You’re not alone if you say “I just pay for them out of pocket”, but you might be missing an easy way to save tax. This edition of TAXBITES discusses HealthPlus – our simple and inexpensive self-insurance plan for medical expense reimbursement that will save you a lot of tax. There are no medical questions, it’s easy to use, and with no annual premiums, set-up fees or expenses, there is no downside to enrolling. It’s 2016, and with new higher Ontario tax brackets for high-income earners, the tax savings are as high as 49%.
Protect Insurance continues to provide the life and income-protection expertise that professionals have relied upon for years. In addition, we now offer a suite of financial, tax, financial planning and employee benefits services. Our TAXBITES series of newsletters explores a wide range of topics and we hope you find the content interesting and implementable.
Save as much as 49% by more tax effectively paying your medical bills
How do you pay your medical bills? You’re not alone if you say “I just pay for them out of pocket”, but you might be missing an easy way to save tax. Especially in light of Ontario’s new 50%+ tax rates on incomes over $200,000, this is an important tax planning topic for 2016.
What are the options?
Many people are aware that they can apply for personal tax relief on their tax return using the Medical Expense Tax Credit. The credit is only available for medical expenses in excess of $2,208 per year, and is calculated at the lowest marginal tax rate – about 20% in Ontario. For high income earners, even if their expenses actually exceed the threshold and tax credits are generated, those credits will be worth much less than the income taxes paid, considering the 46% to 53% marginal tax rate that will apply to their income. And, of course, if they are healthy and their expenses are below the threshold, there is no relief at all. Most people assume there is no alternative.
In a prior issue of TAXBITES we discussed group insurance. Although applicable in many situations, group coverage is not an option for everyone, most notably incorporated individuals with no other employees. Even for those with group insurance coverage, there are often items that are not covered or not covered at 100%.
For the smaller practice or individual business owner, the solution we recommend is HealthPlus – our simple and inexpensive self-insurance plan for medical expense reimbursement.
How does it work?
Health and dental expenses are among the few remaining expenses that a corporation can cover for an employee without triggering a taxable benefit. However, directly reimbursing yourself or another employee for medical expenses is not allowed. Using HealthPlus, an independent third-party, your corporation can insure you for household medical expenses and you’ll save a significant amount of tax. There are no medical questions, it’s easy to use, and with no annual premiums, set-up fees or expenses, there is no downside to enrolling in the plan.
When you incur a medical expense you simply pay it as usual with after tax money. Once or twice annually you prepare a claim on behalf of your corporation. At that time, in addition to the value of the expense, you add a 10% admin fee plus applicable taxes. You submit the claim form, original receipts and the corporate cheque (a fully deductible business expense). In return, you will personally receive a tax-free reimbursement for the amount of the expense. Using HealthPlus, the medical expense is efficiently and tax-effectively transferred to your corporation.
The savings come from the fact that you are presently paying these expenses with personal after-tax dollars rather than corporate before-tax dollars. At an income of $150,000 the savings are 35%. At the new highest Ontario tax bracket for earnings in excess of $220,000, the savings are a whopping 49%!
What expenses are allowed?
There is a long list of eligible expenses on the HealthPlus website (www.healthplusplan.ca) but as a general rule, if a licensed medical practitioner prescribes or recommends the treatment, the expense is eligible. The most common expenses we see are prescription drugs, paramedical services like massage and chiropractic, glasses/contacts/eye surgery, orthodontics and major dental.
There are no expressed limits, for example eyeglasses are not limited to $250 every two years as is common with insured plans. Expenses are eligible even if incurred when travelling out of province or country.
Are there any caveats?
HealthPlus is an employee benefit, so you must be an employee of your corporation. That said, if you pay yourself purely with dividends you may still be eligible to participate. Call to discuss.
There is no expressed maximum amount of annual claims but CRA has said it should be reasonable. Expenses related to purely cosmetic procedures are not allowed.
You must be a participant at the time the claim is incurred so you can’t wait until after you’ve had treatment to sign up and claim. Since there are no costs to sign-up and maintain the plan, we recommend putting the plan in place now in case you need it in the future.
Where can I get more info?
Feedback, comments, questions and next edition
I hope you found this edition interesting and useful. I’d love to get your feedback, comments and questions on any of the above. The next edition of TAXBITES will discuss the government’s new rules for life insurance effective January 1, 2017 and why this is the year to take a hard look at permanent insurance. Stay tuned!
The views expressed in this commentary are those of Protect Insurance Agencies Inc. (Protect) at the date of publication, are subject to change without notice, and are not represented to be error free. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific insurance products or investments, nor is it intended to provide tax, legal or accounting advice in general or specific to your circumstances. Buyers should review all documents relating to any insurance or investment carefully before making a decision and should ask their advisors for guidance based on their specific circumstances. Protect assumes no responsibility for how you use the information you obtain from this commentary. E. &. O.E.