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Jim Maroney

:: Income tax relief - a medical expense credit

::Maroney on Money for April 6, 2002

With our medical system teetering on the edge, Canadians can expect the list of expenses covered by medicare to be trimmed. Throw in our insatiable thirst for the fountain of youth and it’s a pretty safe bet that we’ll all be bucking up more for the medical care we desire.

It’s also a virtual certainty that, as taxpayer’s dip into their bank accounts, they’ll be looking for income tax relief in the form of a medical expense credit to help them out along the way. It is imperative that taxpayers understand how the medical expense credit is calculated if they wish to maximize their claim.

The first point to understand about the medical expense credit is that the simple act of paying for a qualifying medical expense doesn’t automatically entitle you to a claim. The medical tax credit is formula driven and linked to the amount of your net income earned during the year. Entitlement to a medical expense claim is a function of the amount you spent on qualifying medical expenses and your net income in the year.

Federally, you are only entitled to a medical expense credit to the extent your total qualifying medical expenses are greater than $1,678 or 3 per cent of your net income, whichever is less. In other words, if your net income in 2001 is greater than $55,933, your medical expenses must amount to more than $1,678. If your net income in 2001 is below $55,934, your medical expenses must exceed 3 per cent of your net income.

The medical expense credit is unique in that it can be calculated using any 12-month period ending in the year. For example, you could select a 12-month period ending January 1, 2001 and include all medical expenses paid during this period going back to January 2, 2000. In this case, you’d be claiming, on your 2001 tax return, medical expenses that were paid almost entirely in 2000. Bearing this in mind, you’ll need to keep medical receipts for both the current year and the prior year in order to figure out which 12-month period provides you with the optimum claim. If you’re unable to make a claim this year keep your 2001 medical receipts for next year just in case they can be used to establish a medical expense claim in 2002.

As an aside, there’s another reason to keep medical receipts for at least two years and, while it’s not a tax planning strategy I’ve ever recommended, it is one that I’ve been able to use. In the year of death, the calculation of the medical expense credit can include expenses paid for any 24-month period (as opposed to the standard 12-month period) that includes the date of death.

Notice, with the way the medical expense formula works, you may be better off paying for eligible medical expenses over a short period of time rather than spreading the payment out over several years. Say, for example, that your child needs braces to fix their teeth ($1,500) and you need bi-focals ($500) to help you read the dentist’s cost estimate. If you can afford to, it may be beneficial to pay for the dental work in one lump-sum (even if the work is to be done at a later date) and buy the eyewear around the same time. Assuming your net income for the year is $50,000 you will be entitled to a tax credit of $500 ($2,000 less 3 per cent of $50,000). As a tax credit, this will provide you with a tax saving of roughly $116. Had you paid for these expenses more than twelve months apart, you would not have be entitled to any tax credit at all.

Remember too that you can claim medical expenses paid by either you or your spouse or common-law partner. This is similar to the charitable donation rules in that it doesn’t matter which spouse made the payment. To qualify, the beneficiary of the payment must be yourself, your spouse or common-law partner or their child or a parent, grandparent, brother, sister, uncle, aunt, niece or nephew who lived in Canada at any time in the year and depended on you for support.

In most cases, because medical expenses must generally exceed 3 per cent of net income, medical expenses should be claimed on the tax return of the spouse with the lowest net income.

Amazing as it may sound, there is further tax relief available for low-income earners in the form of a refundable medical expense supplement or tax credit worth up to $520. Unlike, non-refundable tax credits, refundable tax credits have real cash value because they are treated just like income tax instalments or tax withholdings from employment earnings.

As expected, this refundable medical supplement is only available to taxpayers resident in Canada throughout 2001, who were over the age of 18 at the end of that year and who had a qualifying medical expense claim in the first place. Furthermore, taxpayers must have either employment income or self-employed earnings of at least $2,598 in 2001.

Like the basic medical expense credit, the medical expense supplement is based on a formula. This formula sets the supplement equal to 25 per cent of allowable medical expenses to a maximum of $520.

Unlike the basic medical credit, the formula used for the supplement considers the income of both the taxpayer and his or her spouse. Where the combined net income of both spouses exceeds $19,705 the medical expense supplement is reduced by 5 per cent of the excess. Do the math and you’ll find that this supplement completely disappears where combined net income exceeds $30,105 in the year.

To summarize, making the most of your medical expenses involves choosing the optimal 12-month period ending in the year, combining all eligible expenses on a single return (usually the lowest income earner) and controlling the timing of your medical expense payments.

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Free Tax Advice Article Submitted to Income Tax Canada.net exclusively by Jim Maroney
CA Canadian Chartered Accountant with Brown, Andrews & Maroney in Maple Ridge, BC, Canada

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