Should You Be Paying Personally for Health and Dental Expenses?
In short, the answer is no. You can pay more taxes, but why would you? As business owners, the CRA gives us very few opportunities to do things in a tax-preferred way. Business owners are entitled to write off legitimate health and dental expenses through your business. There are a few caveats here: you need to be incorporated, you need to be fair and reasonable, and you need a third-party administrator to adjudicate your claims. So if you’re a business owner without a benefit plan, you should take advantage of this opportunity.
What Are CRA approved health and dental expenses?
There is a lengthy list of expenses that CRA allows you to write-off. Many more items than that are typically included through most employer benefit plans. Items like orthodontics, vision care, paramedical expenses and many more items are eligible to be written off through your business.
What is a Third-Party Administrator or Claims Adjudicator?
These types of companies specialize in administering health and dental expenses for businesses. They know what expenses are eligible and which are not. They reimburse employees and/or business owners for any out-of-pocket health expenses that they may incur over the course of a calendar year. Typically, employees have a set limit determined by their employer that they can submit. The claims adjudicator reimburses the employee and the claims payer is reimbursed by the business plus administrative charges and applicable taxes. The nice part about this is the company typically only pays for expenses that are incurred, unlike an employee benefit plan. Claims Adjudicators will typically charge between 10-15% for this service.
Health Spending Account versus Employee Benefit Plans?
Employee benefit plans typically cover a set number of benefits over the course of a benefit year. They may cover a significant offering of common benefits like prescription drugs, dental, paramedical coverages. There usually are limits and deductibles in place. The insurance company guarantees the rate for the benefit year (insured plans) or the company will guarantee the payment in Administrative Services Only (ASO) plans. Insured plans mitigate against any catastrophic occurrences (prescription drugs, accidental dental, private nursing). Benefit plans are subject to significant rate increases depending upon how many claims are made over the course of the benefit year. If you don’t make any claims, you do not get your premiums back.
Health Spending Accounts are an assigned spending amount by employee classification or tenure. Employees have complete flexibility on amounts or benefits that they may seek reimbursement upon. The expenses need to be CRA-eligible and remain within limits designated by the employer. If the amount is not used over the course of the benefit year, there is an option to roll-over any remaining balance to the following year. This is up to the discretion of the employer. Any unused amounts get credited back to the company. This gives employers greater cost certainty and future predictability. The employer is given the flexibility to change the designated amounts (increase or decrease) on the calendar anniversary of the plan.
If you have a spouse with an employer benefit plan, a health spending account may be the only plan you require.
There is a lot of confusion by Accounting professionals about eligibility and how Accountants advise their corporate clients on these types of expenses. Some feel that you need to incur $2,500 in medical expenses for it to be worthwhile to submit through your business. You have the option to submit medical expenses personally on your income tax return. Remember that you’re paying in after-tax dollars. Depending upon what your personal marginal tax rate is, this could be as much as 53%. The government allows you to deduct on your income tax return the lesser amount of 3% of your net income (line 236) or $2,237 for approved medical and dental expenses. Regardless of your marginal tax rate or the health and dental expenses incurred over the course of the year, it makes sense to submit these expenses through your business. If you issue dividends to yourself versus a salary makes the argument even greater.
The only exception that may be considered is if you have a spouse with a very comprehensive and robust plan that involves little or no health and dental expenses to be paid personally out-of-pocket. So how are you paying for your health and dental expenses?
Chris Coulter is the Founder and President of The Finish Line Group. He works with business owners to leverage their businesses to increase their wealth, reduce corporate and personal taxes, create viable succession strategies, enable employee retention strategies and allow them to exit their businesses on their terms.
Chris’ passion for what he does evolve from the mistakes he made in his first business; by not diversifying his risk and not utilizing a lot of the opportunities within his business to create significant wealth. Chris found out the difficult way and now educates business owners on how to avoid many of his former oversights and ultimately help control where their finish line ends.