For small business owners and incorporated professionals in Canada seeking effective ways to provide health benefit plans for themselves, the choice between the Medical Expenses Tax Credit (METC) and a Health Spending Account (HSA) can be critical. Both options aim to reduce the cost of personal medical expenses, and they share an identical list of eligible medical expenses.
However, significant differences set them apart, making it vital for you to make an informed decision tailored to your unique circumstances.
Understanding the METC
The Medical Expenses Tax Credit (METC) is a non-refundable tax credit provided by the Canadian government. It allows Canadians to claim a credit for eligible out-of-pocket medical expenses when they file their personal income tax. This credit is applied to your personal tax return to reduce the amount of tax you owe. However, it’s crucial to note the following key points:
- Non-Refundable Credit: The METC is a non-refundable tax credit, meaning it cannot be used for a refund. It reduces your tax liability but cannot bring your tax balance above zero.
- Expense Threshold: Only expenses exceeding the lesser of $2,479 for 2022 or 3% of line 23600 net income can be claimed. This means that the METC never reimburses 100% of the cost.
HSA (Health Spending Account)
An HSA is a Canada Revenue Agency (CRA)-regulated plan where organizations, including small businesses and incorporated professionals, reimburse their employees for personal medical expenses. The HSA offers several advantages over the METC:
- Tax-Deductible to the Corporation: All expenses incurred within the HSA are tax-deductible to the corporation. This provides a cost-effective way to support employee health benefits.
- Reimbursement Rate: An HSA reimburses 100% of the cost from the very first dollar spent. This means that every eligible medical expense is fully covered.
A Practical Comparison
Let’s illustrate the difference between METC and HSA using a practical scenario.
Scenario:
- Income: $100,000
- Eligible Medical Expenses: $5,000
METC Calculation
- Lesser of $2,479 or 3% of net income: $100,000 * 0.03 = $3,000
- Since $2,479 is less than $3,000, you can claim expenses exceeding $2,479.
- Eligible Medical Expenses for Tax Credit: $5,000 – $2,479 = $2,521
- METC at the Lowest Marginal Tax Rate (20.6%): $2,521 * 0.206 = $505.71 Tax Credit
- Tax Paid to withdraw $5000 from corporation: $7353*.32 = $2353
HSA Calculation
- Administrative Fee: $5,000 * 0.08 = $400
- GST on Admin Fee: $400 * 0.05 = $20
- Fully Deductible Business Expenses: $5,000 + $400 + $20 = $5,420
Read more: Navigating Employee Health Benefits: HSAs vs. Insurance-Based Group Benefits
Bottom Line:
In this scenario, you have the choice between receiving a personal non-refundable tax credit of $505.71 after spending $5000 of personal dollars or a fully deductible business expense of $5,420 by using an HSA. The 2 most important considerations are the tax you’ll pay to withdraw the $5,000 from the business and declare it as personal income (in this example it’s $2353) and the fact that the METC only kicks in after meeting the $2479 threshold.
The clear advantage lies with the HSA, as it provides reimbursement for every dollar spent, starting from the first dollar.
