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Understanding health insurance

March 28, 2018

Are you entitled to a tax refund for your medical expenses?

I was surprised to learn following my son’s accident that I could claim a portion of both his health expenses and our health insurance premiums on my tax return.

It was the call every parent dreads most: “Your son’s been in an accident.” Fortunately, in my case, the next words I heard were, “But he’s all right.”

After I caught my breath, I learned that my 19-year old son who was away at university had been in an accident. While he wasn’t badly hurt, his front teeth were. His formerly perfect, orthodontically aligned two front teeth were no more.

This was bad news. But I felt a sense of relief. It was something we could fix. However, as I soon discovered, major dental reconstruction is a costly affair. In our case, we were lucky in that because it was an accident, a portion of the expense was covered by my health insurance at work.

What I didn’t know, however, until I went to file my tax return, was that I could also claim the portion of the bill that I covered myself as a tax credit, along with a portion of our health insurance premiums.

Stuart Dollar, Director of Tax and Insurance Planning for Sun Life Financial, says, “The Medical Expense Tax Credit may be one of the most underused tax breaks available to Canadians.” Why? “Because getting the most from it requires some careful planning – including keeping all of your medical receipts.”

How does the medical expense tax credit work?

You can get a credit for unreimbursed medical expenses that exceed a set threshold. The threshold for the 2017 tax year is 3% of net income (the income you’re left with after deductions such as RRSP contributions) or $2,268, whichever is less.

The credit is given at the lowest marginal tax rate. The lowest federal tax rate is 15%. Provincially, tax rates vary, but in Ontario the lowest rate is 5.05% Added together, this makes the lowest marginal tax rate in Ontario 20.05%.

Either spouse can claim the credit and can use the entire family’s medical expenses. So, in most cases, the lower-earning spouse should claim the credit because their threshold will be lower.

You can use the credit to reduce your taxes for the year but your expenses don’t all have to come from the same tax year. They just have to come from any 12-month period that ends in the tax year. For example, you could use expenses you had from January 1, 2017 to December 31, 2017 or you could use expenses you had from January 2, 2016 to January 1, 2017, whichever works better for you.

Out-of-pocket medical expenses can be claimed. All eligible medical expenses not covered by a health insurance plan may be claimed. For example, if you went to the dentist and the charges were $750, and your health insurance plan reimbursed you for $450, then you can claim $300.

Out-of-pocket health insurance premiums can be claimed so long as the plan is a private health services plan designed to pay for medical expenses not covered by your provincial medial insurance plan. (You can only claim the portion of the premiums you pay yourself, not any amount covered by your employer.)

Dollar provides the following example:

Let’s say a family’s combined medical expenses, including health insurance premiums were $10,200. If they were reimbursed through a health insurance plan for $6,000, their out-of-pocket medical expenses would be $4,200.

Say, after doing the math, the lower-income spouse had $3,000 in expenses over the minimum threshold. The lowest federal tax rate is 15% and if they lived in Ontario where the lowest rate is 5.05%, their total credit would be $601.50 (20.05% of $3,000).

“In the grand scheme of things, getting $600 back after out-of-pocket expenses of $4,200 may not seem like much,” says Dollar, “but the credit is designed to help those who have substantial medical claims.”

In our case, I’m very grateful that my son’s accident only injured his two front teeth. We won’t be getting a large tax break this year by claiming the Medical Expense Tax Credit. But I’m also very grateful that his accident wasn’t more serious. For those having to cover far more costly medical expenses, claiming the tax credit may provide some much-needed financial assistance.

For more information on the Medical Expense Tax Credit, refer to The Canadian Health Insurance Tax Guide.

  • Health insurance is an important way to guard your income against unexpected medical expenses. You can also protect your income if you’re unable to work with disability insurance, and get financial help coping with and recovering from a serious illness, with critical illness insurance.

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