Self-employed and incorporated professionals can deduct medical expenses
David Christianson, BA, CFP, R.F.P., TEP
As you know, eligible medical expenses create a medical expense tax credit that may be able to reduce your taxes.
However, medical expenses are only claimable to the extent that they exceed a threshold of $2,011 or 3% of the taxpayer’s net income for the year. The expenses over and above the threshold reduce federal income taxes by 17%, and provincial taxes by an additional amount.
On the other hand, if you are a business owner, self-employed or an incorporated professional, you may be able to make your (and your employees’) entire family medical expenses a deduction from taxable income (as opposed to a credit). If you are paying tax on taxable income above $40,000, a deduction will be more valuable to you, and more of the expenses can be used toward the claim.
This arrangement is called a Private Health Service Plan (PHSP). This is set up with an administrative trustee (typically a small trust company which provides such a product, or a benefits specialist like Olympia Benefits Inc.,) or an insurance company. It is a "cost plus" arrangement, where the trustee receives proof of payment for medical expenses incurred by any of the people covered by the plan.
The trustee adds an administration fee, and then sends the combined amount to the company owner or self-employed person. When the expense is reimbursed, it is a deductible business expense. It is not taxable to the employee, nor are there deductions for EI or CPP premiums.
This is different from a group insurance plan, as there may or may not be any "insurance" aspect. The company usually takes all the risk (though it can set limits), rather than passing on the risk to an insurance company by paying group insurance premiums. For this reason, these plans are most popular among the self-employed and those with a very small number of employees. More employees means more risk, and an insurance element is then more appropriate.
The expenses that are reimbursed must be eligible medical expenses that would have qualified for credit, if paid directly. If an employee pays a portion of the PHSP premium, then this amount would qualify for the medical expense credit for the employee.
As an example, take an individual who files as a self-employed professional, with taxable income of $70,000, facing a $2,500 orthodontic expense for a child. The tax saving would be about $1,375 with a PHSP, compared to an estimated $126 saving if claimed as a medical expense tax credit.
The administrative fee would be in the range of 10% of the claim, or $250 (also deductible).
The PHSP is specifically defined under Section 248(1) of the Income Tax Act. However, there are still numerous regulations that must be followed in order for the deduction and the non-taxable benefits to qualify. It is important that you carefully choose your administrator to avoid the potential of disallowed deductions and complications with CRA.
Ask questions like length of time in this particular business, how many groups the company handles, how it administers claims, if they take responsibility and liability for the adjudication of the claim, if they have a customer service department where you can talk directly to a claims officer, and if they have online account enquiries or online claims process.
The PHSP is not for everyone, but if you file a Form T2125 – Statement of Business and Professional Income with your tax return, then you may qualify.
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David Christianson is a fee-for-service financial planner and portfolio manager, whose team at Wellington West Total Wealth Management Inc. provides comprehensive financial advice and management. You can e-mail him at dchristianson@wellwest.ca or visit his website at www.davidchristianson.com.