax rate is 40%, that's $1,600 back in your pocket — versus maybe $150 from the personal tax credit.

The PHSP is dramatically more powerful for anyone with meaningful health expenses.

How to set one up

Setting up a PHSP requires a third-party administrator — the CRA doesn't allow self-administered plans. Here's the process:

1. Sign up with a PHSP administrator like Zemma. You'll provide basic information about your business structure.

2. Pay your health expenses normally. Go to the dentist, fill prescriptions, see your therapist. Keep your receipts.

3. Submit claims. Upload your receipts to the administrator. They verify CRA eligibility and process the reimbursement.

4. Get reimbursed. The reimbursement flows through your business as a deductible expense — reducing your business income dollar for dollar.

The entire process takes about 5 minutes to set up, and you can start submitting claims immediately.

Sole proprietors vs. incorporated

The deduction works slightly differently depending on your business structure:

Sole proprietors: Your PHSP deduction is limited to the lesser of your earned income multiplied by a percentage, or a fixed annual cap. For most sole proprietors, this means you can deduct a meaningful amount — often $1,500 to $3,000+ per year depending on your income and family size.

Incorporated businesses: If you pay yourself from a corporation, you have more flexibility. Your corporation sets a reasonable annual contribution amount, and the full amount is deductible as a business expense. There's no percentage-of-income cap — just a reasonableness test.

The bottom line

If you're self-employed in Canada and paying for health expenses out of pocket, you're overpaying on taxes. A PHSP converts those personal expenses into business deductions — legally, simply, and without changing anything about how you access healthcare.

Zemma makes it easy to set up a CRA-compliant PHSP in minutes. No broker, no medical questions, no paperwork maze.