November 29th, 2004

Blurb: Medical expenses are grabbing a greater proportion of household expenditures. But keep those receipts, you may be able to get a tax credit for some or all of them.

The tax treatment of medical expenses

By Peter Diekmeyer o

One of the things that Canadians have consistently been proudest about over the years has been the quality and fairness of their health care system. In Canada, both rich and poor get equal access to government-provided medical attention whenever they need it. At least that's the way it's supposed to work.

The sad fact of life is that Canada's medicare system is under increasing strain, and private-sector medical services providers are picking up the slack.

The Canadian Income Tax Act provides relief for those who spend a large proportion of their taxable income on medical coverage. And since experts say the problem will get worse in coming years, it pays to be informed about the relevant provisions.

Private health care: an ever-present reality

According to Statistics Canada, Canadians spent $31.4 billion on private medical and hospital care, drugs and pharmaceutical products during 2003. That represents about a quarter of the resources that Canadians allocate to health services with public expenditures are included.

But while $31.4 billion sounds like a lot of money, the trend is far more worrying, because that amount represents a 62.1% increase from what Canadians spent on private health services just ten years ago. The change is in large part attributable to Canada's aging population, and as a result, those numbers will almost certainly worsen.

Limits on medical expenses

Canadians who pay medical expenses in any 12-month period ending in a taxation year are eligible for a 16% tax credit on those expenses. The problem is that total eligible medical expenses must first be reduced by the lessor of 3% of your net income or $1,755.
The net effect of this provision is that if your had $40,000 in net income last year, you are only eligible for a tax credit on that portion of your expenses that exceeds $1,200 ($40,000 x 3%). That means Canadians who spend only a couple of hundred dollars year are typically excluded from the credits. The system is designed more to help those who spend a large proportion of their income on health services.

Like most of its provisions, those in the Income Tax Act and interpretation literature related to medical expenses are fairly extensive. Among the inclusions are medicine, fees for doctor's visits, dentistry expenses, private health plan premiums and so on. But it's important to remember that you cannot include any expenses that were reimbursed by your private insurer.

Nursing and retirement homes

Among the most onerous medical expenses are the ongoing costs related to caring for elderly relatives who are either in nursing or retirement homes. But while the two types of institutions have similar characteristics, there is a big difference in tax treatment they get, because all costs associated with the former are considered to be medical expenses, but not the latter, says Sonny Bernard, a tax partner at Bessner Gallay Kreisman.

"It's a big problem," says Bernard. "Many are spending a lot of money on private care, and it puts a big strain on them and their families."

According to Bernard, nursing homes are typically for those who cannot take care of the basic elements of everyday life on an ongoing basis, such as eating, getting dressed, remembering to turn of the gas stove and so on. Nursing home fees are considered to be medical expenses, whether they were paid to a public, or private institution. And if the patient cannot claim the tax credit on those expenses, they may be claimed by relatives who provided the patient support.

Retirement home fees are not considered to be medical expenses as such, but according to Bernard, a portion of the fees may be eligible for the tax credit if it is used to pay for medical-related services such as a 24-hour a day nursing availability.

Cosmetic surgery, implants and corrective eye surgery

One of the fastest growing categories of private medical expenses is certain electible cosmetic procedures such as breast implants and facial surgery, liposuction and so on. These are ineligible for the federal tax credit, however corrective eye surgery --so the patient does not have to wear glasses,-- qualifies.

Medical expenses incurred outside Canada

The long waiting times required to get treatment in many Canada's hospitals has led many Canadians to look elsewhere for treatment, particularly in the United States. Medical expenses incurred outside of Canada at reputable hospitals or treatment facilities are still eligible for the tax credit.

Canadians who are required to travel in order to get medical attention because it is not available in their own area, are allowed to deduct travel related expenses including air or train tickets and hotels.

The future

One of Canada's greatest challenges, will be to figure out how to pay for the medical care that its aging baby boomers will need in the coming years. According to the Canadian Medical Association, Canadians spent $121.4 billion on health services last year, -- approximately 10 percent of our GDP. With the first baby boomers set to turn 60 next year, that amount will only increase, as will the proportion spent on private care. As a result, keeping abreast of the tax consequences will be more important than ever.


For more information about the tax treatment of medical expenses, check out Canada Customs and Revenue Service's Web-site at:


Peter Diekmeyer is the Montreal Gazette's management columnist. He can be reached at:


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