The Broken Medical Expense Tax Credit
By Jason Watt, CU, CLU
Your clients are likely rounding the corner to tax season, and gathering up receipts to support their desire to minimize their tax bills. Some of those receipts will likely include medical expense receipts.
As we know, most families have relatively low direct health care costs. The things that do carry a cost include dental care, vision care, and prescription drugs. If you’re unfortunate enough to have a serious chronic condition, then there are often additional direct and indirect expenses.
For 2017, the average direct health care costs to a Canadian household were $1816, and the total health care costs were $2579. These are average figures; I don’t know the mode, but it would be useful. The average individual income for those aged 35 to 44 yrs was $55,900 in 2016; we can extrapolate that to $57,000 at 2% inflation for 2017, for the sake of consistency. I have chosen that age range to try and capture 2-person households with kids. 32% of 2-parent households in Canada have roughly the same level of income, so this does represent a significant portion of the population.
Why does any of this matter? In order to be able to claim the medical expense tax credit, you have to have expenses exceeding 3% of your net income. The list of eligible medical expenses is designed to generally capture direct and not indirect expenses.
Now, net income will be reduced by tax deductions, and the only deduction that’s widely available is RRSP contributions (child care expenses as well, but that’s only going to be available in a narrower set of circumstances). The median RRSP contribution in 2016 was $3,000. Maybe I should index this figure to inflation again, but that has not been the reality. This figure is unchanged since 2013.
This would land us at an average net income of $54,000 (net income minus deductions) with claimable medical expenses of something like $2200 (let’s assume that 1/2 of the indirect costs are claimable, which I think is probably generous).
$54,000 x 3% = $1620. You can only claim what’s in excess of that, so $2200 - $1620 = $580 of medical expense tax credit claim is available, on average. A tax credit in Canada results in tax savings at the lowest tax rate. In Ontario, our most populous province, that lowest tax rate is 20.05%. So, your tax savings, as an Ontarian, would be $580 x 20.05% = $116.29. In Alberta, my home province, the savings would be $580 x 25% = $145.
How much work do you think this taxpayer put in to keep all the receipts and proof of expenses to generate $116.29 of tax savings? How many taxpayers did all this work, not knowing how the tax system works, and ended up with no tax savings available at all? To me, this is a broken tax credit. I know it works well for families that have very high health care costs - several of my friends have used it when they pay for fertility treatments, which typically cost around $30,000-$35,000 per year. But for the average family, it is either of little or no benefit.