One of the most common questions we ask business owners is, “how do you pay for your visit to the dentist”? 95% of the time, the response we hear is, “out of my personal pocket”. As soon as we hear that, we know we can save that person a lot of tax expense they didn’t know they were paying.
Medical Expenses and Tax Deductions
In case you aren’t familiar, the Canadian Revenue Agency allows individuals to claim approved medical expenses (click here to see list) against your income as a tax deduction. The issue is that your medical expenses have to exceed 3% of your annual income to be eligible. According to a report by Industry Canada, the average Canadian household spends about $2,700 on out of pocket health care expenses. If you are self-employed or an owner of an incorporated business and earn less than $90,000 annually you do not qualify for the tax deduction.
How can we Help you Save on Medical Bills?
Now let’s talk apples to apples. Assume you make $100K annually and your family medical expenses for the year are above average at $3,500.
Based on the above scenario, a claim of $3,500 on your personal taxes exceeds the 3% restrictive tax rule. This tax rule works in a similar way to a deductable – the government will reduce the amount of medical expenses you can claim. So, let’s put this into numbers using our assumption ($100K income, $3500 in medical expenses).
3% of $100K is $3,000, thus reducing your eligible personal medical expenses from $3,500 down to $500. The $500 is then eligible as a tax credit against your marginal tax rate (in BC, that’s approx 38% when you make $100K) so, the bottom line NET tax savings for you is approx $190.
A Health and Welfare Trust is a Smarter Way
Instead of claiming your medical expenses on your personal tax return, those same medical expenses can be applied as a business tax deductable expense using a financial planning tool called a private health services plan or health and welfare trust and is governed by the Income Tax Act.
Using the same assumptions as above and applying it to an incorporated business owner who has a Health & Welfare Trust, the $3,500 medical expenses can be converted into a $3850* tax deductable business expense. The NET tax savings result for your business is $520 ($3850 x 13.5%).
Enough Math, How Much Further Ahead am I if I use the Trust?
You are 63% better off or net $330 more in your back pocket if you set up a Health & Welfare Trust verses claiming medical expenses on your personal tax return. That’s a big difference!
Wouldn’t my Accountant do this for me?
Not likely. To set one up, you need to be life / accident and sickness insurance licensed. Most accountants normally have a CA, CGA, CMA etc. but not this specific license.
What does it Cost to set this up?
To set up a Health & Welfare Trust, it’s a once lifetime set up fee of approximately $200. Yes, the set up fee is tax deductable too. Most times, you can recover the cost of the setup fee in the first year – every year after you’ll be much further ahead! To change your receipt from a personal expense to a business expense, it costs 10%, which is tax deductable!
What Kind of Medical Expenses can I Claim?
Most things such as: laser eye surgery, dental, chiropractic; register massage therapy, acupuncture, physiotherapy, eyeglasses, psychologists, prescriptions, etc. For a full list, visit http://www.cra-arc.gc.ca/E/pub/tp/it519r2-consolid/README.html
I Want to Save on my Taxes – How do I Set it up?
We look forward to meeting you and answering any questions you may have. Call us at 604 681 4493 or firstname.lastname@example.org. It’s just a couple quick signatures.
*$3,850 is based on the $3,500 medical expense plus a 10% fee which is also tax deductible