Advantages Over Covering Medical Costs Directly
The medical expense tax credit is 15% + the lowest marginal tax rate (6.05% in Ontario) in excess of the lesser of 3% of your combined net income or $1,926. PHSP’s on the other hand are not eligible for this credit. Instead they not taxable at all to the employee and are fully deductible to the employer resulting in much larger savings for both the employee and the employer.
As it can be quite complex to calculate the benefit provided by this credit, take the following example.
Joe, who lives in Ontario, owns his own consulting business ABC Consulting. Joe pays himself $50,000 a year plus enough money to cover his $2,500 of medical expenses. In 2006, with a marginal tax rate of 31.15%, ABC Consulting had to pay out $3,631.08 to cover the $2,500 in medical bills. The other $1,131.08 went to pay taxes on that money paid to Joe. Joe’s medical credit on his taxes will be $189.80.
Now imagine that instead Joe had a PHSP set up and the same salary of $50,000. ABC Consulting would now have to pay $2,500 for the medical expenses (paid tax free through HealthSmart to Joe), plus the $250 administration fee. Joe would no longer get the medical tax credit.
ABC Consulting now has to spend $881.08 less covering these same medical expenses. Joe is now free to take that $881.08 out as an additional bonus that year resulting in an additional $416.82 in his pocket (after considering the loss of his medical tax credit).