Finance Minister Paul Martin has given self-employed Canadians an Early Christmas present.  As of January 1, 1998, premiums paid for health and dental insurance will be deductible from business income.  Premiums paid to a Private Health Services Plan (PHSP) are deductible as long as the taxpayer’s primary source of income is from self-employment, and income from other sources does not exceed $10,000.

The maximum deduction from business income for the self-employed individual is $1,500, with and additional $1,500 maximum deduction for his or her spouse and $750 for each dependent child.

The previous system limited the tax credit to 26% based on the excess premium that was over 3 percent of net income.  In other words, the higher you net income, the lower your tax savings.

The new arrangement allows the self-employed to deduct the full amount of the premium paid in 1998 from taxable income.  This saves tax at the marginal tax rate, and can mean a savings of 26% to 52%, depending on the tax bracket.

Many people with Registered Retirement Savings Plans (RRSPs)

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hear of examples such as, Mary is in a 40% tax bracket, if she invests $1000 in a RRSP her tax deferred savings will be $400 ($1000 x 40%).  Under the new system the same tax advantage would apply to Mary’s Private Health Services Premiums.  If her premium is $1,000 annually and if she is in the same 40% marginal tax bracket, her savings would be the same.

Take for example ‘John’, a self-employed computer programmer with an annual income of $50,000.  His marginal tax bracket is about 40% and his net income is $35,000.  He is married, has two children, and pays $140/month for his PHSP.

Under the old system John’s calculations would be as follows:

$35,000 (Net income) x 3%=$1,050

$1,680 (annual premium paid) - $1,050 = $630 $630 (excess premium paid over 3%) x 26% (tax savings) = $163

And under the new system:

Premium paid is $1,680($140 x 12)

Marginal tax bracket is 40%

Tax savings is $672 ($1,680 x 40%)

John will realize additional savings of $508.20 ($672 - $163.80) under the new system.

The above examples are for illustrative

purposes only.  Bear in mind that tax rates will vary depending on income; you should consult your tax advisor for further information.

Given these illustrations, it is apparent that the new tax changes can benefit the average self-employed Canadian.  It is also apparent that the government has realized that a great deal of Canada’s future depends on self-employed individuals.

The Consultant’s Insurance Consultants offer a variety of Private Health Care Plans to suit individuals and families of all sizes.

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The Consultant’s Insurance Consultants

1206 - 90 Burnhamthorpe Road West

Mississauga, Ontario

L5B 3C3

(905) 276-5505     1 (800) 604-0040

Fax (905) 270-1177

E-Mail. info@thecic.com

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