Claiming a tax credit for out-of-pocket medical costs - Akler Browning LLP

Canadians are fortunate to benefit from a publicly funded health care system, in which most costs of care ranging from routine visits to a family doctor to intensive care in a hospital setting are paid for by government-sponsored health insurance.

While there is no doubt that most medical costs are not the financial responsibility of the individual, it is nonetheless a fact that a significant (and growing) number of medical and para-medical costs must be paid for on an out-of-pocket basis by the person incurring those costs. And those costs can, in some instances, run to thousands of dollars per year.

The costs which first come to mind are, of course, those which must be incurred for prescription medicine. While some Canadians have full or partial coverage for such costs through an employer-sponsored benefits plan, the majority of Canadians (especially those working on a part-time or contract basis) don’t. Similarly, visits to a dentist must be paid for by those who don’t have private medical insurance on an out-of-pocket basis. The same goes for services provided by any number of medical and, especially, para-medical practitioners, including physiotherapists, psychologists, and registered massage therapists.

It’s a virtual certainty that nearly all Canadians will incur one or more of those uninsured costs over the course of a year. The good news for those individuals and families is that in many instances a federal and provincial tax credit can be claimed to help offset those costs. The bad news is that the rules on determining just what expenses qualify for the credit and how and when to claim it can be complex.

First, the basics. The technical rule is that, for 2019, taxpayers can claim a tax credit for qualifying medical expenses which exceed 3% of their net income for the year or $2,352, whichever is less. That’s a confusing calculation to many Canadians, and it’s perhaps easier to think of it in these terms:

• For 2019, taxpayers who have income of $78,400 or less can claim all qualifying medical expenses which exceed 3% of their income for the year. As an example, someone who has $50,000 in income for 2019 can claim qualifying medical expenses over $1,500 ($50,000 × 3% = $1,500).

• For 2019, taxpayers who have income over $78,400 can claim their qualifying medical expenses which are greater than $2,352.

There is also some degree of flexibility in the timing of a claim made for the medical expense tax credit. Specifically, a claim made on the return for 2019 can include any qualifying medical expense incurred in any 12-month period which ends in 2019. Consequently, taxpayers can, in order to maximize the expenses claimed for the year (and so exceed the statutory thresholds outlined above) can pick any 12-month period ending during 2019.

For example, an individual might have incurred significant medical expenses in the last half of 2018 and the first half of 2019. That taxpayer would likely benefit from choosing the period July 1, 2018 to June 30, 2019, and claiming all medical expenses incurred during that period on his or her return for 2019.

There is, unfortunately, no formula or rule-of-thumb which allows a taxpayer to easily or quickly pick the time period which will provide the greatest credit amount, since that determination depends on when qualifying medical expenses were incurred. To determine the optimal period for a medical expenses tax credit claim, it’s really a matter of trial and error, or doing the computation for different time periods and choosing the one that gives the best result.

In aggregating those medical expenses, it’s also possible for families to include all qualifying expenses incurred by both spouses and by any children who were born in 2002 or later. The claim for the credit (using the total family medical expenses) can then be made by either spouse. Since the amount of the allowable expense claim increases as income decreases, it makes sense for the claim for total family medical expenses to be made by the lower-income spouse on his or her return for the year, as long as that spouse’s tax payable for the year is greater than the amount of the credit to be claimed.

Of course, the first determination which must be made when calculating a medical expense tax credit claim for the year is which expenses do or do not qualify for the credit. The number and kind of expenses which can be incurred for medical care are almost limitless in their scope and variety, and the list of qualifying and non-qualifying expenses for purposes of the credit reflects that reality.

The Canada Revenue Agency (CRA) helpfully provides a chart of the types of expenses which can qualify for the medical expense tax credit, and that chart includes other requirements which must be met in order for a particular expense to qualify. It’s well worth reviewing that chart (which is available on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/lines-330-331-eligible-medical-expenses-you-claim-on-your-tax-return.html#mdcl_xpns) as the requirements imposed in order to qualify can be very specific and are not necessarily intuitive. For instance, to claim the cost of a walker as a medical expense, it is necessary to have a doctor’s prescription for that equipment. However, the cost of a wheelchair can be claimed with no requirement for a prescription. Finally, although the chart listing eligible medical expenses is 14 pages long, the CRA notes that such listing is “not exhaustive”. A full listing can be found in CRA Income Tax Folio S1-F1-C1, Medical Expense Tax Credit, which is available at https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-1-individuals/folio-1-health-medical/income-tax-folio-s1-f1-c1-medical-expense-tax-credit.html.

The exercise of determining eligible medical expenses for all family members, calculating the optimal time period for making a medical expense tax credit claim, and determining the actual credit claimable can be a time-consuming process. However, given that such expenses are usually unavoidable, the dollar figure costs are often significant, and the effort has to be made only once a year, it is an annual effort worth making.