- Medical Expense Credit (updated Jan 2005)
- Infirm Dependents and Caregiver Amount
- CPP Disability Benefit
- Disability Tax Credit
- Attendant Care
- Refundable Medical Expense Supplement
- Living Benefits
- Long-term Care Insurance
- Critical Illness Insurance
The medical expense tax credit system is divided into two components. The first component is for medical expenses of the taxpayer, his/her partner, and minor children in excess of a threshold amount of 3% of net income or $1,813 (2004 indexed figure), whichever is less.
The second component addresses medical expenses for dependents other than minor children, which includes adult children, grandchildren, parents, grandparents, siblings, uncles, aunts, nieces and nephews. For each of the dependents, the amount eligible for credit is the costs incurred less 3% of the dependent’s net income or $1,813, whichever is less. This absolute amount is further restricted to $5,000 per dependent.
The most common expenses eligible for the credit include:
- Premiums paid to private extended health plans (not Medical Services Plan of BC premiums)
- Out-of-province medical insurance premiums
- Payments to a doctor, dentist, nurse or licensed private hospital that are not covered by an insurance plan
- Prescription drugs
- Prescription glasses or contact lenses
- Hearing aids and batteries
- Acupuncturist (if a qualified medical practitioner)
- Psychologist (if licensed by the province to provide therapy or rehabilitation)
- A variety of equipment for people with disabilities
- For people with severe and prolonged mobility impairment, the cost of renovations to allow the individual to gain access to, or to be more mobile or functional within, the home. The same type of expenses incurred in building a new home will also qualify.
There are hundreds of expenses which qualify, so it is impossible to list them all here. Allowable medical expenses incurred outside Canada also qualify.
The one requirement common to all medical expenses is that a receipt must be submitted to back up the claim; therefore, if in doubt, don’t throw it out – send it to us with your income tax information.
Medical expenses incurred in any 12 month period ending in the tax year can be used for the purpose of calculating this credit. Thus, it may be wise to “bunch up” your medical costs, e.g. replace your glasses or update your prescription along with major dental work.
Additional tax credits are available in certain circumstances for the following dependant relatives 18 years old or older:
- Child or grandchild
- Parent or grandparent, brother or sister, aunt or uncle, niece or nephew
They can be the relatives of either the taxpayer or spouse, must have resided in Canada at some time during the year and have been dependant for support at some time during the year due to mental or physical infirmity (infirmity is not as strict a test as for the disability tax credit).
If neither the above credit nor the equivalent to spouse credit is claimed by anyone in respect of the above relatives and a dwelling is maintained by the taxpayer for him/herself and the dependant relative, a caregiver amount may be claimed subject to the following restrictions:
- For a parent or grandparent, they must be 65 or older
- The dependant must have a net income of less than an annually indexed amount
If you become disabled and thus unable to work, you (and possibly your dependent children) may qualify for a monthly benefit. The disability may be either physical or mental and must be “severe and prolonged”. If disabled after December 31, 1997, you must have contributed to CPP for four of the last six years. During that period, you must have earned at least 10% of each year’s maximum pensionable earnings (e.g. $4,000 in 2004). The disability benefit continues as long as eligibility applies until age 65, when regular CPP benefits begin. CPP retirement benefits are lower than disability benefits because OAS eligibility begins at age 65.
A disability tax credit worth approximately $1,000 per year is available to persons who have a “severe and prolonged mental or physical impairment”. The impairment must be certified by a doctor on Form T2201 and submitted for evaluation. The impairment must markedly restrict some activity of daily living (e.g. thinking & remembering, feeding & dressing oneself, speaking, hearing or walking).
Full-time care or nursing home fees may not be claimed as medical expenses in addition to this credit. However, part-time care up to a maximum amount of $10,000 ($20,000 in the year of death) may be claimed as medical expense in addition to the disability credit. Although this amount is called part-time care, the Tax Department interprets this provision to include full-time care to a maximum of these amounts. The attendant must be 18 years old or older and must not be the spouse of the disabled person.
People who have a disability certified on Form T2201 by a medical practitioner can claim medical expenses without limit for full-time attendant care or full-time nursing care, as long as the attendant is not under 18 years old or the spouse of the taxpayer. The following conditions must exist in order to make the claim:
The taxpayer has a “severe and prolonged mental or physical impairment” and requires a full-time attendant or full-time care in a nursing home. Impairment means that the sufferer is “markedly restricted in the activities of daily living” (feeding, speaking or walking, for example) and that the condition will likely last more than 12 months, or,
The taxpayer maintains a self-contained living space but requires a full-time attendant because he/she is dependent on others for a considerable amount of time. The attendant’s SIN number must be obtained for this claim. Remuneration paid to one full-time attendant means the total amount paid to any number of attendants and only covering one attendant at a time.
Effective in 2002, people who live in assisted-living or 24-hour care residences can now claim a portion of their rent as a medical expense. The facility must prepare a receipt, splitting out the total that represents attendant care, even if it is only part-time. The patient still must be certified on Form T2201 for a disability.
Either of two options can be used to claim full or part-time care by an attendant:
- Up to $10,000 (or $20,000 in year of death) as medical expenses plus the disability credit amount, or
- All of the amounts paid for attendant or nursing home care, but no disability claim.
Either or both entitlements under #1 above can be claimed by the taxpayer or transferred to a spouse. The $10,000 amount can be claimed by anyone who pays the care costs and can claim the person as a dependent. Dependents are defined to include children or grandchildren or Canadian resident parents, grandparents, siblings, aunts, uncles, nieces or nephews. Any unused portion of the disability credit can be transferred to a relative you are dependent upon. If the dependent person is neither a child or grandchild, they must be living with the supporting party.
Note that attendant care expenses necessary to allow a person to earn business or employment income can be deducted from that income rather than be claimed as a medical expense credit. This also avoids the medical threshold amount. The deduction is limited to the lesser of amounts paid to allow the disabled person to perform employment or business duties and 2/3 of earned income for the year. These expenses are separate from those that would be included in the options above.
You or your parent may be at the point where it is time to sell the family home and move into a care residence. The financial math of this needs to be understood. We recently reviewed such a situation. The senior’s other retirement income was approximately $30,000. The family home was sold for $400,000 and the seniors’ care residence cost approximately $40,000 pa. Before moving, the senior was paying approximately $4,000 in income tax. If the house proceeds were invested conservatively in bonds, the investments would produce apron $20,000 before tax, and $13,500 after-tax. However, if the senior qualified for a disability certificate, then the $40,000 care costs might qualify as a medical credit, in which case the income tax bill actually would decrease to $2,000.
Be aware that the after-tax income from the house proceeds ($20,000) would not cover the care costs ($40,000); thus, the senior would need to draw down the capital amount by approximately $20,000 annually in the early years. In later years, this amount would need to increase as the investment income decreases due to the drawdown of investable capital. This also has investing implications for how the bond portfolio is laddered out, in terms of intervals and maturing amounts.
There is an extra tax break for medical expenses for certain people. The taxpayer must meet the following criteria:
- Reside in Canada throughout the year
- Be 18 or older at the end of the year
- Have employment income minus RPP contributions, union dues and employment expenses plus net self-employment income of an annually indexed amount
- Have net income combined with spouse’s net income of less than $26,754
The credit is limited to the lesser of 25% of the allowable medical expenses and an annually indexed amount, reduced by 5% of the net family income in excess of an annually indexed amount.
A life insurance policy may include a living benefit provision. In the event that the policyholder is diagnosed with a terminal illness and is expected to die within the next 12 months, a certain percentage of the face value of the policy will be paid out before death.
If your policy does not include this provision, you should inquire as to whether a rider can be added at no additional charge.
The amount paid out varies from company to company and there are likely some conditions re: the types of illnesses covered, documentation required and the length of time the policy must be in force before benefits are paid.
The benefits are paid directly to the insured and may be used for any purpose. The amount of benefits paid out directly reduces the amount of insurance paid to the beneficiary on the death of the insured. For this reason, it may be necessary to obtain permission from the beneficiary to collect this benefit.
Many retired people are concerned that they will have enough financial resources to bear the possible cost of long term care in their latter years. While a “retirement forecast” conducted for you by Errin Mechler, of our office may answer that question, there is another alternative.
A few insurance companies (e.g. Clarica, Commercial Union, RBC Insurance) sell long term care insurance policies which provide coverage in the event of chronic illness or cognitive impairment, such as Alzheimer’s.
The policy can include various periods of coverage, e.g. one, two, five years or life. The benefits pay for expenses such as facility or at-home care. Benefits can be up to $300/day and are tax-free. A policy for facility care can be issued for a person aged 30-80 and for home care for a person aged 30-75.
Recent premium quotes for $100/day per person coverage for life with a 90 day waiting period were $6,086 a year for a 65 year old couple or approximately $3,000 for a single 65 year old.