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I can’t believe I forgot yet another Tax Freedom Day. I am so busy this time of year. I didn’t even get my Happy Tax Freedom Day cards out into the mail until last night. What an embarrassment.
But yes, Tax Freedom Day was last week, June 14th to be exact. Virtually every Canadian added some extra cash to their pay cheque as of June 14th and to be honest, it could not have come at a better time. It costs $100.00 to fill my car each week and the price of food (based on the price of corn) continues to climb along side.
I think Tax Freedom Day will always be a bit of a second-rate holiday for people like me. While it is an important day for most Canadians, it holds little importance for HSA owners. After all, they already enjoy a greater degree of tax freedom when it comes to their medical expenses. When an individual business owner experiences savings of $5,000-$10,000 a year for their high-cost medical expenses through an HSA, you can understand why Tax Freedom Day is a bit over-rated. After all, an additional $150.00 in their pocket from mid-June to December isn’t going to change the world. They have turned Tax Freedom Day into a year-long event. Sort of like those neighbors who leave their Christmas lights up all year long…because they can’t get enough of the holidays I suppose.
But I am always looking for a reason to celebrate and even though I missed the official date, I still have 30 people coming over on Saturday for a Tax Freedom Day BBQ. You know, the kind where you drink lower-taxed domestic beer versus imports and play games like “pin the tail on the finance minister”. That reminds me, I need to order my dollar-shaped cake for the party!
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.
OK. I have to make an announcement. One that I am sure will shock many of you out there who know me personally and read my blog. It is a little embarrassing, however, I went to the dentist today….for the first time in twelve years!!
I know – somewhat gross, but I brush and floss daily and had perfect teeth as a child. Not a big issue in my books. I was one of those kids everyone hated, where I never needed braces and everything just grew in perfectly – even my wisdom teeth. I probably should ask my father for some money in lieu of costs associated with braces, considering how much my perfect dental history saved him. However, I have been scared of dentists and the idea of having someones fingers poking my teeth, so I resisted until I got an accidental chip on my front tooth.
The first thing that I encountered when booking my appointment was the famous line – “do you have insurance?”. I said yes and booked my appointment. Since it had been a while, I had to get the full exam with those creepy x-rays and the counting of the teeth. The dentist was a wonderful woman and I would highly recommend her to anyone in and around Oakville, Ontario (e-mail me if you want the details). Given the painless experience, I was ready to get all kinds of treatments like whitening and a guard to stop me from grinding at night – I deal with allot of stress these days managing the upcoming re-launch of Gremolata. The dentist said, these are all great things, but they will not be covered by insurance. That is when I said “no problem, I have a health and welfare trust”. She looked at me funny and that is when sales man James took over.
I explained to her about the Health and Welfare Trust I have with Benecaid and that I had a reserve of funds I could use for exactly this type of expenditure. She noted that these costs can be substantial but I told her that I had more than enough to cover it. She was impressed. After all, how many clients walk into a dental office and say, give me the works! Well, those with an HWT would.
I think this is why I am so passionate about Health and Welfare Trusts. I don’t feel limited to a plan. I can get the basic care I need but also invest in the things that will make me feel better about myself – such as brilliant white teeth or a new nose (the later requires more thought). All joking aside, it is a great feeling to know that you have the tax-free money to spend when and how you want to. It also makes me think how impressed every employee would be with the company they work for if they had access to the same HWT as I did.
Oh, and for the record. No cavities and a healthy smile was the diagnosis I received! Whew!
I am a bit of a looser when it comes to taxes and I am probably the first Canadian to submit their return each year. I always get a reimbursement cheque and immediately put it back into my investment portfolio. For self-employed Canadians however, there is a better option!
A smart place to put your tax reimbursement is always a Health Care Spending Account (HCSA or HSA). But what should you think about before putting your money into one? Well, if you own your own business that is not incorporated, you may want to consider opening a Private Health Services Plan (PHSP) this year. If you do, you should take a few steps to consider if this is a good option for you…
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Do a headcount of your family members. To determine your maximum PHSP allowance each year, you simply add $1,500 for each eligible adult over the age of 18 years and $750 per dependent under 18 years old. If it is you, your spouse, and your son, then you are entitled to $3,750.00.
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Top-up or Not? Take a look at your finances (high-level) and get a sense of how much money you will be getting back from your return. If you have a financial planner or broker, speak with them about topping up your RRSP contributions. They will have access to several calculators to help you determine how much your return could be if you “maximized it”. You may want to top-up to get the reimbursement to equal your PHSP allowance.
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Take a look at your family and business finances and decide if you can go a year without the reimbursement. Some families rely on their tax reimbursement each year, so deciding not to take it can be a bit of an issue. If you can live without the money and put off that trip to Disney World with the kids for the coming year, why not make it work for you next year?
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Be sure to send in your return to Canada Revenue Agency sooner than later. Why? The earlier you receive your reimbursement, the better off you are for next year’s deductions with your PHSP. The deduction for the PHSP is pro-rated, so you will want to start your contributions early in the year to get the full benefit. The faster you get your money back, the faster you can open your account. But remember, you can always simply open the account and fund it yourself until you get reimbursed – but why use your own money?
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Finally, determine the final deposit amount for your PHSP. This is done by calculating the difference between your maximum PHSP allowance (less pro-rated months if you are not early) and your return reimbursement. If you are getting more back from CRA versus your PHSP allowance, congratulations! If not, you need to look at how much your family needs for healthcare and whether or not you want to top it up with your own money. Remember, what you put into your PHSP is a full deduction for you (unlike RRSPs), so you may want to go the extra mile here.
Well, that just about covers it. If you do decide to use your tax return to fund a PHSP, remember that the strategy here is to use the funds to pay for your healthcare costs while making a sensible tax move. The money you deposit in the coming months will be 100% deductible off your 2008 return as a business expense. If you think about the same money going into an RRSP, you would never receive the full amount as a tax deduction. If you are going to be making regular RRSP contributions throughout 2008, why use your 2007 reimbursement to get a small lift when you could get a full lift from a PHSP?
It is the last week for Canadians to make contributions into their RRSP to take advantage of the tax-deduction for 2007. I myself have received numerous calls from my financial advisor reminding me to top-up my contributions for 2007 and letters indicating that my advisors will be available until the wee hours of the night to help me should I decide to add more to my investment plan. It makes me wonder, how many Canadian small business owners would put more into the RRSP each year if they could free up the extra money? Are they spent?
Financial advisors tend to focus on the after-tax money available to invest as opposed to looking at ways to free-up pre-tax dollars as a tool for investing. For many small business owners, the HSA is an unknown option. Each year, they take a few of their after-tax receipts and make a claim for the medical tax credit. A nice gesture from the federal government to reimburse for medical expenses but certainly not enough to give someone more money to invest. The reality is that if they had a Health Spending Account, they could be using the tax-savings to re-invest into their retirement plan.
Each year, some financial advisors look for ways their small business clients can contribute more without giving them any real options to free-up the funds to do it. To all my readers out there who are financial advisors with small business clients…get them an HSA today! Show them how they can make their current after-tax expenses into pre-tax business deductions. Show them how this will impact their taxable earnings and how they can use the savings to re-invest in their RRSP! Given the economic conditions and the tough time your clients have had this year, this is a great way to show them how resourceful you are in finding ways to build wealth for them using a readily available and sensible solution – the HSA.
Every few weeks, I am showcasing a different advantage of owning a Health Spending Account in this segment called…
HSA Advantage….
Tax savings. I wasn’t going to add this to my blog as I assumed everyone understood this as a benefit by now. But in thinking about my posts, I wanted to ensure everyone had clarity on ALL of the benefits of a health spending account, so here we go…
When an incorporated business opens a health and welfare trust (HWT) for one employee or numerous employees, the total amount (including the administrative fees) becomes an eligible business deduction for the company – just like paper for the copier, pens, staples, or materials. It comes off the books as an expense and the impact on taxes would be the same as any other accepted expense.
For sole-proprietors, the contributions are also an eligible expense. If it is one individual with no employees, the amount deposited into their private health services plan is declared on their annual return. In almost all cases, the amount provides greater tax relief than the standard medical tax credit they would traditionally apply for. For groups, the amount deposited into each employees health and welfare trust would be considered a straight deduction similar to incorporated entities and declared along with the owner’s PHSP on their annual return.
Another opportunity for tax savings is related to salary and total compensation. Some companies incorporate an HSA into the total compensation of their employees by amending the salary to include an amount to be deposited into a Health and Welfare Trust. For example, if an employee earns $80,000 and they agree to receive a portion in HSA contribution (say $10,000/year), the employees taxable income would reduce to $70,000 and they would receive $10,000 in tax-free earnings into their HSA. The benefit for the employer is that the $10,000 becomes a business expense and the source deductions owed by the employer on behalf of the employee would be reduced from a percentage of $80,000 to one of $70,000.
Either way, the key tax savings benefit is that the HSA allows you to pay for your expenses in pre-tax dollars as opposed to after tax dollars.
Why do people hold onto their claims for such a long time? Seriously, what is that about? When I pay for a claim out-of-pocket, I submit it to Benecaid as I have a Health and Welfare Trust with them. I submit the claim form and receipt within a week of incurring the claim – but I am apparently a minority.
You see, many people batch their claims and submit them at once. What is surprising is that many people actually submit their claims once a year, sometimes for amounts exceeding $6,000! I scratch my head in amazement every time I hear this, especially if you consider the following.
Let’s say you have an HSA and make $6,000 a year in claims. For arguments sake, we will assume that you incur the same amount each month in healthcare expenses, $500. Most people batch their claims to save the cheque processing and postage fees (these average between $3.00-$4.00 at most administrators). However, if they sent them in each month, the maximum amount they would incur in fees would be $48.00/year, and that amount is being a bit aggressive. While we all like to save money, the issue here is that claims receipts have no interest bearing value – they are not making you any money while sitting in a shoebox. Or worse, the original costs are causing you to place other household expenditures onto a credit card each month and carrying a long-term balance. In which case the interest charged means that you are loosing money!
But let’s pretend that you have a big wad of cash under the mattress at home and do not need a credit card. If you submitted your claims monthly and deposited your $500/month reimbursement cheques into a RRSP at 3%/year, you would make $102.30 in one year and receive the tax deduction of $6,000 for registered savings. A year later, that amount would be worth $6,285.00 and in ten years, that initial deposit could be worth $8,200.00!! More than enough to pay for the $48.00 in fees but more importantly, you are putting your money to work for you and not letting it sit in some form of debt or non-interest bearing vehicle!
So, enjoy the tax savings from your HSA but please remember to submit your expenses for reimbursement! The faster you get the money back, the faster you can put it to work reducing debt or building wealth! I don’t want to do an interest calculation on a credit card at 22% to get the point across folks!
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.
Every few weeks, I will be showcasing a different advantage of owning a Health Spending Account in this segment called…
HSA Advantage….
Taxes, we all have to pay them. Last week, I received all of my paperwork for the newly incorporated Gremolata Media Group Inc. What a stack of forms! Of course, one of the first things I noticed was the tax remittance forms…which made me think about the Health Spending Account and how simple it is to deduct as a business expense for the corporation.
If you own an incorporated entity, whether it is a global conglomerate or simply a corporation of one, you can open a Health and Welfare Trust (HWT) to cover your medical expenditures. If you are not incorporated, you can open a Private Health Services Plan or PHSP (see below). After my first wave of forms from CRA, I now understand why so many business owners love their HSA. Their is no annual paperwork! The deposits into the HSA are a business expense – nothing more, nothing less. You do not need to fill out any complex forms or ask for a special return from CRA, you simply add it as a debit to your books for the amount deposited into the employee’s health and welfare trust. The money is non-taxable for the employee, so you do not need to account for it on their compensation or make complex changes to their T4.
As for PHSPs, the story is a bit different. It is still a relatively easy process. On your annual return as an unincorporated sole-proprietor, you simply enter the amount you contributed into your PHSP on Line 9270 – Other Expenses.
When you think about it, the process is pretty simple. Certainly one of the easier items to report to CRA in terms of business expenses – versus mileage, leases, rent, interest earned/paid, or investments. So, why doesn’t everyone have an HSA??
HSA Information for Canadians 