Understanding Eligible Medical Expenses: How to Maximize Your Tax Deduction

It’s tax season, and while you are diligently hunting and gathering all the important tax slips and walk your tax package over to your accountant with fingers crossed you don’t owe a penny this year, we thought we would shed some light on what we would consider an often-misunderstood tax deduction which is the medical expense tax deduction. Many have a hard time figuring out exactly what qualifies as a medical expense and how it’s used, thus leaving potential money on the table, and we can’t have you doing that!

For the purpose of explaining this deduction I am going to use Cynthia and Bill (a made-up couple for the purpose of this newsletter).  Each tax season they do their best to maximize the income tax deductions available to them. However, one potential deduction they never seem to use is for medical expenses. Cynthia and Bill realize that medical expenses are a non-refundable tax credit, which can be subtracted from taxes owing, but they find the credit confusing.

Tax Deduction vs. Tax Credit: Clearing Up the Confusion

I thought it would be best to start here, a tax deduction and the tax credit might sound similar in nature or rather, you might just be confused by the two. They both save you money, but how do they work?

A tax deduction (I have always thought it should be referred to as income deduction for simplicity) reduces the amount of income that is subject to tax. Tax deductions get subtracted from your total income, lowering your total taxable income subsequently reducing your tax owing. An example of a tax deduction would be self-employed business expenses or RRSP contributions. These amounts would then reduce your total income for the year, as a result reducing the tax you pay overall.

A tax credit reduces the amount of tax owing. So, after your total taxable income is determined, you can apply your tax credits which then reduce the amount of tax you then have to pay.

To further confuse you there are two types of tax credits, refundable tax credits and non-refundable tax credits. For the purpose of this newsletter, it’s important to know the difference because medical expenses generate a non-refundable tax credit. This means, the credit will only reduce your outstanding tax owing,  If you owe nothing it will not generate a refund.

In the same example where you are not owing any additional tax, a refundable tax credit would then trigger a refund, an example of a refundable tax credit would be a charitable donation.

What is an eligible medical expense?

Expenses incurred for necessary medical or reconstructive purposes are eligible. Generally, expenses for treatment that was purely cosmetic in nature isn’t an eligible medical expense.

The Canada Revenue Agency (CRA) has a useful list to determine if an expense is eligible. Eligible expenses are very broad, and some of the items on the approved list may be surprising. For instance, up to $1,000 or 50% of the amount paid for an air conditioner for a person with a severe chronic ailment, disease or disorder is eligible, as are the incremental costs associated with gluten-free food products for those with celiac disease.

The takeaway is to never assume. When determining if an expense qualifies, Cynthia and Bill should review the CRA website or speak to their tax advisor/ accountant.

Can Cynthia and Bill use old medical expenses?

Cynthia and Bill haven’t claimed medical expenses for several years and wonder if they can make use of older expenses. Unfortunately, the answer is no. Bill can claim only medical expenses he or Cynthia (the credits can be claimed for spouses or common-law partners) paid in any 12-month period ending in the previous tax year. Therefore, any expense older than last year is of no use to them.

If a child of the taxpayer or their spouse or common law partner is a dependent, expenses paid for by the family for the year can be used in calculating eligible expenses.

What are net medical expenses?

Together, Cynthia and Bill incurred medical expenses of $7,500 last year. However, eligible expenses don’t equal total expenses. Cynthia’s employer provides a group health plan, and her company-sponsored insurance reimbursed the household $2,500. Eligible expenses are net of any reimbursement, and therefore only $5,000 of their expenses may be claimed.

However, there is one more step in determining net eligible medical expenses. The CRA has a prescribed threshold (minimum) that is deducted from eligible medical expenses to determine net eligible medical expenses. The prescribed threshold is the lesser of 3% of the taxpayer’s net income or $2,421 (for 2021) and $2,479 (for 2022).

After determining net eligible expenses, a provincial and federal credit is applied to determine net credit available to the taxpayer.

Should Cynthia or Bill claim the net eligible medical expenses?

Medical expenses can be claimed on either of their returns or split between their returns. Usually, it’s more advantageous to claim all expenses on one return.

Last year Cynthia earned $180,000, and Bill earned $52,000.

If Cynthia were to claim the expenses, the net credit would be $505:

If Bill were to claim the expenses, the net credit would be $690:

So, in Cynthia and Bill’s case, it’s better to have the eligible expenses claimed on Bill’s return.

Other considerations

Where you can, be proactive in managing your medical expenses. It may be a good idea, if possible to realize anticipated expenses in the same year to bypass the threshold and take advantage of the credit.

For example, this year Cynthia will require expensive dental treatment that will likely exceed the threshold. Bill may want to consider having his procedure that might be minimal in cost and would not bypass the threshold on its own in the same year as Cynthia’s dental work to maximize the credit in a year when it’s available.

And for the snowbirds, it’s important to properly document all expenses regardless of where they’re incurred. Expenses don’t have to be incurred or paid in Canada to be eligible.