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Winter 2000  

Taxation of E-commerce
New Legislation to Combat Money Laundering
The Kiddie Tax

Private Health Insurance Premiums

One item that was available for the first time in the 1998 taxation year and, of course, will be available 1999 and future years pertains to self-employed individuals: and the deductibility of premiums paid to private health care insurers. If this one item is missed on a return it could easily result in several hundred dollars of income tax being paid unnecessarily.

Prior to 1998, self-employed businesses: could not treat their owners as employees for income tax purposes. The income that they reported on their tax returns was calculated as the difference between revenues earned and expenses incurred during the year. If the company paid private health insurance premiums for its employees, the amount that was applicable to the owner was not deductible for income tax . purposes. This held true for the owner’s spouse as well, unless it could be proven that he/she was a bona fide employee.

This arrangement was thought to be discriminatory to unincorporated businesses when it was recognized that the same owner, had he incorporated his company instead of maintaining it as a sole proprietorship or partnership, could have deducted these premiums as expenses with no questions asked.

The government decided to rectify this imbalance. Commencing January 1, 1998 premiums paid under a private health insurance plan (termed private health services plan or PHSP) for the proprietor/partner, his spouse or any member of the household may be deducted as a business expense on the owner’s income tax return. However, there are a few conditions that must be met.

The first is that the proprietor/partner must be engaged regularly and continuously in the business throughout the time period when such premiums were paid. And for the taxation year in question and the immediately preceding year, the claimant must have earned at least fifty percent of his total income for the year from the business at hand and not have earned income from non-business sources in excess of $10,000 for the year.

Secondly, the premium must have been paid to (a)  a government licensed insurance provider or trustee; (b) a PHSP administrator; or (c) a tax exempt business, professional organization or trade union that has been set up to run such a plan.

A third stipulation prevents the claim to be deducted twice - once in the adjusted calculation of net income for income tax purposes of the proprietorship/partnership and for a second time by any other family member claiming the amount as a medical expense on their individual income tax forms.

Finally, there are rules concerning the calculation of the deductible amount. The employer must ascertain that at least one member of his staff has been in his employ for a period of three months or more, and if this condition is met, that at least 50% of such employees are covered by a PHSP, though not necessarily the PHSP provided by his firm.

If all these considerations are met, the employer is then allowed to deduct premiums paid on his own behalf. These will be limited to the lowest cost equivalent coverage provided to his employees. So if the company pays 30% of the cost of employee premiums and the employee bears the rest, the employer may only deduct 30% of his premiums as long as they represent coverage that is essentially identical to that of his employees.

If the above conditions cannot be met, it is still possible for the owner-manager to claim private health care premiums, but only up to a maximum dollar amount. In this case, the government will allow you a deduction of up to $1,500 for each of yourself, your spouse and household members over the age of 18 at the beginning of the year and $750 for younger household members, prorated for the number of days covered during the taxation year.

Winter 2000: Private Health Insurance Premiums | Taxation of E-commerce | New Legislation to Combat Money Laundering | The Kiddie Tax

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