Can I Set Up a Health Spending Account (HSA) in My HoldCo? | Life Insurance Questions Answered

Can I Set Up a Health Spending Account (HSA) in My HoldCo?

A common question business owners and accountants face is whether a Health Spending Account (HSA) can be set up within a Holding Company (HoldCo) instead of an Operating Company (OpCo). While this may seem like an effective tax and benefits strategy, it’s essential to understand CRA guidelines and best practices to ensure compliance.

What is a HoldCo, and How Does it Differ from an OpCo?

A Holding Company (HoldCo) is primarily used to hold investments, real estate, or shares in other businesses. It does not generate revenue through active business operations. In contrast, an Operating Company (OpCo) is responsible for the day-to-day business activities, generating revenue, and employing staff.

Since an HSA is designed as an employee benefit, it must be structured with a legitimate business purpose to comply with CRA regulations. This makes it difficult to justify setting up an HSA in a HoldCo.

Why You Can’t (or Shouldn’t) Set Up an HSA in a HoldCo

🚫 HoldCos Don’t Have Business Operations

  • HSAs are meant to provide tax-free benefits to employees, but since a HoldCo doesn’t generate income from active business operations, there’s no clear business purpose for offering employee benefits.
  • CRA could see this as an attempt to extract funds tax-free rather than a legitimate business expense.

🚫 CRA May Consider It a Shareholder Benefit

  • If a HoldCo does not have employees earning T4 income, then offering an HSA could be viewed as a shareholder benefit, making it taxable rather than tax-free.
  • Even if a shareholder takes a T4 salary from the HoldCo, CRA may still question why an investment or asset-holding companyneeds an employee benefit plan.

🚫 HoldCos Are Not the Ideal Entity for Employee Benefits

  • Employee benefits, such as HSAs, are designed for companies that actively employ people and generate revenue—which HoldCos typically do not.

Best Practice: Use the Operating Company (OpCo) for the HSA

✅ Use the OpCo for Employee Benefits

  • If a business owner has an OpCo that generates revenue and employs staff, the HSA should be structured through the OpCofor compliance and legitimacy.
  • The OpCo can reimburse health expenses tax-free, creating a proper employer-employee benefit structure.

✅ Extend Coverage to Employees

  • If the business has employees, it’s generally recommended to offer the HSA to all full-time employees—not just the owner—to reinforce its legitimacy as an employee benefit plan.
  • While different employee classes (e.g., Executives, Managers, Employees) can be established, the plan should not unfairly exclude employees.
  • You can allow different limits for each class, and classes can be based on occupation, tenure, family status, etc.
  • If an employer chooses not to extend HSA coverage to all employees, there must be a clear, justifiable reason—otherwise, CRA may view the HSA as a shareholder benefit rather than a legitimate employee benefit.

✅ Alternative Compensation Strategy: HSA vs. Bonus

  • If the business is considering paying bonuses or raises, an HSA can be a more tax-efficient alternative, as it allows employees to receive funds tax-free for eligible medical expenses.
  • A Wellness Spending Account (WSA) can also be used for non-medical expenses (e.g., gym memberships, childcare, RRSP contributions) but is taxable like a bonus.

Final Verdict: Can a HoldCo Offer an HSA?

🚫 No, a HoldCo is generally not the right entity for an HSA.
✅ The OpCo should sponsor the HSA, where there is active business income and employees.

If you have questions about setting up an HSA for your business, feel free to reach out. We can help compare different structures and ensure compliance with CRA guidelines.