Tax Reimbursement Time…Five HSA Tips!

I am a bit of a looser when it comes to taxes and I am probably the first Canadian to submit their return each year.   I always get a reimbursement cheque and immediately put it back into my investment portfolio.  For self-employed Canadians however, there is a better option!

A smart place to put your tax reimbursement is always a Health Care Spending Account (HCSA or HSA).  But what should you think about before putting your money into one?  Well, if you own your own business that is not incorporated, you may want to consider opening a Private Health Services Plan (PHSP) this year.  If you do, you should take a few steps to consider if this is a good option for you…

1. Do a headcount of your family members.  To determine your maximum PHSP allowance each year, you simply add $1,500 for each eligible adult over the age of 18 years and $750 per dependent under 18 years old.  If it is you, your spouse, and your son, then you are entitled to $3,750.00.
2. Top-up or Not?  Take a look at your finances (high-level) and get a sense of how much money you will be getting back from your return.  If you have a financial planner or broker, speak with them about topping up your RRSP contributions.  They will have access to several calculators to help you determine how much your return could be if you “maximized it”.  You may want to top-up to get the reimbursement to equal your PHSP allowance.
3. Take a look at your family and business finances and decide if you can go a year without the reimbursement.  Some families rely on their tax reimbursement each year, so deciding not to take it can be a bit of an issue.  If you can live without the money and put off that trip to Disney World with the kids for the coming year, why not make it work for you next year?
4. Be sure to send in your return to Canada Revenue Agency sooner than later.  Why?  The earlier you receive your reimbursement, the better off you are for next year’s deductions with your PHSP.  The deduction for the PHSP is pro-rated, so you will want to start your contributions early in the year to get the full benefit.  The faster you get your money back, the faster you can open your account.  But remember, you can always simply open the account and fund it yourself until you get reimbursed – but why use your own money?
5. Finally, determine the final deposit amount for your PHSP.  This is done by calculating the difference between your maximum PHSP allowance (less pro-rated months if you are not early) and your return reimbursement.  If you are getting more back from CRA versus your PHSP allowance, congratulations!  If not, you need to look at how much your family needs for healthcare and whether or not you want to top it up with your own money.  Remember, what you put into your PHSP is a full deduction for you (unlike RRSPs), so you may want to go the extra mile here.

Well, that just about covers it.  If you do decide to use your tax return to fund a PHSP, remember that the strategy here is to use the funds to pay for your healthcare costs while making a sensible tax move.  The money you deposit in the coming months will be 100% deductible off your 2008 return as a business expense.  If you think about the same money going into an RRSP, you would never receive the full amount as a tax deduction.  If you are going to be making regular RRSP contributions throughout 2008, why use your 2007 reimbursement to get a small lift when you could get a full lift from a PHSP?