How much can self-employed Canadians deduct for health expenses?
One of the first questions self-employed Canadians ask when they learn about PHSPs is: "How much can I actually deduct?" It's a fair question — and the answer depends on your business structure.
The key distinction is between sole proprietors and incorporated business owners. Both can use a PHSP to deduct health expenses, but the limits work differently.
Sole proprietors: the earned income formula
If you're a sole proprietor (freelancer, consultant, contractor filing a T2125), your PHSP deduction is governed by specific rules in the Income Tax Act.
The maximum you can deduct each year depends on two factors:
1. Your earned income from self-employment
2. Your family status (single, with spouse, with dependents)
The formula
For sole proprietors, the annual PHSP deduction limit is calculated as follows:
- You only: The lesser of $1,500 or your earned income
- You + spouse or common-law partner: An additional $1,500
- Each dependent: An additional $750 per dependent
These amounts are effectively the maximum the plan can reimburse to be deductible. The limits reset each calendar year.
Worked examples
Example 1: Solo freelancer earning $80,000
| Category | Limit |
|---|---|
| Self | $1,500 |
| Total maximum | $1,500 |
At a 33% marginal tax rate, that's approximately $495 per year in additional dollars available for health care.
This might seem low — but remember, $1,500 covers a lot of routine health expenses (two dental cleanings, a few prescriptions, an eye exam). And $495 in additional annual health spend is still $495 you didn't have before.
Example 2: Freelancer with spouse, earning $120,000
| Category | Limit |
|---|---|
| Self | $1,500 |
| Spouse | $1,500 |
| Total maximum | $3,000 |
At a 40% marginal tax rate, that's approximately $1,200 per year in additional dollars available for health care.
Example 3: Freelancer with spouse and two kids, earning $120,000
| Category | Limit |
|---|---|
| Self | $1,500 |
| Spouse | $1,500 |
| Child 1 | $750 |
| Child 2 | $750 |
| Total maximum | $4,500 |
At a 40% marginal tax rate, that's approximately $1,800 per year in additional dollars available for health care.
For a family, $4,500 per year covers a significant portion of typical health expenses — dental for the whole family, kids' orthodontics, prescriptions, glasses, and more.
Incorporated business owners: the reasonableness test
If you operate through a Canadian corporation, the rules are different — and more generous. There's no statutory percentage formula or fixed cap. Instead, the CRA applies a reasonableness test.
Your corporation can establish a PHSP and set an annual contribution amount for each covered member (you, your spouse, your dependents). The corporation deducts these contributions as a business expense, and the reimbursements are tax-free to you.
What counts as "reasonable"?
The CRA hasn't published a specific dollar limit for incorporated business owners. Instead, they look at whether the contribution level is reasonable given:
- Your actual medical expenses
- The number of people covered (you, spouse, dependents)
- What comparable private plans would cover
- Your overall compensation structure
In practice, annual PHSP contributions of $5,000-$15,000 for a family are common and well within the bounds of reasonableness for most incorporated professionals. Some business owners with significant medical needs contribute more.
Worked examples
Example 1: Incorporated consultant, no dependents, earning $80,000
A reasonable annual PHSP contribution might be $3,000-$5,000. This comfortably covers dental, prescriptions, vision, and some paramedical care.
At a combined corporate + personal tax rate of approximately 35%, $4,000 of PHSP contributions creates approximately $1,400 per year in additional dollars available for health care.
Example 2: Incorporated professional, family of four, earning $200,000
A reasonable annual PHSP contribution might be $8,000-$12,000. This covers comprehensive health expenses for the whole family — dental, orthodontics for kids, prescriptions, therapy, vision, physio, and more.
At a combined rate of approximately 45%, $10,000 of PHSP contributions creates approximately $4,500 per year in additional dollars available for health care.
Example 3: Incorporated IT contractor, spouse only, earning $150,000
A reasonable annual PHSP contribution might be $5,000-$8,000.
At a combined rate of approximately 42%, $6,000 of PHSP contributions creates approximately $2,520 per year in additional dollars available for health care.
Sole prop vs. incorporated: the comparison
| Sole Proprietor | Incorporated | |
|---|---|---|
| Annual limit | $1,500-$4,500 (depends on family) | $5,000-$15,000+ (reasonableness test) |
| Limit type | Fixed formula | Flexible |
| Family coverage | Yes, with additional room | Yes, with additional room |
| Tax savings (typical) | $500-$1,800/year | $1,400-$4,500+/year |
If you're currently a sole proprietor with significant health expenses, incorporating could unlock substantially higher PHSP deductions. This is one of several tax advantages that make incorporation worth considering at higher income levels — talk to your accountant about whether the overall math works for your situation.
How to maximize your deduction
Regardless of your business structure, here are practical tips to maximize your PHSP benefit:
1. Include your whole family. Expenses for your spouse and dependent children are eligible. Family coverage dramatically increases your potential deduction, especially for sole proprietors.
2. Claim everything eligible. Many people forget that massage therapy, therapy sessions, prescription sunglasses, and fertility treatments are all eligible. Review the full CRA list of medical expenses (section 118.2).
3. Keep every receipt. Your PHSP administrator needs receipts to process claims. Get in the habit of photographing receipts immediately after appointments.
4. Don't double-dip. You can't claim the same expense through a PHSP and on your personal tax return (Line 33099). But if you hit your PHSP limit, any excess can still be claimed personally.
5. Consider incorporating. If you're a sole proprietor earning over $80,000 with significant health expenses, the increased PHSP room alone might justify incorporation. Factor this into your incorporation decision.
Getting started
Setting up a PHSP takes about 5 minutes with Zemma. You'll provide your business structure and family details, and Zemma handles the administration — verifying CRA eligibility, processing claims, and providing year-end documentation for your accountant.
No broker. No premiums. No medical questions. Just a straightforward way to turn your health expenses into business deductions.