Published: 5 July 2006
When you read this title you might think “what ?!?!?” but this is a possibility! Many small businesses and employers have extended health plans that cover some medical and dental costs but what happens to the amount that is not covered?
If your plan covers 80% of your $1,000 dental bill, you will have $200 of after tax personal funds that will go to your dentist. If we assume you are paying taxes at the highest rate, your business had to earn $350 and you had to pay $150 in income taxes so that you could give $200 to the dentist.
If the total of your expenses not covered by the medical/dental plan exceeded 3% of your net income or $1,813 (which ever is less), then the portion over this threshold amount can be claimed as a non-refundable tax credit. In other words, if you spent $2,000 over and above what your plan covered and you earned over $60,500, you got to claim a whopping $29.92 as your non-refundable tax credit!
An alternative to this is to have your company set up a plan, commonly known as a medical trust, with an insurance company. You give your company the $200 dental bill that you paid, the company sends the dental bill to the insurance company who in turn invoices the company $221.40 which is the bill plus a 10% administration fee and then GST on the 10% administration fee (Rate varies, please confirm with your insurer). The company pays the insurer the $221.40 and then the insurance company pays you back the $200. This flow of funds has now resulted in you getting 100% coverage of your dental bill tax-free and the company only having to earn $220 (assuming the company is GST registered).
The nice thing with this situation is that you could have group coverage with your spouse’s employer or a former employer and get 100% coverage for the entire family at a minimal cost to your company. In addition, expenses limited by group plans can be covered through this “private” plan.
If your company has a group plan and pays significant premiums for coverage, you may want to consider claiming all your medical and dental costs through the medical trust instead.
Another option great for high profit years is to pre-fund an account with your insurer. The fund flow would work as follows:
This situation works very well if you are expecting a high medical cost year and wish to reduce company profits before year-end.
The deductibility of costs varies if your business is un-incorporated so be sure to speak with your professional accountant and insurance agent before you proceed.
This article was written by Gabrielle Loren -- a partner with Loren & Company, CGA's located in North Vancouver, BC and can be reached at firstname.lastname@example.org, at 604-904-3807 or check out their website at www.loren.bc.ca