Many taxpayers seem to be unaware of the ability to claim medical and dental expenses on their personal tax returns. Furthermore, many self-employed taxpayers seem to be unaware of alternative options available to deduct these from their business income. So let’s tackle both of these issues.
Here is a brief summary of medical and dental expenses that can be claimed on your personal tax return:
- extended health and dental premiums paid through employment (they are taken off your paycheque and NOT paid by your employer; does not include life insurance, AD&D, short or long term disability)
- extended health and dental premiums paid to a private plan like Manulife or Pacific Blue Cross
- dental expenses including crowns, cleanings, fillings, root canals, etc.
- orthodontic expenses including braces, retainers, etc.
- physiotherapy, chiropractic, registered massage therapy, acupuncture, naturopath
- ambulance and hospital rooms
- attendant care and nursing home
- difference in food costs for those with celiac or gluten intolerance (i.e. regular loaf of bread is $2 and gluten free is $8 so you can claim $6 for every loaf purchased in a year)
- cosmetic surgery (when medically necessary)
- prescription drugs and vaccines
- hearing aids
- orthopedic shoes, boots and inserts
- tutoring services (when there is a learning disability)
Some of these items do have conditions for claiming however you can always check out CRA’s comprehensive A-Z list for more information.
Now that we know what’s deductible, let’s look at how a small business owner can deduct these. Either way, as an individual taxpayer, you can receive a tax credit on the difference between your total expenses and the 3% minimum threshold (maximum of $2,152).
To avoid losing the ability to claim the first $2,152 of expenses, as a business, you have another option which is to let the business pay for your medical and dental expenses. Now it isn’t as simple as the company paying for them. There are health and dental plans available with your local Chamber of Commerce, Manulife or Pacific Blue Cross, however these types of insurance plans will charge you a monthly premium which will then only cover a certain percentage of the above items. There are too many variables to consider here so I will not include them in the comparison.
Or you can set-up a health trust. What I like about the health trust is that there is no monthly fee. You pay a nominal one-time set-up fee and a 10% admin fee based on what you actually use of the plan. It isn’t an insurance plan but rather a self-funded plan. Since you are already out-of-pocket for the medical and dental expenses, having this plan allows you to deduct 100% of those same expenses on your business instead of receiving a tax credit on the difference over 3% of your net income.
Let me show you an example. A family of four with combined net income of $80,000, a 30% tax rate and has total medical and dental expenses of $4,000 for the year.
- Tax Credit Option: $4,000-$2,152 (maximum threshold)=$1,848*20% tax credit rate = $369.60 of tax savings
- Health Trust Option: $4,000*30% = tax savings of $1,200 plus CPP savings of $396. The admin fee would be $400 (10% of $4,000; not including the one-time set-up fee). Total net tax savings are $1,196.
Therefore, the difference between using the tax credit and having a health trust is $826.40 of tax savings.
This illustration has been done for someone who is not incorporated and living in BC. The same benefits still apply and in fact, there can be increased benefits to using this in a corporation too.
Your numbers and situation may be different so remember to always seek the advice of a Professional Accountant before implementing anything. Would also suggest talking to an Insurance Expert too.