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How to write off medical expenses

One thing Canadians have consistently been proudest about over the years is the quality and fairness of our health care system. The rich and the poor get equal access to government-provided medical attention whenever they need it. At least, that's the way it's supposed to work.

The sad fact is that our medicare system is under increasing strain, and private-sector medical services providers are picking up the slack.

The Canadian Income Tax Act provides relief for those who spend a large proportion of their taxable income on health care. And since experts say more of us will end up shelling out for more medical expenses in the coming years, it pays to be informed about what you can and can't write off.

Private health care: an ever-present reality
According to Statistics Canada, Canadians spent $31.4 billion on private medical and hospital care, drugs and pharmaceutical products in 2003.

While that sounds like a lot of money, the overall trend is far more worrying, because that amount represents a 62.1% increase from what Canadians spent on private health services 10 years ago.

The change is in large part attributable to Canada's aging population. As a result, how much we spend on medical services will almost certainly increase in the coming years.

Limits on medical expenses
Canadians who pay medical expenses in any 12-month period ending in a taxation year are eligible for a 16 percent tax credit on those expenses.

The problem is the total eligible medical expenses must first be reduced by three percent of your net income or $1,755, whichever is less.

The net effect is that if you had $40,000 in net income last year, you are only eligible for a tax credit on the portion of your medical expenses that exceeds $1,200 ($40,000 multiplied by three percent).

That means Canadians who spend only a couple of hundred dollars year are typically excluded from the credits. The system is designed more to help those who spend a large proportion of their income on health services.

Like most of its provisions, those in the Income Tax Act and interpretation literature related to medical expenses are fairly extensive. Among the items you can claim are medicine bills, doctor's fees, dentistry expenses and private health plan premiums.

But it's important to remember that you can't include any expenses that were reimbursed by your private insurer.

Nursing and retirement homes
Among the most onerous medical expenses are the ongoing costs related to caring for elderly relatives who are in nursing or retirement homes.

While the two types of institutions have similar characteristics, there is a big difference in tax treatment they get. While all costs associated with the former are considered eligible medical expenses, but costs associated with the latter are not, says Sonny Bernard, a tax partner at Bessner Gallay Kreisman in Montreal.

"It's a big problem," he says. "Many people are spending a lot of money on private care, and it puts a big strain on them and their families."

According to Bernard, nursing homes are typically for those who can't take care of the basic elements of everyday life on an ongoing basis, such as eating, getting dressed, remembering to turn off the gas stove and so on.

Nursing home fees are considered medical expenses whether they were paid to a public or private institution. If the resident can't claim the tax credit on those expenses, they may be claimed by relatives who support her.

Retirement home fees are not considered medical expenses as such, but according to Bernard, a portion of the fees may be eligible for the tax credit if it is used to pay for medical-related services such as 24-hour-a-day nursing availability.

Cosmetic and corrective eye surgeries
One of the fastest growing categories of private medical expenses is certain electible cosmetic procedures such as breast implants, facial surgery and liposuction.

These are ineligible for the federal tax credit. But corrective eye surgery, which results in the patient not having to wear glasses, does qualify.

Medical expenses incurred outside Canada
The long waiting times required to get treatment in many of the country's hospitals has led many Canadians to look elsewhere for treatment, particularly in the US. Medical expenses incurred outside of Canada at reputable hospitals or treatment facilities are still eligible for the tax credit.

Canadians who are required to travel in order to get medical attention because it is not available in their own area are also allowed to deduct travel-related expenses including air or train tickets and hotels.

The future
One of Canada's greatest challenges will be to figure out how to pay for the medical care that its aging baby boomers will need in the coming years. According to the Canadian Medical Association, Canadians spent $121.4 billion on health services last year, approximately 10 percent of our Gross Domestic Product (GDP).

With the first baby boomers set to turn 60 next year, that amount will only increase, as will the proportion spent on private care. As a result, keeping abreast of the tax consequences will be more important than ever.

For more information about the tax treatment of medical expenses, check out the Canada Revenue Agency's web site.

Peter Diekmeyer is the Montreal Gazette's management columnist.

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-- Posted: Dec. 15, 2004
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