Tag: Medical

CRA relaxes position on deductibility of PHSP premium payments

At issue

Claiming annual payments for medical expenses does not often lead to significant tax relief.  In addition to being a non-refundable tax credit at the lowest bracket rate, there is a cap on the amount used as the base for calculating the claim.

For business owners, a strategy that may offer a better tax result is to establish a private health services plan (PHSP) for employees.  Carefully structured, this entitles the employer to a business deduction for the plan premium, while the employee will have no income inclusion when premiums are deposited nor when qualifying medical payments are eventually paid out of the PHSP. 

In November 2015, the Canada Revenue agency (CRA) announced a welcome change in its position on deductibility of PHSP premium payments.    

CRA Income Tax Folio S1-F1-C1, Medical Expense Tax Credit (METC) 

This is the CRA’s administrative guide to claiming medical expenses.  Qualifying expenses are enumerated in the folio, and may be claimed for any 12-month period that ends in the taxation year for which a return is being filed.

As with most tax credits, the credit rate is at the lowest bracket rate (federally 15%) multiplied by the qualifying amount.  But unlike most credits, the actual amount expended is not what is used directly for the calculation.  Rather, the medical expense total is reduced by the lesser of two figures:

  • the fixed amount (indexed annually), which is $2,208 for the 2015 tax year, and 
  • 3% of the taxpayer’s net income

A similar calculation applies for the corresponding provincial/territorial credit.

Income Tax Act (ITA) Canada 

A “private health services plan” is defined in ITA s.248(1).  Practical guidance is given in IT339R2 ARCHIVED – Meaning of private health services plan.  Though archived, this bulletin continues to be referenced in CRA’s own communications.  It confirms that a payment made into a PHSP is a business expense for the employer under ITA s.18(1)(a), but not a benefit to the employee under ITA s.6(1)(a)(i).

Key to being a PHSP is that it is based on an employment relationship.  A plan could be at risk of losing PHSP treatment if benefits favour shareholders over employees.  On the other hand, it may be acceptable if the benefits of a shareholder-employee are comparable to other employees.  Further insight on this issue can be gleaned from Income Tax Folio S2-F1-C1, Health and Welfare Trusts.

CRA roundtable, Canadian Tax Foundation conference – November 24, 2015

CRA’s position has to-date been that in order to qualify as a PHSP, all medical expenses covered under a plan had to be eligible for the METC.  The question was posed to the CRA panel whether the agency had an update regarding its position.

The CRA now considers that a plan is a PHSP as long as all or substantially all of the premiums paid relate to medical expenses eligible for the METC.  Generally that means 90% or more of covered expenses must be METC-qualified.  The reason for the change is to alleviate concerns that nominal or incidental charges (eg., non-prescription vitamins) may put a plan offside, thus allowing for certainty and flexibility in plan design and administration.

The revised position is retroactive to January 1, 2015.

Practice points

  1. A personal tax credit is available to offset qualifying medical expenses. However, due to the structure of the credit calculation, the amount of relief is often limited.
  2. Bearing in mind what costs there may be in establishing a PHSP, a plan of this type will likely lead to a better tax result for supporting medical expenses incurred by employees.
  3. A PHSP is based on an employment relationship.  Where shareholders are also employees, expert advice should be sought in order to assure that the proposed plan remains within the PHSP rules. 

Exercise and the medical expense tax credit

At issue

The scope of expenses that may be claimed under the medical expense tax credit (METC) is limited to the criteria outlined in subsection 118.2(2) of the Income Tax Act.  

For a medical “service” to qualify, the payment must be made directly to a licensed medical professional, or to the corporation employing that professional.  For any “device or equipment” to qualify, it must be prescribed (in the medical sense) by a medical practitioner to qualify, and also be prescribed in the legislative sense.  This prescribed list of about two dozen types of equipment and devices appears in Income Tax Regulation 5700.

Though on the face of it, these rules are fairly black-and-white, they are often the subject of inquiries to the Canada Revenue Agency (CRA) and appeals to the court system.  

Roberts v. The Queen, 2012 TCC 319

The taxpayer had prostate cancer, and suffered from incontinence following a radical prostatectomy.  His doctor recommended that he join the local YMCA and engage in an exercise routine.  Correspondence from the doctor confirmed that the symptoms of incontinence decreased dramatically after joining the club.

The disallowed METC claim was “regrettably” upheld on appeal, as there is no provision for health club membership within s.118.2(2).  The taxpayer’s alternative argument was that the CRA allows for recreational programs to qualify as medical expenses, but the judge clarified that this would only apply for individuals entitled to claim the disability tax credit. 

Anthony v. The Queen, 2012 TCC 334

The taxpayer suffered from severe chronic panic, for which her doctors recommended she purchase and use a hot tub.  This alleviated the pain and significantly assisted her ability to walk.  Even so and even though CRA did not dispute the effectiveness of the hot tub, the METC claim was denied on reassessment.

On appeal, the judge considered ITA paragraphs by which the hot tub might constitute a home renovation that is “of a type that would not normally be incurred by persons who have normal physical development” and/or whether it is a “device that is exclusively designed to assist an individual in walking where the individual has a mobility impairment.” [The emphasis appeared in the judgment.]

Though the judge was explicitly sympathetic, on both grounds she found that a hot tub is something “commonly purchased by persons who do not suffer severe disabilities and is not exclusively designed to assist persons with a mobility impairment.”  Accordingly it did not fulfill the legislative intent, and the appeal was dismissed.

CRA 2011-0402881E5 – Weight Loss Program as a medical expense

The CRA was asked about METC qualification for a few types of expenditures, including fees paid for a weight-loss program.  

The author took the view that such a program undertaken by an individual for the treatment of obesity may qualify if provided by a licensed medical practitioner for therapeutic or rehabilitative purposes.  On the facts presented however, the opinion was given that the intended claim would be unlikely to succeed.

Practice points

  1. Patients should take their medical advice from qualified medical practitioners, but as taxpayers they should not assume that a treatment or device automatically qualifies for the METC just because it was medically prescribed.
  2. Where alternative treatments, devices and/or device features are presented, it would be prudent to review the METC criteria before making a final decision.
  3. Guidance on the CRA’s approach is available on its website.  Search for Interpretation Bulletin IT-519R2 (Consolidated), Medical Expense and Disability Tax Credits and Attendant Care Expense Deduction.