The medical expense tax credit provides financial relief for individuals who have incurred significant medical expenses for themselves and/or certain of their dependants. This tax credit is a non-refundable credit that reduces an individual’s income tax liability.
The formula for the medical credit is comprised of two components:
- Part one: Medical expenses in respect of the taxpayer, the taxpayer’s spouse or common-law partner, and their children under the age of 18.
- Part two: Medical expenses related to certain non- arm’s-length individuals who are dependent on the taxpayer.
In part one the federal medical expense tax credit is 15 percent of the amount of the medical expenses in excess of the lesser of $2,152 (2013 figure) and three per cent of the individual’s net income. The formula works to create a minimum threshold below which the legislators consider expenses to be normal expenses that should be paid out-of–pocket, without tax assistance.
In part two of the calculation, the medical expenses of the taxpayer’s other dependants can be accumulated and reflected in the overall formula. This is a valuable and often missed opportunity where the definition of dependant is more far-reaching than anywhere else in the Income Tax Act. Dependants for this credit include the children of the taxpayer and taxpayer’s spouse who are over the age of 18, parents, grandparents, aunts, uncles, nieces or nephews. Dependency is based on the facts of the situation but the CRA will look for evidence that the taxpayer is providing the dependant with the basic necessities of life such as food, shelter and clothing, on a regular and consistent basis. The breadth of this opportunity should not be overlooked. Seldom do we see the recognition of a dependant relationship to such a great extent.
The federal medical expense tax credit for this second phase is 15 per cent of the amount of the medical expenses in excess of the lesser of $2,152 (2013 figure), and three per cent of the dependant’s net income. This second calculation is completed for each dependant, with medical expenses being claimed by the taxpayer.
Parts one and two of the calculation are added together, with the total applied as a reduction to the taxpayer’s federal income tax liability.
Eligible medical expenses can be incurred in any 12-month period ending in the taxation year. By tracking expenses chronologically, taxpayers may alter the choice of the 12-month period in order to optimize the value of the credit. If, for example, total expenses incurred for the period November 2013 to October 2014 exceed the expenses for the period January 2014 to December 2014, the taxpayer has the ability to select the period that provides the most advantageous outcome. Provided the period ends in 2014 and the expenses have not been claimed for 2013, it is up to the taxpayer to optimize the strategy.
The federal medical expense tax credit is meant to provide tax assistance and, with careful planning, taxpayers can structure the claim in a way to maximize the outcome. Similar amounts may be claimed on provincial and territorial income tax returns.
E.O. & E.
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Contributors to this edition:
James W. Kraft, cpa, ca, mtax, tep, cfp, clu, ch.f.c.
Deborah Kraft, mtax, tep, cfp, clu, ch.f.c.