With April being the month most of us are thinking of filing our tax returns the subject of Tax Credits should be of interest to many of you.
Tax Deductions and Tax Credits are two entirely different tools to reduce our income taxes. A tax deduction lowers a person’s tax liability by reducing their taxable income. As an example, a $5,000 RRSP deduction for someone with an annual net income of $45,000 would mean their net taxable income is now $40,000. In BC they would be in the 21% combined federal and provincial tax bracket and this RRSP deposit would save them $1,050 in income taxes.
A Tax Credit is a dollar-for-dollar reduction of the taxes owing, so a $5,000 Tax Credit is far more valuable than a $5,000 Tax Deduction.
Tax Credits can be either Non-Refundable or Refundable with the refundable variety being the greatest value of the two. Non–Refundable Tax Credits are designed to reduce your federal tax payable, but they don’t create a tax refund. Refundable Tax Credits not only reduce the amount of tax you must pay, but they can help you get a tax refund from the government.
The METC is a Non-Refundable Tax Credit on medical and dental services, procedures, or products paid by the taxpayer (or their spouse) on behalf of themselves or their dependent children. Totaled expenses must first be over the lesser of 3% of net income OR $2,397 in 2020. In 2021 this will grow to $2,421. View these caps as a deductible as amounts below the cap will not be eligible.
If one spouse has a lower income it usually makes sense to combine all the expenses and file under their tax return. As an example, if the lower-income spouse has $30,000 of net income, the 3% deductible would be $900. Should the higher income spouse have a net income of $60,000 the 3% deductible would be $1,800.
What are some of the other rules & features?
- The eligibility period is any 12 months, as long as the last month ended in 2020. Thus, an expense on December 1, 2019, could qualify for a credit on your 2020 tax return, as long as the 12-month period you selected ended November 30, 2020.
- The taxpayer must be at least 18 years of age and a Canadian resident throughout the year.
- For those settling the estate of a loved one, CRA allows the past 24-month period up to the date of death, to be used. This assumes that the same METC expenses were not used in the year prior to death.
- Generally, all dental and medical expenses incurred outside of Canada qualify, as long as proper documentation exists.
- Should you have Extended Medical Insurance either through an employer’s group benefits plan or a private policy such as Blue Cross, the portion not paid by the plan can be filed as part of the METC. This includes any deductibles or co-insurance elements you have to pay.
- In addition to the METC is a little-known additional tax credit called The Refundable Medical Expense Supplement (RMES). To be eligible for this extra credit you must have earned income from employment sources, thus many senior citizens are unfortunately excluded if their income is 100% passive from investments or pensions.
- Another route to claim expenses which is also not well known is the Disability Supports Deduction. This allows those with physical and mental impairments to deduct certain expenses to earn income.
What services, procedures & products are eligible to claim?
Almost all dental & medical expenses performed by licensed practitioners qualify. Typically, the guideline is – if a prescription is needed from an MD or ND it qualifies. Even CRA says that their list is not inexhaustible and annually new products and services are added.
You can find the most current list approved by CRA online