What is a PHSP? The tax-free health account most self-employed Canadians don't know about
A Private Health Services Plan — or PHSP — is one of the most powerful tax tools available to self-employed Canadians, and almost nobody knows about it.
If you've ever wondered how business owners deduct health expenses while you're stuck paying out of pocket, the answer is usually a PHSP. It's defined in the Income Tax Act, explicitly recognized by the CRA, and available to any Canadian earning self-employment income.
What exactly is a PHSP?
A PHSP is a health benefit plan that allows a business to reimburse its owner (and their family) for eligible medical expenses. The reimbursement is a tax-deductible business expense — meaning the business gets to write off the cost, and the individual receives the reimbursement tax-free.
The legal definition comes from subsection 248(1) of the Income Tax Act:
A "private health services plan" means a contract of insurance in respect of hospital expenses, medical expenses or any combination of such expenses, or a medical care insurance plan or hospital care insurance plan.
In practical terms, it's a plan administered by a third party that reimburses you for medical expenses your provincial health plan doesn't cover.
The CRA's position: IT-339R2
The CRA has published detailed guidance on PHSPs in Interpretation Bulletin IT-339R2. This bulletin confirms that:
- A PHSP must be administered by a third-party (you can't self-administer)
- The plan must cover medical expenses as defined in section 118.2
- Reimbursements are tax-free to the recipient
- Contributions are deductible as a business expense
This isn't obscure tax law. The CRA has been clear about PHSPs for decades. The problem is that most accountants focus on the personal medical expense tax credit (Line 33099) and never mention the far more advantageous PHSP route.
How a PHSP differs from group insurance
Most people's mental model for "health benefits" is group insurance — the kind you get from an employer. A PHSP is fundamentally different:
| Group Insurance | PHSP | |
|---|---|---|
| Premiums | Monthly premiums whether you use it or not | No premiums — you only pay for what you use |
| Medical underwriting | Often requires medical questionnaire | No medical questions |
| Coverage limits | Fixed coverage categories and maximums | Covers any CRA-eligible expense |
| Waiting periods | Often 3-6 month waiting periods | No waiting period |
| Broker required | Usually purchased through a broker | No broker needed |
| Unused premiums | Lost if you don't claim | Nothing to lose — pay-per-use |
| Tax treatment | Premiums deductible, but limited benefit | Full reimbursement, fully deductible |
For self-employed Canadians without employees, a PHSP is almost always more cost-effective than group insurance. You're not paying into a risk pool — you're deducting your actual expenses.
Who can use a PHSP?
Any Canadian business can set up a PHSP. The most common users are:
Sole proprietors and freelancers — If you file a T2125 with your personal tax return, you can establish a PHSP through a third-party administrator. Your deduction is subject to annual limits based on your earned income.
Incorporated business owners — If you operate through a Canadian corporation, the corporation establishes the PHSP and makes contributions on your behalf. The corporation deducts the contributions as a business expense, and you receive reimbursements tax-free. Contribution limits are more flexible — the corporation sets a "reasonable" annual amount.
Partnerships — Partners can access a PHSP through the partnership, with deductions flowing through to each partner's share of income.
Contribution limits
This is where sole proprietors and incorporated owners differ:
Sole proprietors: The Income Tax Act limits PHSP deductions for sole proprietors. The maximum deduction is the lesser of a percentage of your earned income or a fixed annual cap. The exact amounts depend on your family status — you get additional room for a spouse and dependents.
For example, a sole proprietor earning $100,000 with a spouse and two children might be able to deduct roughly $2,500-$3,000 per year.
Incorporated owners: There's no statutory percentage cap. Instead, the CRA applies a "reasonableness" test. Your corporation can set annual PHSP contributions at a level that's reasonable given the medical expenses you actually incur. For a family of four with typical health expenses, $5,000-$15,000 per year is common and defensible.
What expenses does a PHSP cover?
A PHSP covers any expense that qualifies as a medical expense under section 118.2 of the Income Tax Act. That's a long list — over 80 categories. The most commonly claimed include:
- Dental: cleanings, fillings, crowns, bridges, implants, orthodontics
- Vision: eye exams, prescription glasses, contacts, laser eye surgery
- Prescriptions: any medication prescribed by a licensed practitioner
- Mental health: psychologist, psychiatrist, counsellor, psychotherapist
- Paramedical: physiotherapy, chiropractic, massage therapy, acupuncture
- Fertility: IVF, fertility medications, related procedures
- Medical devices: hearing aids, orthotics, prosthetics, wheelchairs
- Travel: medical travel over 40km, accommodations for medical treatment
The key requirement is that the expense must be prescribed or provided by a licensed medical practitioner, and it must fall within the CRA's definition of eligible medical expenses.
How Zemma makes it simple
Traditionally, setting up a PHSP meant working with a benefits broker, filling out paperwork, and waiting weeks for approval. Zemma streamlines this into a 5-minute online setup:
1. Create your account and tell us about your business structure
2. Pay your health expenses normally — dentist, pharmacy, optometrist, whatever you need
3. Submit your receipts through the platform
4. Receive your tax-free reimbursement
There are no premiums, no medical questions, and no broker. Just a simple platform fee and dollar-for-dollar reimbursement of your actual health expenses — fully deductible as a business expense.
If you're self-employed and paying for health expenses with after-tax dollars, you're leaving money on the table. A PHSP is the CRA-approved way to fix that.