Health Spending Account (HSA) in Canada 2025

Updated for 2025 · CRA eligible expenses · Tax-free reimbursement

A Health Spending Account (HSA) — also called a Private Health Services Plan (PHSP) — is an employer-funded account that reimburses employees for eligible medical expenses on a completely tax-free basis. HSAs have become increasingly popular with small businesses and as a supplement to traditional group insurance plans because they are flexible, cost-controlled, and tax-efficient for both employers and employees.

How an HSA Works

1. Your employer allocates a dollar amount to your HSA account each year (e.g., $500, $1,000, or $2,000)
2. You (or your covered dependants) incur eligible medical expenses
3. You submit receipts through your HSA provider's app or portal
4. Reimbursement arrives in your bank account — tax-free
5. Unused balances may carry forward (depending on plan design) or expire at year-end

Tax Treatment

Reimbursements from a properly structured HSA (Private Health Services Plan under CRA criteria) are completely tax-free to the employee. There is no income tax, no CPP, and no EI on HSA reimbursements. The employer also deducts contributions as a business expense.

This makes the HSA one of the most tax-efficient compensation tools available. A $1,000 HSA reimbursement is worth more than a $1,000 salary increase — a salary increase at a 43% marginal rate nets only $570 after tax, while the HSA reimbursement is the full $1,000.

What CRA Considers an Eligible HSA Expense

HSA expenses must qualify as medical expenses under the Income Tax Act (the same standard as the Medical Expense Tax Credit). The list is extensive:

Common Eligible Expenses

• Prescription drugs and medications
• Dental treatment (basic, major, and orthodontics)
• Vision care (glasses, contact lenses, eye exams)
• Physiotherapy, chiropractic, massage therapy (by registered practitioners)
• Psychologist and mental health therapy
• Hearing aids and batteries
• Custom orthotics and medical footwear
• Ambulance services
• Hospital private or semi-private room upgrade
• Medical equipment (CPAP machines, blood pressure monitors)
• Lab tests and diagnostic imaging not covered provincially
• Laser eye surgery
• Fertility treatments and IVF (eligible under certain conditions)
• Medical cannabis with a prescription

Generally Not Eligible

• Cosmetic procedures (purely aesthetic)
• Vitamins and supplements (unless prescribed for a medical condition)
• Gym memberships (covered by Wellness Spending Accounts, not HSAs)
• Life insurance premiums
• Personal care products

HSA as a Standalone Plan for Small Businesses

HSAs are particularly popular with small businesses (under 10-15 employees) as a complete replacement for traditional group insurance. Instead of paying insurance premiums with fluctuating costs, the employer:

• Sets a fixed budget per employee (e.g., $2,000/year)
• Pays only when claims are submitted
• Avoids the administrative complexity of group insurance
• Provides completely flexible coverage — employees claim whatever they need most

The CRA requires that to qualify as a PHSP, the plan must be primarily for health (and not a form of additional salary), and the employer must not be in a position to benefit personally from the plan (owner/operator restrictions apply).

HSA as a Supplement to Group Insurance

Large and mid-sized employers often offer an HSA in addition to traditional group insurance. Common designs:

• Top-up HSA — Claims not covered by the group plan (co-insurance, amounts over limits) can be submitted to the HSA
• Flex credits into HSA — Employees allocate unused flex benefit credits to an HSA at year-end
• Fixed HSA allocation — Every employee receives a set HSA amount annually regardless of other coverage

Carry-Forward Rules

Plan design varies. Some HSAs allow unused balances to carry forward for 1-2 years; others expire at year-end. Employer-funded HSAs where the employer retains unused amounts (use-it-or-lose-it) are common. Check your plan documents to understand your specific carry-forward rules.

CRA Requirements for a Valid PHSP

For an HSA to be tax-free, the plan must meet CRA's Private Health Services Plan criteria:

• The plan must be exclusively for medical expenses (no cash alternatives)
• Arm's length employees must benefit from the plan
• The plan must be in writing
• For owner-managers: special rules apply; spouses/relatives cannot be the only enrolled employees

Frequently Asked Questions

Can I claim my gym membership through an HSA?

No. Gym memberships are not eligible medical expenses under CRA rules and cannot be claimed through an HSA. However, a Wellness Spending Account (WSA) covers fitness expenses — though WSA reimbursements are taxable. See our WSA Guide.

Can I use my HSA for my spouse and children?

Yes. HSA eligible expenses extend to your spouse and dependant children, as well as other eligible dependants as defined by the Income Tax Act.

Do I need to keep receipts for HSA claims?

Yes. Keep all original receipts for HSA claims. Your employer or HSA administrator may request receipts, and CRA can audit HSA claims. Receipts should clearly show the service provider, date, amount, and nature of the expense.

This guide is for informational purposes. CRA's list of eligible medical expenses is subject to change. Verify eligibility with your HSA administrator or tax professional.