Millions of Canadians will pay at least $1,000 more if Ottawa taxes health and dental plans, study finds

Posted on January 30, 2017 in Health Debates – Full Comment
January 29, 2017.    JOHN IVISON

The debate about the taxation of health and dental benefits has, to this point, been an academic argument about fairness and tax efficiency.

But it’s about to get intensely political, as Canada’s doctors and dentists tell voters exactly how much the move to tax plans that cover prescription drugs, dental and vision care might cost them.

The very public lobbying campaign aimed at persuading the government to drop any plans it may have to tax health care not provided under provincial systems will kick into high gear when the House of Commons resumes next week.

The Canadian Dental Association reports that 50,000 protest emails have already been sent to local MPs and Bill Morneau, the finance minister, through its < > online petition.

Key to the success of those efforts will be soon-to-be released research from the Conference Board that suggests middle-income earners across the country will pay an additional $1,000 (or more depending on the province) in additional federal and provincial income tax, if the government does decide to make the health and dental plans held by 13.5 million working Canadians a taxable benefit.

The Conference Board study for the CDA suggests someone earning $45,000 in full-time employment in Ontario, with family coverage, would pay an extra $1,167 in tax. Those earning $60,000 in that province would pay an additional $1,043, while workers earning $90,000 would pay $1,277 more. Those numbers are reasonably consistent across the country, except (it almost goes without saying) in Quebec, where those earning $90,000 would pay a combined $1,729. Obviously, if two wage-earners in the same family have coverage, that amount will double.

The prospect of health and benefit taxation being included in the spring budget was first raised by the National Post last month.

The subject was subsequently brought up by the opposition Conservatives in the House of Commons and by journalists with the prime minister at his end-of-year press conference.

The government’s talking points have been consistent — no decisions have been taken and any move would not be made in isolation. However, health-care organizations remain deeply worried that the proposal is still on the table.

The Liberals have been at pains to point out this would not be a tax grab, aimed at getting their hands on the $2.9 billion that could be levied (at least in year one), if health and dental benefits were treated as income in the same manner as company cars or life insurance.

The government has confirmed a review of health and dental benefits was undertaken by a panel of seven academics, who looked at a range of tax credits (particularly those that benefit high-income Canadians), with the goal of making the tax system as fair, efficient and simple as possible.

The academic argument in favour of taxing health and dental is straightforward — most employee benefits are taxed but, for reasons lost in the mists of past public policy, health and dental coverage is not. The argument for taxation is that those without private health plans, often people on low income, are subsidizing those who have them, generally people in the public sector or those who work in large companies.

Reforming the taxation of benefits has been advocated by the Department of Finance for years.

It was also endorsed by an advisory panel on health-care innovation, chaired by former University of Toronto president David Naylor, in 2015. The Naylor report suggested ending the current system and introducing a “tax swap,” where the government brought in a refundable tax credit to help all Canadians purchase private insurance. The problem with this solution is that it would add additional cost to provide a decent level of coverage — around $1 billion in the Naylor report.

This is not a government that is looking to spend more money, in what is likely to be a bad news budget.
A more cost-effective course of action for the Liberals would be to highlight the existing medical expense tax credit (METC). Making benefits taxable makes them eligible for reimbursement under the METC.

The Conference Board report points out that for those earning less than $45,000, the increased income-tax burden would be cancelled out by claiming the existing tax credit.

The problem is that only 17 per cent of Canadians ever get around to claiming this credit — and it would not offset the cost increase for those earning more than $45,000.

As a result, the potential exists for a massive political backlash.

The health-care coalition points out that when Quebec taxed health and dental benefits in 1993, it resulted in a substantial loss of coverage.

Once benefits were subject to provincial income tax, there was a 14-per-cent decrease in employee-provided supplementary health coverage in the province.

If those levels were repeated nationally, the revenues from the new tax would be much reduced and many Canadians would be forced to buy expensive private coverage (an average $3,521 a year for a family plan).

Meddling with the equilibrium of the private/public health mix has the potential for unintended consequences.

But this is a government that has already proven itself in favour of income tax “fairness” for the middle class “and those working hard to join them.”

If taxing the health and dental benefits of the top 30 per cent of earners yields revenues to fund other social engineering experiments, as far as the Liberals are concerned, so much the better.

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