How to Avoid Mistakes on Box 85 of the T4 Slip

Preamble

This is a lengthy read, not meant for skimming, but for being a thorough source of everything related to Box 85.

Apologies in advance for being long-winded.

Introduction

Box 85 on the T4 slip is used to report employee-paid premiums for private health services plans (PHSP), such as employee contributions to employer-sponsored health and dental plans (T4 slip: Statement of Remuneration Paid - Canada.ca)  In other words, it captures the portion of medical and dental insurance premiums that employees paid themselves (usually through payroll deductions) during the year.

These amounts are not taxable benefits to the employee; instead, they are considered qualifying medical expenses that the employee can potentially claim on their income tax return (Private health services plan premiums - Canada.ca)  Reporting them in Box 85 serves to document the employee’s contributions for tax purposes. While the use of Box 85 is optional from the employer’s perspective, providing this information is highly beneficial. It helps employees easily identify their eligible medical expense premiums and supports their claims for the Medical Expense Tax Credit (METC) (Don’t forget about box 85 when doing T4’s (if you share health and dental costs with staff) – Mainstay Insurance)  

If Box 85 is left blank when employees did pay part of their health premiums, the Canada Revenue Agency (CRA) may later ask the employee to provide proof of payment for those premiums (Private health services plan premiums - Canada.ca)  

In short, Box 85 exists to facilitate accurate tax reporting of employee-paid health plan premiums, ensuring that employees can claim their due tax credits and that employers have a clear record of these contributions.

Types of Contributions Reportable in Box 85

Employee Life and Health Trusts (ELHTs) and Health and Welfare Trusts (HWTs) are two common vehicles employers use to provide health and welfare benefits. Under both structures, employers contribute funds to a trust which in turn provides benefits like group medical, dental, and insurance plans for employees (Income Tax Folio S2-F1-C1, Health and Welfare Trusts - Canada.ca)  (employee life and health trust (ELHT) )  A key tax principle is that employer-paid contributions for health coverage (e.g. premiums for a PHSP) do not create a taxable benefit for employees (Private health services plan premiums - Canada.ca)  Therefore, if the employer fully pays the health plan premiums, nothing is reported in Box 85 (since the employee paid nothing and cannot claim anything). However, many employers share the cost of health benefits with employees — for example, the employer might pay a portion of the premium and the employee pays the rest via payroll deduction. It is these employee-paid portions of premiums (often for extended health and dental coverage) that must be tracked and reported in Box 85.

In the context of ELHTs and HWTs, the tax treatment remains the same: an employee’s contributions toward health benefits are treated as their personal medical expense. For instance, if an ELHT requires employees to contribute to the cost of their health or dental plan, those contributions qualify as medical expenses for the employee, enabling them to claim the METC (employee life and health trust (ELHT) )  Employers should include such amounts on the employee’s T4 slip under code 85. The type of contributions to report in Box 85 includes any premiums or contributions an employee paid during the year for coverage under a private health services plan (this typically covers health, dental, and vision plans that meet the definition of a PHSP) ([Canada] Types of payroll benefits and deductions – Help Center)  Both ELHTs and the older HWTs can provide PHSP benefits; the structure of the trust does not change the reporting requirement for employee-paid premiums.

It is important to note what not to include in Box 85. Contributions related to benefits that are not private health services plans should be excluded. For example, premiums for group life insurance, accidental death and dismemberment (AD&D), or certain disability plans are usually paid by employees after tax but are not eligible medical expenses – therefore, they do not belong in Box 85 (T4 box 85 - Tax Topics - protaxcommunity.com)  Only the portions of contributions that go towards eligible health and dental plans (or similar medical coverage) should be reported. In practice, employers often receive a breakdown of premiums from their insurance provider or trust administrator (showing how much of the total cost was for health/dental vs. other benefits). Using this breakdown, employers must ensure that only the PHSP-eligible portion that the employee paid is summed up for Box 85 reporting.

(Note: Health and Welfare Trusts were an administrative approach historically sanctioned by CRA. As of recent tax law changes, new HWTs cannot be created and existing HWTs were required to convert to ELHTs by the end of 2021 (employee life and health trust (ELHT) )  This transition does not affect the treatment of employee premiums for tax purposes – the employee-paid amounts for health coverage are still reported in Box 85 regardless of whether the plan is administered via an HWT or ELHT.)

Common Tracking Issues Throughout the Year

Accurate reporting of Box 85 requires diligent tracking of employee contributions to health plans. Unfortunately, companies sometimes make errors in this area. Below are some common tracking issues and mistakes to watch for:

• Incorrect Classification of Premiums: A frequent error is lumping all benefit deductions together without distinguishing eligible health plan premiums from other premiums. For example, an employee’s payroll deduction might cover a bundle of benefits – health, dental, life insurance, etc. If the employer mistakenly reports the entire amount in Box 85, it overstates the medical expenses (because life insurance and similar premiums are not claimable). Conversely, some employers exclude all amounts from Box 85, not realizing a portion (the health premiums) should be reported. This misclassification leads to discrepancies: employees often find that the total health-related deductions on their pay stubs for the year don’t match the Box 85 amount. One common scenario is when group life or disability premiums are included in the payroll deduction but filtered out of Box 85 – the Box 85 figure ends up lower than the total deducted from pay (T4 box 85 - Tax Topics - protaxcommunity.com)  (T4 box 85 - Tax Topics - protaxcommunity.com)  Such differences can confuse employees and flag potential errors.
• Missing or Incomplete Records: Throughout the year, employers must maintain records of each employee’s contributions to the health plan. Problems arise if record-keeping is lax. For instance, if an employer does not separately record health premium deductions (perhaps only keeping a single “insurance” deduction total), they may struggle at year-end to determine the correct Box 85 amounts. Missing records might occur with high employee turnover, mid-year benefits changes, or switching payroll providers and failing to carry forward deduction data. Without a clear audit trail of what each employee paid for health coverage, the risk of reporting errors increases. Every payroll run should capture the exact amount an employee contributes to the PHSP, and this data should be stored for T4 reporting and potential audit support.
• Misunderstanding Eligibility Criteria: Some employers misunderstand which contributions qualify for Box 85. A typical misunderstanding is thinking that any employer-sponsored insurance deduction qualifies. In reality, only premiums that meet the definition of a private health services plan count (Private health services plan premiums - Canada.ca)  For example, premiums for a health spending account or extended health/dental are eligible, but premiums for dependent life insurance or critical illness insurance are not (those are not PHSPs). Misunderstanding this can lead to including non-qualifying amounts in Box 85 or, alternatively, failing to report legitimate health premiums. Employers must be clear on the plan details: which components of their group benefits trust or policy are PHSPs versus other insurance. Failing to apply the correct criteria can also mean missing out on amounts that employees could rightfully claim.
• Lack of Reconciliation: A best practice is to reconcile the total employee deductions for health benefits with the amount that will be reported in Box 85, before T4s are finalized. A common issue is not performing this reconciliation, resulting in inconsistencies. If payroll records show $X was deducted from an employee for health and dental, Box 85 on the T4 should also show $X (assuming all those deductions were for eligible plans). The CRA’s guidance, and professional consensus, is that the Box 85 figure should align with what is on the pay stubs (T4 box 85 - Tax Topics - protaxcommunity.com)  When it doesn’t, that’s a red flag of a mistake (perhaps part of the premium was misclassified). Many errors are caught only at year-end, but the groundwork is laid by not monitoring throughout the year.

In summary, the most pervasive issues are classification errors, inadequate record-keeping, and knowledge gaps regarding what qualifies. Companies that do not address these during the year often find themselves scrambling during T4 season or, worse, facing questions from employees and auditors later on.Compliance Risks of Inaccurate ReportingEnsuring Box 85 is accurate is not just a courtesy to employees – it’s an important part of payroll compliance. Inaccurate reporting or bookkeeping in this area can expose the employer to several risks:

• CRA Audits and Adjustments: The CRA actively audits employers to verify correct reporting of income and benefits. The Employer Compliance Audit (ECA) program’s mandate is to check employers’ payroll reporting (including taxable benefits and related information) (Evaluation Study - Employer Compliance Audit (ECA) Program - Canada.ca)  If an audit uncovers that health benefit contributions were handled incorrectly, the consequences can ripple through many employee tax returns. In fact, CRA studies have found a high rate of errors in employers’ reporting of benefits – in roughly 80%+ of audits, some form of non-compliance is detected and corrected (Evaluation Study - Employer Compliance Audit (ECA) Program - Canada.ca)  An error with Box 85 might indicate a larger issue (such as misclassified benefits), prompting auditors to dig deeper. For example, if an employer mistakenly treated a taxable benefit as a non-taxable health premium, the CRA audit will result in adjustments: the employer may need to issue amended T4 slips, and employees’ past tax returns might be reassessed to include the previously unreported taxable benefit. The ECA program is a “one-to-many” system: one employer mistake can lead to CRA reassessing numerous employees’ taxes (Evaluation Study - Employer Compliance Audit (ECA) Program - Canada.ca)  This scenario is undesirable for all parties.
• Penalties and Interest: Financial penalties can arise from inaccurate T4 reporting. While Box 85 itself is an informational item (and an omission of Box 85 might not directly trigger a penalty since it’s optional), errors often coincide with improper handling of taxable benefits or source deductions. If an employer’s mistake led to an employee benefit not being taxed when it should have been, the CRA can assess the employer for the unpaid income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums, plus interest on those amounts. In cases of significant errors or negligence, penalties may be charged. For instance, failing to report required information on slips or failing to file amended slips in a timely manner could result in fines under the Income Tax Act’s information return provisions (Employers' Guide – Filing the T4 Slip and Summary - Canada.ca)  Repeated failures to report income (even on the part of the employer preparing slips) increase the likelihood of punitive penalties. In short, getting the classification wrong can have costly results: the employer might bear the burden of taxes that should have been withheld, along with interest and potential penalties for non-compliance.
• Loss of Employee Trust and Tax Implications: From an employee’s perspective, errors in Box 85 can be frustrating or financially detrimental. If Box 85 is understated (or omitted entirely) due to employer error, an employee might miss out on claiming a medical expense they were entitled to. They may only discover this during a tax review or audit when asked for receipts. Conversely, if Box 85 is overstated (including non-eligible items), employees might over-claim medical expenses and later face reassessments denying those claims. Either situation can erode employees’ confidence in the employer’s payroll reporting accuracy. Additionally, if corrections are needed after T4s are issued, employers must issue amended T4s and communicate these changes to employees, which can be administratively burdensome and lead to confusion. In worst-case scenarios, serious compliance failures (like misreporting benefits broadly) could subject the company to deeper audits, damaging its reputation and leading to further scrutiny in future years.

In essence, accuracy in reporting Box 85 is part of the employer’s broader legal obligation to report remuneration and benefits correctly. Inaccurate reporting not only poses a risk of financial penalties and interest, but it also heightens audit risk and can complicate employees’ personal tax situations. CPA Canada members advising or working within organizations should be keenly aware of these stakes when overseeing T4 preparation.Best Practices for ComplianceTo avoid the pitfalls above and ensure smooth, compliant reporting, employers should adopt the following best practices regarding Box 85 and health benefit contributions:

• Integrate Box 85 Tracking into Payroll Systems: Set up your payroll system to separately track employee contributions to health and dental plans. Most modern payroll software allows you to define deductions specifically as employee-paid health premiums so that they automatically flow to Box 85 on the T4 ([Canada] Types of payroll benefits and deductions – Help Center)  ([Canada] Types of payroll benefits and deductions – Help Center)  For example, configure one deduction code for “Health/Dental Premium (Box 85)” and use that for any employee contributions to a PHSP. By structuring the payroll inputs correctly from the start, you minimize manual calculations at year-end. Ensure that this deduction is taken after tax (since it’s not a pre-tax deduction in Canada) – payroll should not reduce taxable income for these amounts, as employees only get credit via their tax return, not through reduced withholding.
• Obtain Clear Premium Breakdowns: Work with your benefits provider or trust administrator to get a detailed breakdown of premiums for each component of coverage (health, dental, vision, life, disability, etc.). This information is typically available at policy renewal or upon request. Use it to allocate the proper portion of employee contributions to eligible health services plan premiums. For instance, if an employee’s total bi-weekly deduction is $50 and $35 of that is for health/dental while $15 is for life insurance, only $35 should count toward Box 85. Having this clarity prevents misclassification. Keep documentation of how contributions are split, in case you need to support the calculation later.
• Educate Payroll and HR Staff: Ensure that those responsible for payroll understand what Box 85 represents and why it’s important. Provide training or reference materials highlighting that only PHSP-eligible premiums should be tracked for Box 85. Staff should know, for example, that an Employee Life and Health Trust’s contributions toward a dental plan are treated differently from contributions toward a life insurance plan. A quick internal guide listing which benefit plans are eligible for Box 85 can be very helpful. By educating staff, you reduce errors born of misunderstanding (such as accidentally coding a taxable benefit as a health premium or vice versa).
• Routine Reconciliation: Don’t wait until February to reconcile health premium contributions. Perform periodic reconciliations (for example, quarterly or after any major changes in benefit rates). Compare the year-to-date amounts deducted for health and dental benefits for each employee against what your records indicate should be reportable. This exercise will catch discrepancies early. By year-end, you should be able to tie each employee’s total PHSP contribution directly to the Box 85 amount that will be on their T4. As noted, any difference between what was deducted and what is reported signals an issue that needs correction (T4 box 85 - Tax Topics - protaxcommunity.com)  Routine checks make the year-end process a confirmation step rather than a fire drill.
• Maintain Proactive Documentation: Keep thorough documentation to substantiate Box 85 amounts. This includes storing payroll reports that itemize health premium deductions for each employee, copies of invoices or statements from insurers showing premiums, and any employee communications about changing coverage or contribution rates. In addition, consider proactively providing employees with an annual summary of their health premium contributions (for example, in a year-end letter or on their final pay stub of the year). Such documentation mirrors the Box 85 figure and can serve as proof for the employee if the CRA ever inquires. In the absence of a Box 85 entry, employees often need a letter from the employer to claim their premiums (Don’t forget about box 85 when doing T4’s (if you share health and dental costs with staff) – Mainstay Insurance)  providing the information up front (either via the T4 or a separate statement) is far more efficient and reinforces compliance. Good documentation habits also prepare your organization for any payroll audit – you can readily show how Box 85 was calculated and that it matches actual contributions.
• Review Trust Agreements and Policies: If you operate an ELHT or HWT, review the trust documentation to ensure it clearly distinguishes employee contributions and their intended use. This is somewhat more technical, but as CRA’s guidance notes, if a trust does not explicitly apply employee contributions to a specific plan, they may assume contributions fund all plans proportionately (Income Tax Folio S2-F1-C1, Health and Welfare Trusts - Canada.ca)  Clarity in the trust or plan texts can help in accurately attributing what portion of benefits was funded by employees. Additionally, ensure any new health benefit or reimbursement program introduced (such as wellness spending accounts or new insurance benefits) is evaluated for tax purposes – decide upfront if it falls under a PHSP category (eligible for Box 85 reporting) or if it’s a taxable benefit. Having a CPA or payroll specialist involved in plan design changes will support compliance from day one.

By implementing these practices, employers can significantly reduce the risk of errors with Box 85 reporting. In essence, the approach is to be proactive and detail-oriented: categorize contributions correctly at source, verify the data regularly, and document everything.

Employers who follow these steps will find that year-end T4 preparation is smoother and that they are well-positioned to demonstrate compliance should the CRA inquire. Moreover, employees will appreciate the accuracy and clarity, as it directly affects their personal tax filings.

Conclusion

Box 85 may seem like a minor entry on the T4 slip, but it carries important implications for tax compliance and employee tax benefits. This guide has highlighted that Box 85’s purpose is to record employee-paid health plan contributions, thereby enabling employees to claim medical expense tax credits legitimately.

We examined how contributions to Employee Life and Health Trusts and Health and Welfare Trusts work in this context – reaffirming that only the employee-funded portions of eligible health benefits are reported, and that employer-paid portions remain non-taxable and outside of Box 85.

Common pitfalls such as misclassification of premiums, poor record-keeping, and confusion over eligibility criteria can lead to inaccuracies in Box 85 reporting. These mistakes not only inconvenience employees but also expose employers to compliance risks, including audits, reassessments, and penalties if associated taxable benefits were handled incorrectly.

For CPA Canada members and other professionals overseeing payroll and T4 reporting, the key takeaways are clear. First, knowledge and precision are vital: understand which benefits qualify for Box 85 and ensure only those amounts are captured. Second, systems and processes must support accuracy: configure payroll systems appropriately and reconcile data to catch errors early. Third, maintain a compliance mindset: recognize that even if Box 85 itself is optional, accurate reporting of all payroll information is a regulatory obligation, and being careless can have serious financial and reputational consequences.

The CRA’s enforcement activities show that employers are expected to get these details right (Evaluation Study - Employer Compliance Audit (ECA) Program - Canada.ca)  and a high rate of adjustments on audit underscores the importance of diligence.

In conclusion, employers should strive to make Box 85 reporting an integral part of their annual payroll routine – not an afterthought. By following practices such as clear classification of deductions, continuous tracking, and thorough documentation, organizations will ensure that their T4 slips are complete and correct. This not only upholds compliance with tax laws but also provides a service to employees, making it easier for them to utilize the tax credits available to them without hassle.