In general, Canadians may claim their medical expenses in their annual personal income tax returns. Medical expenses can include payments for prescriptions, dentist, chiropractor, massages, travel insurance premium, laser eye or cosmetic surgeries. You can claim medical expenses incurred for yourself, spouse, common law partners or other adult dependents (subject to certain restrictions). The tax savings is usually minimal, if any, for higher income individuals. Why? The higher your taxable income, the less of a tax break you get for medical expenses.
For example, if your income (including professional earnings) after deductions such as professional expenses, RRSP and interest etc., is $100,000, your medical bills for any 12 3month period ending in 2007 must be over and above $1,926 to get any tax break at all. For example, if you have incurred medical bills of $2,000, you are only eligible to claim $74 of these expenses ($2,000 minus $1,926). That translates to approximately $16 of tax savings. You do not get any tax break for the first $1,926 of medical expenses once your income reaches a certain level.
If you are self employed, claiming your medical expense based on the above is not necessarily the most tax efficient way.
Have you heard of a Private Health Service Plan (PHSP)?
What is a PHSP? A PHSP is an effective and legal way for a self employed dentists to convert personal health, vision, medical and dental expenses into a fully tax deductible business expense. This can result in very significant tax savings for you. If you are at the highest tax bracket of 46.40 per cent, you will save $464 for every $1,000 health premium. This is much better than the few dollars you would have saved by claiming them as medical expenses in your personal return as per the example above.
For a self employed dentist (whether as a sole proprietor or in a partnership) who only has family member employees, you may deduct, subject to certain other limitations, medical/dental plan premiums up to $1,500 for each of you, your spouse and other adult dependents living with you and $750 for each of your children who is under the age of 18. The health premiums could be for some traditional medical plan (eg., Blue Cross) or for the cost plus program offered by insurance companies.
For those who have employees including non-family members and you pay 100 per cent of their premium, you might deduct more than the limit permitted above. That means if the annual premium calls for example, $1,700 per person, you can deduct the full $1,700. Please note if you pay less than 100 per cent of the premium for each employee, your deduction will be limited. Remember, the premium is not taxable in the employees’ hands. This is an extra tax-free perk for your employees. Consult your insurance advisors on the details of the medical health plans available in the market and decide which plan works best for you and your employees.
Also, don’t forget, it is possible to have different levels of coverage for part-time, full-time and executive employees (for example dentists). Remember, the Canada Revenue Agency always has the right to review and challenge your tax deductions. They might surprise you with a tax bill if your coverage is unreasonably high as compared to that offered to other employees.
If this works well for you, introduce this concept to your patients who are self employed. Why? Because if they can deduct their dental bills in a far more tax efficient way, they may be more willing to pay for those long overdue dental procedures.