For Sole Proprietors

For when you’re doing it alone

The Medical Expense Tax Credit (METC) is an important tax benefit that allows individuals to claim eligible medical expenses on their income tax return. However, there are specific criteria and limitations associated with this tax credit. One of the key limitations of the METC is the income threshold. To claim the tax credit, individuals must have their eligible medical expenses exceed a certain threshold. This threshold is calculated as either a fixed dollar amount, which can change annually, or a percentage of the individual’s net income, whichever is lower.

The METC is a valuable tool for deducting health expenses. However, for sole proprietors, leveraging business deductions combined with a comprehensive benefit program offers a more significant tax advantage. By making a benefit program the primary means of covering medical expenses, not only can businesses enjoy the benefits of deductions, but they also optimize their tax advantages. This approach positions the METC as a secondary means of deducting costs, providing a comprehensive and tax-efficient strategy for health expense management.

For when you’re doing it together

As a sole proprietor, navigating the realm of tax deductions is crucial for optimizing your financial strategy. One avenue that often goes overlooked is the significant advantage offered by group benefits plans in covering medical expenses. Rather than relying solely on personal medical expense tax credits and personal income, enrolling in a group benefits plan can provide substantial tax deductions.

Group Benefit Premiums

Client Profile

  • Sole Proprietors income : $50,000
  • Group Benefit Premiums : $3,300
  • Medical Expenses : $2,000

How Deductions are Calculated

  • The sole proprietor deducts the group benefit premiums from their gross income reducing their taxable income From $50,000 to $46,700
  • Gross Income ($50,000) – Group Benefit Premiums ($3,300) = Taxable Income ( $46,700)

How Premiums Deductions are Applied

  • The Sole Proprietor applies their deducted taxable income to calculate their tax lability of $10,721
    Taxable Income ( $46,700 ) x Marginal Tax Rate ( 0.23) = Tax Owed ($10,721)
  • The Sole Proprietor applies their deducted taxable income to calculate their CPP at $5,137
    Taxable Income ($46,700 ) x Marginal Tax Rate ( 0.11) = Tax Owed ( $5,137)

How Deductions Benefit the Employer

The Sole Proprietor has quickly and simply, deducted the group benefit premiums from their income and reduced their income form calculating taxes

  • The Sole Proprietor has exchanged their medical claims for Insurance premiums to cover the medical expenses and create a tax deduction there is no need to calculate the tax credit deductible or tax credit amounts.
  • By transferring medical expenses to group benefit plan and deducting the premiums, the sole proprietor’s tax liability reduces to $15,858.
    Tax Owed ($10,721) + Employee CPP Contribution ($5,137) = Tax liability ( $ 15,858)
  • Tax liability $15,858
    The sole proprietor saves $ 1,067 more using a group benefit program than the METC

Expense Tax Credit

Client Profile

  • Sole Proprietors income : $50,000
  • Group Benefit Premiums : N/A
  • Medical Expenses : $2,000

How Deductions are Calculated

  • The Sole Proprietor’s taxable income remains the same as $50,000
    Taxable Income ( $46,700 ) x Marginal Tax Rate ( 0.23) = Tax Owed ($10,721)
  • The Sole Proprietor applies their full taxable income to calculate their tax liability of $11,500
    Taxable Income ( $50,000) x Marginal Tax Rate ( 0.23) = Tax Owed ( $11,500)
  • The Sole Proprietor applies their full taxable income to calculate their CPP at $5,500
    Taxable Income ($50,000) x Marginal Tax Rate ( 0.11) = Tax Owed ( $5,500)

Medical Expenses are Applied

The Sole Proprietor must calculate the deductible for their medical expense tax credit and the amount of credit which will be applied

  • First The sole proprietor’s must calculate their tax credit deducible for the year which is $1,500
    Taxable income ($50,000) x deductible (3%) = total amount eligible
  • Secondly The sole proprietors must calculate the amount of the expense greater than the deductible to claim in this case $500.00
    Amount of expenses ($2,000) – deducible(1,500) = $500
  • The sole proprietor’s must calculate the amount of their tax credit received in this case $ 75.00
    Medical Expenses ($500) x Credit Rate (0.15) = $75
  • The sole proprietor applies the tax credit to their taxes owed reducing their tax payable in this case to $11,425
    Tax Owed ( $11,500) – Medical Expenses Tax Credit ( $75) = Adjusted Tax Owed ( $11,425)
  • The employer Then adds their CCP contributions to their Adjusted tax owed to calculate their full tax liability of $16,925
    Tax Owed (S11,425) + Employee CPP Contribution ($5,500) = Tax liability ( $ 16,925)

How Deductions Benefit the Employer

  • By maintaining medical expenses personally and applying the medical expenses tax credit, the sole proprietor’s effective tax liability reduces to $16,925.
  • Tax liability $16,925.
    The sole proprietor spends $ 1,067 more using the METC than a group benefit program

Individual Health Insurance Policies

Characteristics

  • Owned by the Applicant/Insured
  • The Individual Insured has Control Over the Policy Coverage
  • Fully Portable
  • Claims adjudication by the insurance company’s claims department
  • Capacity to customize the policy to the Insured
  • Fairly rigid maximum coverage levels
  • Depending on plan design deductibles may apply
  • Co-insurance usually applies

Underwriting

  • Usually Fully Underwritten at the time of application
  • Pre-existing conditions will typically be excluded by a rider at time of policy issue

Premiums

  • Premiums are Based on the underwriting characteristics of the insured
  • Premiums are Relatively high compared to group policy

Taxation

  • No cost sharing option premiums are 100% paid by the Insured
  • Premiums qualify as a medical expense tax credit
  • Benefits are Tax Free

Group Benefit Health Policies

Characteristics

  • Owned by Sponsor of the group plan
  • Plan member has some control over coverage selected but not over the master contract
  • Coverage terminates if the plan member leaves the group
  • Claims adjudication by the insurance company’s claims department
  • Fairly customizable but subject to the limitations of the master contract
  • Levels of coverage generally higher than for individual policies
  • Depending on plan design deductibles may apply
  • Co-insurance usually applies

Underwriting

  • Simplified underwriting for basic coverage – potential full underwriting for enhanced or additional coverage
  • Because there is Simplified underwriting, pre-existing conditions are generally covered by the plan

Premiums

  • Based on the generic makeup of the group as a whole and the claims history of the group
  • Generally lower than for an individual policy

Taxation

  • Premiums may be paid 100% by an employer, employee or shared
  • Premiums paid by the employer are deductible for the employer and do not constitute a taxable benefit for the employee (except in Québec)
  • Benefits are tax-free

Finding an Advisor

As a sole proprietor, choosing the right advisor is crucial due to your unique business structure and tax regulations. An expert advisor understands the intricacies of group benefits for sole proprietors and can design a tax-efficient benefits package tailored to your needs.

Choosing the Right Plan

Crafting a comprehensive benefit plan for sole proprietors’ balances needs, costs, and sustainability, aided by expert guidance. Effective plan design involves understanding your unique needs, customizing coverage to balance comprehensiveness and affordability, and strategically managing costs for long-term sustainability.

Not sure yet? Let us help.

Benefit programs are planned in 5 steps.