The Canada Revenue Agency (CRA) has issued a warning about a current tax scheme involving Health Spending Accounts (HSAs) which are being marketed to small businesses. HSAs are self-insured health plans arranged by employers for their Canadian resident employees, to provide tax-free health and dental benefits.

Employers who incur costs to provide a qualifying HSA to their employees can deduct such costs for tax purposes, as a business expense. However, some insurance agents/brokers and financial planners are marketing HSAs to businesses (generally, sole proprietorships) that have no arm’s length employees. In such circumstances, costs incurred are not deductible business expenses, and will be disallowed by the CRA.

The CRA Tax Tip warning of such schemes can be found on its website at https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2019/warning-buyer-beware-when-it-comes-to-health-spending-accounts.html.