Who Can Set Up an HSA and How Does It Work?
Learn who qualifies to open a Health Spending Account and how to use it effectively
Health Spending Accounts (HSAs) offer one of the most tax-efficient ways to pay for healthcare in Canada. They are particularly valuable for business owners and incorporated professionals who want more control over their health expenses while minimizing tax. But not everyone can open one, and it is important to understand both eligibility and structure before getting started.
Who Is Eligible to Set Up an HSA?
HSAs are not open to everyone. They are governed by rules set by the Canada Revenue Agency (CRA) and must be structured as a formal benefits plan.
| Eligible | Not Eligible |
|---|---|
| Incorporated business owners | Sole proprietors with no arms-length employees |
| Employers offering benefits to employees | Individuals without business income |
| Professionals with Professional Corps | Contractors working under personal names |
Incorporated professionals such as doctors, dentists, lawyers, and consultants can use an HSA to cover personal or family health expenses through their corporation. Employers can also set up HSAs for staff as part of a group benefits program or a stand-alone plan.
How Does an HSA Work?
An HSA operates as a reimbursement model. You pay for a medical expense up front, then submit a claim to the plan administrator. Once approved, you are reimbursed tax-free from funds contributed by your corporation or employer.
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You choose which eligible medical or dental costs to claim
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You upload receipts or invoices to the administrator’s portal
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Reimbursement is paid back to you personally, usually within days
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The corporation records it as a tax-deductible business expense
Tip: There are no premiums or co-pays. You only pay for what you claim, making it efficient for those with irregular expenses.
Contribution and Spending Limits
The plan sponsor (typically your corporation) decides how much to allocate annually. CRA does not specify a hard limit, but the amount must be reasonable based on income and role.
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Owner-managers may set annual caps in the range of $1,000 to $15,000
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Employees may receive different limits based on position or tenure
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Some plans allow unused amounts to roll forward for one year
The HSA is not a savings account. It is a flow-through account used strictly to reimburse eligible health expenses as they occur.
How It Fits Into a Broader Benefits Strategy
For incorporated individuals, an HSA offers a powerful way to extract funds from a corporation tax-free while meeting healthcare needs. For small businesses, it can serve as a flexible and lower-cost alternative to group health insurance.
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Acts as a top-up to other plans or a primary health benefit
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Offers cost predictability for employers and tax efficiency for users
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Appeals to employees by offering choice over which services to use
Know the CRA Requirements
To maintain tax advantages, the HSA must meet CRA definitions of a Private Health Services Plan (PHSP). This includes:
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A formal written plan
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Clearly defined eligibility and limits
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A third-party administrator to manage claims
Failure to meet these standards can lead to tax penalties or reassessments.
Caution: If you are not incorporated, you cannot use an HSA to claim your own medical expenses. Instead, consider using the Medical Expense Tax Credit or looking into a PHSP that allows participation by sole proprietors with staff.
An Efficient Path to Personalized Health Coverage
An HSA is not a savings vehicle or a traditional insurance policy. It is a reimbursement tool designed for flexibility, efficiency, and tax savings. When set up correctly, it offers real value to employers and professionals who want to support health and wellness without overpaying for one-size-fits-all coverage.