Annual PHSP Review Template for Accountant Client Files

An annual PHSP review belongs in the accountant’s client file because tax treatment depends on more than a paid medical receipt. Eligibility, written terms, claims, timing, and reporting must each hold up. A reusable review template makes those separate checks visible and records the evidence behind the filing position.

What a PHSP actually is and why it sits at the intersection of employment, tax, and medical expense law

A Private Health Services Plan (PHSP) is a CRA-defined arrangement under the Income Tax Act. The plan is also called a Health Spending Account (HSA), Health Care Spending Account (HCSA), or cost-plus plan. The plan must pass separate tests for employment, plan structure, and eligible medical expenses.

Under the reimbursement mechanism, an employee pays eligible medical expenses personally and submits receipts to a PHSP administrator. The administrator reimburses the employee and bills the corporation. For a qualifying arrangement, the corporation deducts the expense and administration fee, while the reimbursement stays out of the employee’s taxable income.

CRA’s PHSP guidance requires all covered expenses to be medical or hospital expenses, connected expenses, or a combination. It also requires all or substantially all, meaning 90% or more, of premiums paid to relate to expenses eligible for the Medical Expense Tax Credit (METC). The plan must have documented coverage, and an unlimited plan is unlikely to qualify. Because these conditions must hold each year, the original setup file cannot stand in for an annual review.

What CRA will scrutinize if the file is audited, and why the accountant's file is the first line of defense

The accountant’s file must support both the corporation’s deduction and the employee’s non-taxable benefit. If the plan fails, the corporation can lose the deduction while the employee faces a taxable benefit. A Board of Directors resolution alone does not establish the plan’s terms. Supporting documents must describe how the plan operates, who is entitled to benefits, and what limits apply.

The review therefore needs to address gaps that make those positions hard to defend. These include no T4 salary for the claimant, benefits disproportionate to documented compensation, and processed expenses that do not qualify. Self-administered plans add risks where the employer approves claims without arm’s-length adjudication. Missing terms and improperly approved claims are separate weaknesses, even when the employer considers its approval process adequate.

Privacy liability also needs to be checked, since an employer that reviews medical receipts itself may face a claim under the Human Rights Code if a former employee who was dismissed believes health information played a part in an employment decision. That risk is distinct from whether the expense qualifies for tax purposes. The audit file also needs to remain available after filing. The Income Tax Act requires adequate books and records to be retained for at least six years from the end of the last tax year to which they relate.

The eligibility question that must be re-confirmed every year: business structure and employment status

Start by checking the client’s business structure, payroll status, and who its employees are now. A corporation can establish a PHSP for an owner-employee, spouse, and dependants, but shareholder status alone does not establish employment eligibility. The owner must receive T4 employment income. A dividend-only compensation arrangement does not qualify the owner for the employment benefit.

For incorporated businesses, there is no statutory deduction cap, but that does not mean any benefit amount is defensible. The benefit must be reasonable and consistent with what an arm’s-length employee in a similar role would receive. The file must also establish that a shareholder-employee receives the benefit in their capacity as an employee. Check whether the business added arm’s-length employees during the year, since that changes the facts on which the assessment rests.

Unincorporated businesses have different rules for qualifying and limits on spending. Where fewer than half of participants are arm’s-length employees, deductible amounts for the owner, spouse, and dependants are capped, with a lower cap for dependants under 18. Plans with no arm’s-length employees need a closer check before they can be treated as eligible. CRA Guide T4002 includes examples of sole proprietors without employees deducting some PHSP premiums under section 20.01.

CRA’s 2022 CALU Roundtable Technical Interpretation states that a self-insured HSA covering only a sole employee-shareholder and family would likely lack the insurance risk needed to qualify. The rules appear to conflict with T4002 because they cover different types of businesses: section 20.01 applies to unincorporated businesses. Record the documented risk without treating it as resolved, and state the factual basis for any employment-benefit position. For Quebec clients, also note that employer-paid PHSP contributions are generally provincially taxable even when federally non-taxable.

Plan documentation: what must exist in the file before any claim is valid

Once eligibility has been checked, read the written plan itself. Its absence is not a minor administrative omission and can lead to a denied deduction and taxable benefits. For a corporate plan, retain the Board of Directors resolution authorizing its creation, but do not use that resolution as a substitute for the operating terms. The written document must establish what employees are entitled to receive.

The file needs terms identifying the employer, eligible employees or employee classes, eligible dependants, annual limits, and claim submission and adjudication rules. It should also state the plan year’s start and end dates and any carry-forward rules so that actual processing can be tested against them. Limits may differ by employee class, such as between full-time and part-time employees or between executives and hourly employees. Those classes must be set out in writing and used in the same way for everyone, without changes to favour a particular person.

Check whether the document reflects the current employee classes and prospectively approved limits. It must be signed before the plan year it covers and bear the actual signing date. A document revised after a large claim does not demonstrate that the employee had that entitlement beforehand. Mid-year increases tied to a specific personal claim draw scrutiny, which makes the effective date a substantive part of the review.

Expense categorization: confirming that processed claims actually qualify under section 118.2(2)

A valid employment relationship and a complete plan document do not make every processed claim eligible. Get the administrator’s annual claims report and check the expenses against section 118.2(2) of the Income Tax Act. Non-eligible claims can threaten more than their own treatment if they push the arrangement below the qualifying threshold. Administrative approval is therefore not a substitute for expense review.

Eligible categories include dental and orthodontic treatment, prescription drugs, medical devices, vision care, mental health counselling, fertility treatments, and hospital expenses. Paramedical services can qualify when provided by a practitioner recognized in the relevant province. Confirm the applicable provincial recognition and licensing for services such as physiotherapy, massage therapy, chiropractic, and psychology. Travel and meal expenses connected with a medical expense within a reasonable time period can also qualify.

Flag purely cosmetic treatments, which generally do not qualify, as well as gym memberships, wellness allowances, general fitness expenses, and other non-medical claims. Where primary group insurance exists, confirm that claims went there first and that the PHSP covered only the unreimbursed portion. Then establish the correct basis for the 90%-or-more test rather than assuming it is simply a percentage of reimbursements. CRA’s PHSP guidance bases the insured-plan test on premiums paid in the calendar year.

Plan-year mechanics: confirming timing, carry-forward rules, and deductibility alignment

Compare the plan’s stated start and end dates with the corporate fiscal year. Where they differ, document the difference and address the deduction timing rather than assuming that the annual claims total belongs entirely in the corporate return. Even otherwise eligible claims can create deductibility problems when these periods are not reconciled.

The way carry-forward is handled must agree with both the written terms and how the administrator processes it. Plans may use strict use-it-or-lose-it terms or permit unused credits from one year to be used in the next, after which they are forfeited. CRA’s administrative position allows carry-forward for no longer than one year, so employer choice is not unrestricted. Find prior-year credits that will soon be forfeited and tell the client about them before year-end. Also confirm that upcoming limit changes were documented prospectively before the new plan year began.

CRA reporting obligations: what must appear on the T4 and in the corporate return

Preparing payroll without reference to the PHSP claims report can lead to the erroneous reporting of valid PHSP reimbursements as taxable benefits on the federal T4. Qualifying reimbursements are not subject to CPP or EI premiums. The corporation deducts eligible claims and administration fees as business expenses on the T2 under the correct expense category.

If the plan or claim fails, the amount can become taxable to the recipient and the corporation can lose its deduction. For a shareholder-employee, the reporting question is not always limited to employment income. CRA’s technical interpretations provide for inclusion under subsection 15(1) where the individual received the benefit as a shareholder.

The file must therefore connect the reporting position to the eligibility finding, plan terms, and claims review. Retain the administrator’s annual claims report with the plan document and receipts as the minimum audit support. For Quebec clients, check how to report provincial taxable benefits separately from the federal result. Finally, check that the records will be kept for the full required period, even after the current filing cycle ends.

A structured annual review template: the checklist organized as a reusable accountant file section

Use the following paragraphs as a repeatable file section. For each layer, enter confirmed or flagged as the status, then add notes on the evidence that supports it or the issue still to be settled. Keep unresolved matters visible rather than treating a completed template as proof of compliance. Finish with the reviewer’s name, completion date, and signature so that the file records the review as well as its outcome.

Layer 1. Business structure and eligibility. Record whether the business is incorporated or unincorporated and the current mix of arm’s-length and non-arm’s-length participants. Record the claimant’s T4 employment income status and any change from the prior year. For a sole shareholder-employee, document the basis for employee-capacity treatment and flag the 2022 CALU Roundtable risk. Note applicable unincorporated deduction restrictions and any Quebec dual-treatment requirement. Enter the status and any client follow-up needed.

Layer 2. Plan documentation. Record the written plan’s location, execution date, and covered plan year, separately from the authorizing resolution. Confirm that it identifies the employer, employee classes, dependants, limits, claim rules, dates, and carry-forward treatment. Note employee-class changes and the effective dates of limit revisions. Flag missing terms, backdating, or changes that were not prospective. Enter the status and whether the current document is in the file.

Layer 3. Expense categorization. Record receipt of the administrator’s annual claims report and the period it covers. Document the section 118.2(2) review, flagging cosmetic, wellness, and non-medical expenses. Where needed, record that the practitioner is eligible in the province and that claims were coordinated with primary insurance. State the calculation basis and period used for the 90%-or-more test, including the calendar-year premium basis where applicable. Enter the status and list the claims that need follow-up.

Layer 4. Plan-year mechanics. Record the plan dates and corporate fiscal dates, and note how they differ, if they do. Confirm that credits carried from the prior year were used or forfeited under the written rules. List unused credits that will soon be forfeited and record what the client needs to be told. Note whether changes to limits were put in writing before the new plan year they apply to began. Enter the status and any unresolved deduction-timing issue.

Layer 5. CRA reporting. Record the federal T4 treatment and the T2 deduction for claims and administration fees. If an earlier layer fails, record whether the amount must be given employment-benefit treatment or shareholder-benefit treatment under subsection 15(1). Record Quebec provincial treatment separately where applicable. Confirm that the plan document, claims report, and receipts are filed for the six-year minimum retention period. Enter the status and any filing issue that still needs to be settled.

File notation. Record the date the review was finished, the reviewer’s name, and signature. State whether plan documentation is current and in the file. Identify each matter requiring client follow-up without marking unresolved layers as confirmed. The finished record should show which tax positions are supported and which still need an answer.