Holy Dental Bill! Help me HSA!

To continue with my dental experience, I decided to ask for a series of estimates for braces – the invisible kind not the kind Tutti wore back in the eighties.  Many of you are asking yourself…why on earth would you want braces?  Especially at your age?  Well, I have always had a bit of an overbite and when my wisdom teeth came in, they caused my teeth to be extra tight.  So, I am exploring the option of getting braces…..until I received the quote.  The cheapest solution will probably be $6,000 for what I am looking for – the equivalent of two 42″ Plasma Screen TVs or new hardwood floors in the house!

I don’t need them right away and can start saving today.  Since Gremolata is incorporated, I qualify for a Health and Welfare Trust.  I don’t want to go overboard here deposit-wise, but I could easily allocated $300 a month towards an HWT in my name.  This could be considered the core health benefit plan for the company.  This would provide me with $3,600 a year in deposits less a 10% administration fee ($360).  Using this schedule, I would have enough saved up for the braces in two years.  The dentist suggested I wait 6 months before I even consider the consultations with the specialist, so this time line works well for me.

Let’s do some tax talking for a minute.  The $3,600/year would become a business expense for the corporation as a cost of doing business – keeping me healthy.  The $3,600 deposited into my Health and Welfare Trust, as an employee of the corporation, would be a tax-free benefit for me (as long as I continue to reside outside of Quebec).  In essence, I am now receiving $3,600 in additional compensation I can use for braces without having to pay the income taxes on the amount.

So, there you have it.  I can use my Health and Welfare Trust to pay for my braces and save both myself and the company money.  I can be flexible with a deposit schedule I am comfortable with financially and use the funds when I have reached my goal.  You now understand how to save money as well as my dental records.  Ah, the internet.

Insurance Is Upset at Flaherty – But Why?

The recent federal budget got the whole Canadian insurance world up in a tizzy.  While most people did not notice the entry, everyone in the benefits consulting and insurance world started freaking out over one paragraph.  It wasn’t in the budget speech.  Rather, it sat in the bowels of the 416 page budget details document.  So what could have gotten everyone so upset?  Well, on Page 282, Appendix 4, the following was documented…

Budget 2008 also proposes to clarify the METC provisions regarding the eligibility of drugs and medications.

Currently, drugs, medications and other preparations are eligible for the METC when they are both prescribed by a recognized medical practitioner (or a dentist) and recorded by a pharmacist. These two requirements are intended to ensure that only costs for substances not generally available to the public and required for medical reasons receive tax relief. However, recent court decisions have interpreted this measure to include, in some cases, the cost of vitamins, supplements and drugs that could otherwise be purchased without a prescription. Such an interpretation goes beyond the policy intent of the METC.

Budget 2008 therefore proposes to clarify the wording for eligible drugs and medications to ensure that those that may be purchased without a prescription remain ineligible.

Holy Cow Batman!  Do you mean that I cannot claim Flintstone Vitamins from my HSA?  I actually need to have a prescription from a doctor and actually see the pharmacist to get something a little more legitimate?  What could the insurers and consultants be so upset about?

Well, they believe that this wording will eliminate ALL over the counter prescriptions.  This is because there is a disconnect on what the government is trying to achieve and what the consultants and insurers understand as “the realm of their industry”.  The goal here is to stop sole-proprietors from buying over-the-counter (OTC) vitamins then claiming them as eligible expenses on the METC.  The consultants and insurers are assuming that the wording will eliminate over the counter drugs completely and not what the federal budget suggests “Items without a prescription”.  There is a difference.  

Yes, this may have some implications on certain health benefit plans and coverage.  But certainly not anything to be too concerned with here.  You can always assume that the CRA will look at each case with what is the best interest of CRA and whether the taxpayer (individual or corporate) acted in good faith given their interpretation of the rules.  After all, they are not all evil monsters out to tax you to death.  The problem here is that the wording regarding OTC drugs and the METC has been grey for far too long and has caused multiple headaches for sole-proprietors and CRA.  So they want to clarify the rules.

Let’s just see what they come up with before everyone starts claiming that the sky is falling.  PS – If you do get hit on the head be sure to see your Doctor first if you need some form of pain reliever – just to be safe!

New Eligible Claims for Medical Tax Credit & HSA

Tax-free Savings Accounts (TFSA) were not the only thing announced during the federal budget this week.  New allowances were made to the list of eligible claims in addition to some strong actions to be taken to tighten up the words and rules on prescriptions and vitamins.  Go Flaherty, get tough with those supplement-poppin baby-boomers!

The budget approved the following items to be included as eligible expenses: altered auditory feedback devices for the treatment of a speech disorder; electrotherapy devices for the treatment of a medical condition or a severe mobility impairment; standing devices for standing therapy in the treatment of a severe mobility impairment; and pressure pulse therapy devices for the treatment of a balance disorder.  Expenses for service animals specially trained to assist an individual who is severely affected by autism or epilepsy to cope with the individual’s impairment, was also added.   Currently, the rules only recognize an individual who is blind, deaf or has a severe impairment that markedly restricts the use of the individual’s arms or legs.

Finally, the budget announced that it would revise the wording on prescription drugs.  Currently, drugs, medications and other preparations are eligible for the Medical Tax Credit when they are both prescribed by a recognized medical practitioner (or a dentist) and recorded by a pharmacist.  However, recent court decisions have interpreted this measure to include, in some cases, the cost of vitamins, supplements and drugs that could otherwise be purchased without a prescription.  To clarify the issue, the government is going to clarify the wording for eligible drugs and medications to ensure that those that may be purchased without a prescription remain ineligible.

This is good news!  By reinforcing the rules, the government is taking a serious stance on the importance of the Medical Tax Credit as well as Health Spending Accounts.  This should be a taken as stern message to some of the fly-by-night HSA providers to shape up your adjudication and HSA knowledge, or ship out!

 

The Medical Tax Credit

In order to understand the benefits of an HSA versus the traditional Medical Tax Credit, I thought it would be valuable to provide some basic information on the credit.  If you own a company, you pay yourself (and your employees if applicable) a salary for the work performed.  This salary is subject to source deductions like CPP, EI, and income tax.  What you have left, you use to finance your lifestyle and in many cases, pay for insurance premiums or out-of-pocket health expenses such as dental bills, prescriptions, or elective surgery.  At the end of the year, you can declare these expenses on your annual tax return and apply for the medical tax credit.  The medical tax credit is a non-refundable tax credit, meaning that it can only be used to reduce federal or provincial/territorial taxes to zero.

Taxpayer and Immediate Dependents

Medical expenses for the taxpayer, their spouse or common-law partner, and dependent children under 18 are claimed on line 330 of the federal tax return.  Only expenses greater than the lesser of $1,925 or 3% of net income can be claimed. The lowest tax rate is applied to the medical expenses to determine the amount of the tax credit you will receive.  

“Other” Dependents

Medical expenses for other eligible dependents are claimed on line 331 and a separate calculation is done for each dependent. Only expenses greater than the lesser of $1,925 or 3% of net income of the dependent can be claimed, up to a maximum of $10,000 per dependent. The lowest tax rate is applied to the medical expenses to determine the amount of the tax credit you will receive.

The key difference between the HSA and the medical tax credit is that the HSA is a full-deduction for the business and 100% tax-free for the recipient (i.e. the employee).  There are no thresholds for deduction by the company and the employee does not declare the deposits into the HSA as the amount is not considered to be income.  The amount spent from the HSA on eligible medical expenses represents a true dollar value in tax-free benefit for the employee versus the amount received from the medical tax credit, which is only a portion of the actual cost.  However, it is important to note that the HSA does not reduce overall personal income tax like the medical tax credit – unless it is paid in lieu of a portion of the employee’s normal salary.  For example, if the employee earned $100,000 in 2007, the source deductions would reflect the amount owed based on $100,000.   However if the employee’s compensation changed in 2008 to be $80,000 and the company deposited $20,000 into an HSA, then the source deductions would be reduced to reflect the amount owed on $80,000 as the $20,000 HSA contribution would be a tax-free benefit.