In a previous Economy Lab post, I talked about tax filers who overpay their taxes. One way that this can happen is to not claim tax credits and deductions to which the tax filer is entitled. A tax credit that may be overlooked by many tax filers is the Medical Expense Tax Credit (METC).
The METC dates back to 1942. It was originally introduced as a tax deduction and was modeled after a similar deduction introduced in the U.S. earlier that year. The METC was later converted to a tax credit in 1988. The idea behind the METC is to recognize that tax payers who incur extraordinary medical expenses (defined as expenses exceeding the average) have a diminished ability to pay.
This tax credit may benefit many households because of the ability to:
- claim a broad range of eligible medical expenses;
- pool eligible medical expenses incurred not only by the tax filer but also their spouse/partner and their children;
- have the lowest income spouse/partner claim the credit; and,
- adjust the claim period to maximize the expenses.
Unfortunately, the structure of the METC is not well understood and understanding its structure can help a tax filer decide how to maximize their benefit from the METC or whether they are even able to benefit at all.
The range of eligible expenses under the METC is exceedingly large. Under the METC you can claim expenses, even those incurred outside Canada, for
- the premiums you pay for private insurance schemes (medical and dental), or at least that amount not paid by your employer;
- the deductibles for these private schemes as well as the non-reimbursable portion of expenses incurred under these plans;
- prescription drugs, including birth control pills and the morning after pill;
- medical practitioners including dentists, orthodontists, optometrists, physiotherapists, dieticians, and the like ( depending on your province);
- accessing an MRI , CT scan, or ultrasound through a private clinic (including that ultrasound you had to pay for to determine the sex of your baby in some provinces);
- fertility related expenses, including the cost of the medication and services provided for intrauterine insemination and in-vitro fertilization (there is an additional credit for these expenses if you live in the province of Manitoba);
- meals and travel to obtain medical services in certain circumstances.
This is not an exhaustive list but provides a good indication of the extensiveness of eligible expenses.
You can, however, no longer claim expenses related to cosmetic medical expenses, which were made ineligible effective March 5, 2010. You also have to be careful not to claim amounts that have or will be reimbursed.
The METC has always had a threshold that has to be exceeded before expenses will be recognized for tax purposes. This threshold exists as it is deemed that expenses below this amount are average medical expenses and these are already partially recognized in Canada through the basic personal amount (currently $10,527 for an individual which amounts to a tax credit equivalent to $1,579.05).
Anything above this threshold is considered to be extraordinary medical expenses and can be claimed under the METC. Currently, only medical expenses exceeding the lower of $2,052 or 3% of a tax filer's net income are recognized.
While the calculation of the threshold is based on an individual's net income, eligible expenses are based on expenses incurred by the whole family. This means that you can pool all your family expenses into one claim, making it more likely that your claim will exceed the threshold.
The METC allows either spouse in a family to claim the eligible expenses. Given the calculation of the threshold, the lower the income of the claimant the better as it means that more expenses will be recognized (assuming the net income of the lower income spouse is below $68,400 which is when the 3% of net income will be less than the threshold of $2,502; if both spouses have net incomes exceeding $68,400 it makes no difference who claims the credit).
However, the net income of the claimant still has to be high enough to benefit from the tax calculation. The METC is a non-refundable tax credit that is currently calculated using the lowest marginal tax rate which is 15%. Non-refundable means that the tax credit can only be used to reduce taxes to zero but will not generate a payment beyond that. This means that tax filers whose tax owing is zero before the application of the METC will derive zero benefit from the METC. In this case, you may be better off having the higher income spouse claim the expenses, assuming their tax owing is positive before the application of the METC.
Finally, the expenses can be for any 12-month period ending in the tax year and not claimed in the previous tax year. Adjusting the expense period claimed can maximize the amount of the tax credit.
As you can see, with a little bit of research and strategizing, you can easily plan your way to a larger METC and thereby reduce your tax liability. Additional information to that provided above about the METC is found in RC4064 Medical and Disability-Related Information and Income Tax Interpretation Bulletin IT-519R2. However, should you claim the METC you should prepare for your return being subject to a "random" review or audit. As long as you follow the rules, there is no reason to fear this.
As you can see, you do not need a team of tax lawyers and accountants to exploit the tax loopholes associated with the METC. Unfortunately, the METC tax loopholes rarely benefit low income tax filers. In fact, the METC needs to be reviewed and its regressivity addressed. This includes consideration of making the METC refundable (a proposal considered but not pursued in 1997), eliminating the ceiling on the threshold calculation, bridging the gap between the personal exemption and the threshold amount, and a re-examination of the threshold based on recent data on average medical expenses. The "3% of net income threshold" was established in 1953 long before public health insurance and is well overdue for a review.
Lindsay Tedds is an Assistant Professor in the School of Public Administration at the University of Victoria.