A Cost Plus program offers a flexible alternative to traditional group insurance, allowing Canadian employers to reimburse their employees for eligible medical and dental expenses on a tax-advantaged basis.
Eligibility rules and spending limits depend heavily on business structure. While incorporated businesses face no dollar cap, unincorporated businesses are subject to CRA-imposed maximums, especially when only related employees are on the payroll.
The program creates a powerful dual tax benefit. The employer deducts the entire cost of the claim as a business expense, and the employee receives the reimbursement as a completely tax-free benefit.
What is a Cost Plus Program?
A Cost Plus program is a CRA-recognized Private Health Services Plan (PHSP) that reimburses employees for eligible out-of-pocket medical expenses on a pre-tax basis.
The term “Cost Plus” refers directly to the funding model: the cost of the claim, plus the fee. The employer pays the employee’s eligible medical expenses through a third-party administrator (TPA), covering the claim amount plus an administration fee and provincial sales tax.
The Cost Plus Reimbursement Process: Step-by-Step
Unlike traditional group insurance, where employers pay monthly premiums regardless of whether employees use the benefits, a Cost Plus plan is a pay-as-you-go system. The reimbursement process typically involves four steps: incurring the medical expense, filing the claim, verifying the details, and issuing the reimbursement.
The typical end-to-end process:
- Incur Medical Expense: The employee incurs an eligible medical expense and pays the provider out of pocket.
- Claim Submission: The employee submits a claim form and original receipts to the third-party administrator.
- Verification: The administrator reviews the submission to ensure the expense meets current CRA guidelines.
- Reimbursement: The administrator invoices the employer for the claim cost plus an administrative fee. Once the employer funds the invoice, the administrator deposits the tax-free reimbursement directly into the employee’s personal bank account.
Pro Tip for Employees: If you have a spouse with a traditional group plan, you should submit the claim to the spouse’s plan first. The Cost Plus program can then be used to reimburse the remaining unpaid balance, maximizing the family’s overall benefits.
How Business Structure Affects Cost Plus Eligibility and Deduction Limits
Eligibility and deduction limits for the Cost Plus plan depend heavily on business structure (incorporated vs unincorporated) and the relationship with employees. Any incorporated business in Canada can establish a Cost Plus program with no statutory dollar cap, while unincorporated businesses face CRA restrictions that vary based on the number and type of employees on payroll.
The following table compares Cost Plus eligibility across the four most common Canadian business structures:
| Business Structure | Eligible for Cost Plus? | Key Condition or Limit |
| Incorporated | Yes | No statutory dollar cap. The owner’s benefit must be reasonable and provided in their capacity as an employee, not a shareholder. |
| Unincorporated (with arm’s-length employees) | Yes, with limits | The owner’s deduction is capped at the lowest cost of equivalent coverage provided to their arm’s-length employees. |
| Unincorporated (with no arm’s-length employees) | Yes, with limits | The owner’s maximum benefit is strictly capped at $1,500 per adult and $750 per dependent child (under 18) per year, and all qualified employees must be included in the plan. |
| Unincorporated (no employees at all) | No | A self-employed individual cannot create a self-insured PHSP for themselves, as one person cannot insure themselves. |
Which Medical Expenses Qualify Under a Cost Plus Program?
A Cost Plus plan covers any eligible expense listed under subsection 118.2(2) of the Income Tax Act, spanning dental, vision, prescription, paramedical, and several other categories.
The following categories represent the most commonly claimed expense types:
- Dental Services: All services from a licensed dentist, denturist or dental hygienist, including cleanings, fillings, crowns, orthodontics, and implants.
- Vision Care: Prescription glasses, contact lenses, laser eye surgery, and exams by an optometrist or ophthalmologist.
- Prescription Drugs: Any drug prescribed by a medical practitioner and recorded by a pharmacist.
- Paramedical Practitioners: Services from licensed professionals such as chiropractors, physiotherapists, psychologists, registered massage therapists, and acupuncturists. The list of eligible practitioners varies by province.
- Medical Devices: Prescribed items like hearing aids, orthotics, CPAP machines, and mobility aids (e.g., wheelchairs).
- Hospital and Ambulance: Costs for private or semi-private hospital rooms and ambulance services, which are not covered by provincial health care.
- Medical Travel: Reasonable expenses for transportation, meals, and lodging when travelling more than 40 kilometres to obtain medical care not available locally.
This is not an exhaustive list; the third-party administrator adjudicates each claim against the statutory definition in the section.
Expenses That Are Not Eligible
Expenses that are excluded from Cost Plus reimbursement include purely cosmetic procedures (such as teeth whitening, hair replacement, and botulinum injections) unless the procedure is required for medical reconstructive purposes following trauma, disease or a congenital abnormality.
Furthermore, general wellness items like gym memberships, over-the-counter vitamins, and non-prescribed supplements do not qualify.
What are the Tax Benefits of the Cost Plus Program?
The primary advantage of a Cost Plus program is its tax efficiency. It converts personal, after-tax medical expenses into a full corporate deduction.
On the employer side, the full cost of a Cost Plus claim is a deductible business expense. This includes the claim amount paid to the employee, the administration fee charged by the administrator, and the provincial sales tax applied to that fee. They do not pay Canada Pension Plan contributions, Employment Insurance premiums, or other payroll levies on the reimbursements.
On the employee side, contributions made by an employer to a qualifying PHSP are excluded from the employee’s income from employment. This means the employee receives the full value of the reimbursement without any income tax, CPP, or EI deduction.
Note that to qualify for these tax advantages, the arrangement must meet the definition of a PHSP. The CRA requires these plans to include an insurance element, meaning there must be an undertaking to indemnify an employee for a health-related expense.
Case Study: The Real-World Tax Advantage of the Cost Plus
To understand the value of a Cost Plus plan, consider the difference between paying for a medical expense with personal after-tax dollars versus corporate pre-tax dollars.
The Scenario: Michael is an incorporated IT consultant in Ontario. Her daughter needs $5,000 in orthodontics.
- Without the Cost Plus (Out-of-Pocket): To pay the $5,000 bill, Michael must withdraw funds from her corporation. Assuming she is in a 40% marginal personal tax bracket, her corporation needs to pay her roughly $8,333 in gross dividends or salary. After she pays $3,333 in personal income tax, she is left with $5,000 to pay the orthodontist.
- With the Cost Plus: Michael pays the $5,000 bill and submits it to her administrator. The administrator charges her corporation $5,000 plus a 10% fee ($500). Her corporation writes off the total $5,500 as a fully deductible business expense, and Michael receives $5,000 tax-free.
The Result: By using a Cost Plus program, the corporation saves nearly $2,833 in cash flow that would have otherwise been lost to personal income taxes.
Cost Plus vs. Traditional Group Insurance: What’s the Difference?
A Cost Plus program reimburses actual claims with no fixed monthly premium, while traditional group insurance requires the employer to pay recurring premiums regardless of usage.
The table below highlights the key differences between Cost Plus and Traditional Group Insurance, comparing how each option handles funding, coverage flexibility, cost control, and overall risk management:
| Feature | Cost Plus | Traditional Group Insurance |
| Funding Model | Pay-as-you-go. You only pay for claims actually incurred. | Fixed monthly premiums, regardless of usage. |
| Coverage Scope | Very broad. Follows the CRA’s comprehensive medical expense list. | Restricted by the insurer’s specific policy definitions and limits. |
| Cost Control | Employers can set hard annual dollar maximums per employee. | Premiums frequently increase annually based on group usage and inflation. |
| Catastrophic Risk | No risk pooling. The employer bears the cost of every claim up to the cap limit. | Excellent for catastrophic risks (life insurance, disability, high-cost specialty drugs). |
When does the Cost Plus program make sense?
Choosing between Cost Plus and traditional group insurance depends on team size, claims pattern, and whether the business needs risk pooling for catastrophic costs. Many businesses use a combination of both structures to balance risk and flexibility.
For small operations, Cost Plus is the most budget-friendly way to offer benefits. Larger firms, however, may see better results with a hybrid strategy. They may use traditional insurance strictly for catastrophic protection and use Cost Plus to pay for predictable stuff like dental and vision.
CRA Compliance Risks for Cost Plus Programs and How to Avoid Them
From a tax professional’s perspective, while Cost Plus programs are highly effective, they must be structured to withstand CRA scrutiny. The most common compliance risks are unreasonable benefit amounts, receiving benefits in a shareholder capacity rather than an employee capacity, and lacking written documentation of the plan in an employment agreement.
To safeguard your deduction and guarantee compliance, you must navigate three primary areas:
The Reasonableness Test
Any business expense must be “reasonable in the circumstances”. While there is no statutory cap on corporations, a $50,000 annual limit for a sole employee earning $60,000, for example, would likely be challenged.
Best Practice: Set an annual limit comparable to what a traditional insurance plan would offer for a similar compensation package (e.g., $5,000 to $15,000 per family).
The Shareholder vs. Employee Risk
While there is no dollar limit for corporations, the CRA requires that the benefit be provided to the owner in their capacity as an employee. If a benefit is granted because of their status as a shareholder, it becomes a taxable shareholder benefit, and the deduction is denied.
Best Practice: Use a TPA to create an arm’s-length relationship. Ensure that the owner has a formal employment contract and receives a regular salary. If there are other employees, offer the plan to all employees in the same class to reflect consistency.
Lacking Documentation and Records
The CRA can disallow deductions if the plan is not properly documented. The CRA requires proof that the PHSP is an official part of the worker’s compensation, not an afterthought used to pay a sudden medical bill.
Best Practice: Maintain a formal plan document, an employment contract referencing the benefit, and keep all receipts, claim forms, and administrator invoices for at least six years.
FAQs about the Cost Plus Program
Do unused Cost Plus benefit limits carry over to the next year?
It depends on how the employer structures the plan documents, but strict rules apply. Most plans operate on a simple “use-it-or-lose-it” basis within the benefit year. The CRA allows plans to be structured with a one-year carry-forward of either unused benefit limits or unclaimed medical expenses (but not both at the same time). They cannot be carried forward indefinitely.
Can I claim medical bills incurred before I officially set up the Cost Plus program?
No. To qualify for tax-free reimbursement, the medical expense must be incurred after the Cost Plus program and the corresponding employment agreement have been formally established. The CRA strictly prohibits retroactive tax planning; you cannot set up a plan today to cover a large dental bill from last month.
