TSG (Tax Specialist Group) - Health & Welfare Trusts (Medical Expenses)

Health & Welfare Trusts

Subject: Medical Expenses
Number: 09-08
Date: 3/20/2009

Where expenses are significant, the savings outweigh the costs

Most individuals take advantage of the non-refundable tax credit available for eligible medical expenditures when preparing their personal income tax return. The benefit of the personal medical tax credit is rather modest and is the range of 20%-25% depending on the province of residence.

The use of a health and welfare trust to pay uninsured medical costs, such as special schooling, medical equipment, cosmetic surgery, elder care, orthodontics, laser eye surgery and many other expenses can help recover over 40% of the costs for high rate individuals.

A health and welfare trust is created by a corporation for an employee (or employees) and is funded by the corporation on a periodic basis. As long as the CRA’s administrative requirements are met, the corporation can claim a deduction for the amount paid into the health and welfare trust. Eligible employees (usually including the owner/manager) then submit eligible expenses to the trust for reimbursement. Also the amount reimbursed by the heath and welfare trust will not be a taxable benefit to the employee.

For example, if an owner/manager incurs $25,000 for special schooling for a child, he/she will need to earn approximately $33,000 (in Ontario) as salary, to fund the expense after claiming the medical tax credit. With a health and welfare trust, the expense can be funded with $25,000 of corporate funds, with no taxable benefit. The result is an $8,000 saving.

There are set up costs to create a health and welfare trust and it is common for trustees to charge a management fee (10% is common). Where expenses are significant, the savings outweigh the costs.

A health and welfare trust should only be created with proper professional advice. Double tax could result if the CRA’s administrative parameters are not met.

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