Why we hate METC calculators for HSAs
Many times, we run into a scenario where a business owner is assessing whether to use an HSA or the Medical Expense Tax Credit (METC). If you understand both concepts, it is a no brainer to setup an HSA. Tim and I have always fought to not include the “HSA vs METC Savings Calculator” on the platform because to us it’s unnecessary. In the context of a small business, I’ll explain my thoughts below.
Let’s go back to basics:
An HSA is a CRA regulated plan, whereby a corporation can reimburse its employee(s) for out-of-pocket medical expenses. 100% of the cost is tax deductible to the corporation. The HSA can be set up for a shareholder/owner if they are also an employee of the company.
The METC is an option for Canadians to receive a tax credit for out-of-pocket medical expenses when they file their personal income tax.
The CRA’s allowable list of medical expenses is the same for the HSA and personal METC.
Let’s look at a case:
I own a corporation and I am also an active employee, I set up a $5,000 HSA. I will use my HSA when my family incurs medical related costs throughout the year. So, this will reimburse me and my family from first dollar of expenses incurred, which is a very important point as you will see.
Let’s say I have $4000 in medical expenses that I submit through my HSA, my corp will fund the $4000 + admin fees and tax for the HSA and I will be personally reimbursed $4000 tax-free. This reduces corporate taxes and is a way to pull funds tax free from the corp. Awesome!
Alternatively, I could personally claim the Medical Expense Tax Credit (METC). Here is the calculation wording as per CRA:
an individual may claim the amount by which the eligible medical expenses in respect of the above listed people exceeds the lesser of the following two amounts:
a fixed amount; and
3% of the individual’s net income for the year.
Fixed amount is below:
So, if I am a business owner with $100,000 of net income and have 2022 expenses, I can claim my medical expenses that exceed the lesser of $3,000 (3% of Net Income) or $2,479. So, I can only personally claim expenses that exceed $2,479 in this case because it is the lesser of the two amounts. If I have $4,000 of claims, then I can only claim METC of $1,521 ($4,000 - $2,479) of expenses on my tax return.
Here is my point, we just did all this math, but we did not need to. The METC, because of the “LESSER OF” calculation, is simply never a better alternative than an HSA. There is really no reason to run an options scenario as the HSA will always be better since it pays from the first dollar of expenses on every eligible claim. Using the METC, you will never get 100% of the expenses covered.
Most importantly from a sales perspective, it’s important to talk to business owners in terms of why they run their own business. Most small business owners will admit that they try to have as many write offs for the business that can be used for their family expenses. So, for example, if my child needs braces and I do not have the cash personally available, but it is in the corporation, I need to pull a dividend or pay myself a salary that gets taxed to cover the expense. So, I would need to take out MORE than the costs for the braces as I must pay tax personally on top of it. If I have an HSA in place, I pay out of pocket personally but turn to the corp immediately and claim it, so I get reimbursed tax free from my business. The business writes off the claim, plus fees. If you explain this to any business owner, they relate to this concept right away. I used to know I had sold a client for sure if they asked, “is this legal?” after I explained it. I would back it all up with the CRA links and be happy to share it with their accountant, as these have been around since the 80’s. The sad reality is there is still very few accountants and even advisors that position these well with small businesses.
Oh, and we do have a tax calculator available because we are suckers for just giving advisors what they want versus arguing that they do not need one, but now you know why I hate these calculators.
COO & Co-Founder