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How does the Medical Expense Tax Credit work in Canada?

Posted by Alden Hui on June 11, 2018
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NOTE: This article has been updated on January 10, 2019 to account for the Medical Expense Tax Credit Threshold increase from $2,302 (2018) to $2,352 (2019)

The Medical Expense Tax Credit (METC) is a non-refundable tax credit applied through your personal tax return. Since it is non-refundable, it can be subtracted from your tax owed, but cannot bring your tax balance above 0. If you incur medical expenses that qualify under the Income Tax Act, you may make a claim for this tax credit.

In this article, we will:

  • Explain common METC rules
  • Perform a sample calculation
  • Reveal a cost-effective alternative (to the METC) for small business owners. 

How does the Medical Expense Tax Credit work?

If you incur medical expenses that qualify under the Income Tax Act, you may make a claim for a tax credit on the amount of expenses that exceeds the lesser of 3% of your net income or $2,352 (the minimum threshold for 2019). After, multiply the lowest marginal tax rate of your province (10% for the case of Alberta) + federal (15%) to the amount that exceeds the threshold. This number is your METC.

 

To make the formula easier, we will associate each variable with a letter:

Net Income ($) = A

Eligible Medical Expenses ($) = B

Lowest Provincial Marginal Tax Rate (%) = C

 

Formula:

Step 1: A * 0.03 = A1

Step 2: Compare A1 with $2,352

Step 3: Take the lower number, we’ll call this A2

Step 4: B – A2 = X

Step 5: X * (C + 0.15) = METC

Note: The 0.15 stands for 15%, which is the lowest marginal tax rate at the federal level.

 

Let’s do a sample Medical Expense Tax Credit calculation:

Net Income = $100,000

Eligible Medical Expenses = $4,000

Province = Alberta = 10% = 0.1

Step 1: $100,000 * 0.03 = $3,000

Step 2: Compare $3000 with $2,352

Step 3: Pick the lower number, therefore, A2 = $2,352

Step 4: $4,000 - $2,352= $1,648

Step 5: $1,648 * (0.1 + 0.15) = $412 = METC

In this case, you have a non-refundable Medical Expense Tax Credit amount of $412.

 

Want to find out your personal METC amount? Try our METC Calculator here.

 

Are there other ways to reduce my medical expenses?

Yes, a Health Spending Account (HSA) is a CRA-approved plan for incorporated business owners to turn 100% of their after-tax medical expenses into before-tax business deductibles. 

Note: An HSA also works for self employed workers / contractors who are incorporated

How does the METC compare to a Health Spending Account (HSA)?

The Medical Expense Tax Credit (METC) and Health Spending Account (HSA) are two competing alternatives to reduce your personal medical expense costs.

How are they different? HSA vs METC.

  • You might ask, "how does the medical expense deduction work?" Well, you must remember that a tax credit is different than a deduction. The METC is a non-refundable tax credit applied through your personal tax return. A non-refundable tax credit is subtracted from your tax owed, but cannot bring your tax balance above 0.
  • The size of the METC is dependent on your medical expenses, net income, and province of residence. In some cases, you may receive little to no tax credit at all.
  • On the other hand, an HSA can eliminate 100% of the taxes on your medical expenses (make it tax-free!). It does this by turning after-tax personal medical costs into before-tax business deductibles. This process occurs through your business, which is why the plan only works for small business owners.

What do they have in common?

  • They both utilize aspects of tax planning

Now, let's use the same numbers above for an HSA calculation:

Note: A Health Spending Account is NOT a tax credit, it is a means to make your medical expenses tax free. Therefore, we cannot directly compare the numbers, but you can still have a general idea of which creates better savings.

Net Income = $100,000

Eligible Medical Expenses = $4,000

Province = Alberta

Marginal Tax Rate (@ $100,000) = 36% = 0.36

The $4,000 medical expense is an after-tax cost, so in reality you are paying $6,250 before tax. ($6250*(1-0.36)=$4000)

Before Tax Cost = $6,250

36% Marginal Tax Rate = ($6,250*0.36) = $2,250 = YOUR HSA SAVINGS

Olympia HSA membership fee = $249

After Tax Cost = $4,249

 

With a Health Spending Account, you save $2,250.

With a METC you receive a $412 tax credit.

While you cannot directly compare those numbers, I think most people would deem the HSA to be a more cost-effective option.  

 

Want to find out how much you can save with an HSA? Try our Savings Calculator  here.

 

How does an HSA work?

At the core, the HSA is a contract between your corporation and yourself. The contract is based on CRA guidelines which allow your corporation to reimburse you for out-of pocket medical expenses. The reimbursements are 100% tax free to you and 100% tax deductible for your company. Basically, you get to withdraw money from your company without having to pay income tax.

What are some additional benefits of an HSA?

There is no wait. You can start saving immediately by claiming your medical expenses as they come.

There is no minimum threshold to qualify. 

100% of your expenses are reimbursed.

Note: you cannot claim medical expenses with both an HSA and a METC. You can only use one.

How can I learn more about HSA pricing and eligible expenses?

Download our FREE Beginner’s Guide to HSA:

what is a health spending account


For more tax tips, check out these resources:

Medical Expense Tax Credit Calculator 

Small Business Tax Credit and Deductions - Canada Tax Planning Ideas

How to pay less income tax in Canada

Complete Canadian Tax Planning Guide for Small Business Owners

 

Topics: medical expenses, tax, medical expense tax credit