How a PHSP works: the technical version

A Private Health Services Plan is defined in subsection 248(1) of the Income Tax Act. CRA's longstanding administrative position (Interpretation Bulletin IT-339R2 and subsequent folios) is that a PHSP must be a plan “in the nature of insurance” (an undertaking by one person to indemnify another, for agreed consideration, against loss from an uncertain event), and that all or substantially all of the premiums or benefits must relate to expenses that qualify for the medical expense tax credit under subsection 118.2(2).

A cost-plus plan like Medallion's meets this through contract rather than premiums: the employer commits to a binding annual term with fixed coverage limits, Medallion adjudicates each claim, and the employer funds approved claims plus an administration fee as they occur. There are no premiums, no medical underwriting, and no restriction to an insurer's benefit schedule. Coverage follows the 118.2(2) medical-expense list, which is broader than most group policies.

On a qualifying plan the tax treatment is what makes the arrangement worth your client's attention: amounts the corporation pays (the expense, the administration fee, and the setup fee) are designed to be deductible business expenses, and the reimbursement is designed to be received by the employee free of tax, with nothing to report on the T1. GST on the fees may also be recoverable as an input tax credit where the corporation is a registrant entitled to claim it.

One hard boundary: CRA's position is that cost-plus plans do not qualify for sole proprietors: there is no employer-employee relationship to support them. Medallion accepts incorporated businesses only.

Coverage extends to employees of the corporation and their dependants: a spouse or partner, children under 18, children under 25 in full-time post-secondary education, and a child of any age who is dependent by reason of mental or physical infirmity (consistent with the dependant rules in subsection 118(6); CRA expects a signed statement from a medical practitioner supporting an infirmity-based dependency).

Eligible expenses are those qualifying for the medical expense tax credit under subsection 118.2(2). CRA, not Medallion, determines eligibility. Two items professionals often miss: employee-paid premiums to other private health plans qualify under paragraph 118.2(2)(q) (the health and dental portion of payroll-deducted group benefits, or a personal Blue Cross-style plan), and medical cannabis qualifies with a medical document from a licensed seller. Our eligible-expenses reference is the client-facing version.