Health Spending Account vs Medical Expense Tax Credit

Health Medical
Spending Expense
Account Tax Credit

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VIDEO OVERVIEW

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The Medical Expense Tax Credit (METC) and Health
Spending Account (HSA) are two competing
alternatives to pay for your personal medical expenses.
Which is the best for you?
This eBook will explore both options, explain their
differences, and show you the optimal choice.

A Special Guide
for Small Business Owners

What is a
Medical Expence
Tax Credit
(METC)?

The METC is a non-refundable tax
credit that is applied through your
personal* tax return. The basis
of the credit centers on meeting a
minimum threshold with the total
of your eligible medical expenses
in a given year.
If you incur medical expenses that qualify under
the Income Tax Act, you may make a claim for a
credit on the amount of expenses that exceeds
the lesser of 3% of your net income or $2,109 (the
minimum threshold). You then apply the lowest
marginal tax rate of your province (20.05% in the
case of Ontario) to the amount that exceeds the
threshold. This number is your METC.
We will now go through two examples using the
METC. One, where you do not qualify and one
where you do qualify for the credit.
*

Note the METC is a non refundable tax credit that affects your personal tax circumstance. The
Health Spending Account will impact your corporate and personal tax circumstance. Moreover,
applying for the METC instead of using a Health Spending Account suggests you have elected
to pay for your medical expenses personally (and not through your corporation with a Health
Spending Account).


2

A Special Guide

Example 1:
Calculating your
credit when you
do not meet the
threshold

Taxable Income: $100,000
Net Income: $70,000
Medical Expenses: $2,000
Minimum threshold: 3% of $70,000 ($2,100); or $2,109
Medical Expenses of $2,000 is less than the threshold
Eligible Amount: $0
Credit: $0

You would receive no credit

as your medical expense total is less
than 3% of your net income ($2,100) and $2,109.


3

A Special Guide

Example 2:
Calculating your
credit when you
do meet the
threshold

Taxable Income: $100,000
Net Income: $70,000
Minimum threshold: lesser of $2,100 or $2,109
Eligible Amount: 4,000 – 2,100 = 1,900
Lowest Marginal Tax Rate: 20.05%
Credit: 1,900 x 20.05% = $380.95
You would receive a non-refundable tax credit
of $380.95.
Now, let’s take a look at the total cost of your
medical expense using the METC.


4

A Special Guide

What is the total
cost of your $4,000
medical expense
using the METC?

Keep in mind, the $4,000 medical expense is an
AFTER TAX expense*. With a taxable income
of $100,000, your personal marginal tax rate is
43.41%.** Therefore, your corporation must pay
you a total management fee (INCLUDING TAX) of
$7,120 to pay for the expense.
Tax of 43.41%: $3,120
Medical Expense: $4,000
TOTAL COST: $7,120
To think of this in another way, your company
must pay you a gross amount of $1.78 for every
$1 you bring home AFTER TAX. 78 cents or
43.41% (your personal marginal tax rate) of your
gross income must be paid in tax.
Now, let’s take a look at the HSA.
*

Your company pays you the management fee (personal income), you pay the government tax,
and you are left with an AFTER TAX sum.

**

For Ontario residents. See here for tax rates in other provinces.


5

A Special Guide

What is a Health
Spending
Account (HSA)?

By paying for your medical expenses with
a Health Spending Account, you use your
corporation to pay your medical expenses
BEFORE TAX.
You forego the METC by using a Health
Spending Account, but:
You save money beginning with the first
dollar.
There is no minimum threshold.
100% of your expenses are reimbursed.
Let’s take a look at an example using a Health
Spending Account.


6

A Special Guide

Example 3:
What is the total
cost of your
$4,000 medical
expense using
the HSA?

When you pay for medical expenses with the
HSA, you pay no income tax. The expense is
written off 100% by your corporation.
There will be a fee for the administration of the
HSA.

Minimum threshold: N/A
Eligible Amount: $4,000
HSA Administration Fee* : $299/year
Total Cost to Corporation: $4,299
Now, let’s take a look at a savings comparison
between the METC and HSA.

*

The arms-length provider or administrator will charge a fee for their services


7

A Special Guide

Savings
Comparison

Savings Comparison
CHOICE 1
Medical Expense
Tax Credit
(After Tax)
TOTAL COST
$7,120
43%
TAXES
$3,120
AFTER TAX
MEDICAL EXPENSE
$4,000

YOUR Co.

SAVES
$2,341
EXAMPLE
Ontario Business Owner
Business Name: YOUR Co.
Personal Income $100,000
Marginal Tax Rate: 43.41%
$4,000 Yearly Medical
Expenses

CHOICE 2
Health Spending
Account
(Before Tax)
TOTAL COST
$4,299
ADMINISTRATION
FEE
$299
BEFORE TAX
MEDICAL EXPENSE
$4,000


8

Conclusion
and
Additional
Resources

The HSA is the optimal choice to pay for your medical expenses.

METC
Minimum threshold
Small percentage recovered
Pay expenses personally

HSA
No threshold
100% reimbursement
Pay expenses with company

Discover the Benefits
of a
Health Spending
Account

Now that you’re familiar with Health
Spending Accounts,
try our
Savings Calculator
and download your custom report.
Download Now


11

Health Spending Account vs Medical Expense Tax Credit

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