Tax-Assisted Approaches for Helping Canadians Meet Out-of-Pocket Health-Care Costs

  • J.C. Herbert Emery University of Calgary


Canadians are not saving for the inevitable costs of drugs and long-term care which they will have to pay for out of pocket in their old age, and these costs could potentially be financially devastating for them. Later in life, when out-of-pocket health-care costs mount, those who previously enjoyed the security of a workplace insurance plan to cover such expenses will face a grim financial reality. Many aspects of care for older Canadians aren’t covered by this country’s single-payer health-care system. Besides prescription drugs, these include management of chronic conditions by ancillary health professionals, home care, long-term care, and dental and vision care.
Statistics show that in 2012, Canadians’ private spending on health care totaled $60 billion, with private health insurance covering $24.5 billion of that amount. Coverage of health-care costs that don’t fall under Medicare’s purview is at present rather piecemeal. The non-refundable federal Medical Expense Tax Credit covers expenses only after the three-per-cent minimum, or first $2,171, of out-of-pocket costs have been paid by the individual. The Disability Tax Credit is available to those with a certified chronic disability, and these individuals are eligible for further support via the Registered Disability Savings Plan. A Caregiver Tax Credit is also available.
The federal government has a golden opportunity to provide an incentive for Canadians to set aside money to pay not only for the often catastrophic medical and drug costs that can come with aging, but also to save so they can afford long-term care, or purchase private health insurance. Too many Canadians, unfortunately, believe

that the federal government picks up the tab for long-term care. In fact, provincial subsidies are provided on a means-testing basis, thus leaving many better-off Canadians in the lurch when they can no longer live alone and must make the transition to long-term care.
Providing more generous tax treatment of current and future out-of-pocket health costs, including insurance premiums, is an obvious way for the federal government to support Canadians to meet their health care needs and improve their well-being. Two existing vehicles can play an essential part of this plan. The government can change the currently non-refundable Medical Expenses Tax Credit and the refundable Medical Expenses Supplement so that out-ofpocket health-care costs are eligible from the first dollar. This would place no added burden on government if the exemption of employer-provided health benefits from employees’ taxable income were removed.
Making an altered METC available to Canadians who pay their out-of-pocket costs from a registered health savings vehicle, which could be created within an RRSP to avoid extra administrative burdens, would provide them with an incentive to save. They could then either self-insure for future out-of-pocket health costs, or purchase private health insurance. A grant component could be added for lower-income families to make such savings incentives more widely diffuse.
Treating health benefits as taxable income subject to the modified Medical Expenses Tax Credit would address efficiency and equity issues with the existing tax treatments of health-care costs while extending tax assistance for out-of-pocket costs to more of the population. When the onus for decision making about payments and insurance purchases is placed on consumers, cost containment in health care and quality improvement incentives naturally follow.


Blomqvist, Åke and Colin Busby, 2014. “Paying for the Boomers: Long-Term Care and Intergenerational Equity,” C. D. Howe Institute Commentary, no. 415. (http://www.cdhowe. org/pdf/Commentary_415.pdf )

Boychuk, Gerard, 2008. National Health Insurance in the United States and Canada: Race, Territory, and the Roots of Difference. Washington D.C.: Georgetown University Press.

Busby, Colin and Jonathan Pedde, 2014. “Should Public Drug Plans be Based on Age or Income?” C. D. Howe Institute Commentary, no. 417. Commentary_417.pdf)

Butler, James R. G., 2002. “Policy Change and Private Health Insurance: Did the Cheapest Policy do the Trick?” Australian Health Review, vol. 25, no. 6: 33-41.

Campbell, Colin, 2013. “J. L. Ilsley and the Transformation of the Canadian Tax System: 1939-1943,” Canadian Tax Journal / Revue fiscale canadienne, 61(3): 633-670.

“Canadian White Paper on Employment and Income,” Federal Reserve Bulletin, June 1945, 536-549.

Canadian Institute for Health Information (CIHI), 2005. “Exploring the 70/30 Split: How Canada’s Health System is Financed,” Ottawa: Canadian Institute for Health Information.

CIHI, 2008. “Drug Expenditure in Canada, 1985-2007,” Ottawa: Canadian Institute for Health Information.

CIHI, 2014. “National Health Expenditure Trends, 1975 to 2014,” Ottawa: Canadian Institute for Health Information.

Deber, Raisa B., 1999. “Medical Savings Accounts: A Fine Idea Unless You’re Sick,” Health Policy Forum 2 (1): 4-5.

Deber, Raisa B., Kenneth C. K. Lam and Leslie L. Roos, 2014. “Four Flavours of Health Expenditures: A Discussion of the Potential Implications of the Distribution of Health Expenditures for Financing Health Care,” Canadian Public Policy/Analyse de politiques XL(4): 353-363.

Department of Finance Canada, 2015. Tax Expenditures and Evaluations 2014.

Emery, J. C. Herbert, 2010. “Understanding the Political Economy of the Evolution and Future of Single-Payer Public Health Insurance in Canada,” SPP Technical Papers, The Health Series, The School of Public Policy, University of Calgary.

Evans, Robert G., 2004. “Financing Health Care: Options, Consequences and Objectives,” Chapter 5 in The Romanow Papers: Volume I, The Fiscal Sustainability of Health Care in Canada, edited by Gregory P. Marchildon, Thomas McIntosh and Pierre-Gerlier Forest. Toronto: University of Toronto Press.

Finkelstein, Amy, 2002. “The Effect of Tax Subsidies to Employer-Provided Supplementary Health Insurance: Evidence from Canada,” Journal of Public Economics 84: 305-339.

Forget, Evelyn L., Raisa Deber and L. L. Roos. 2002. “Medical Savings Accounts: Will They Reduce Costs?” Canadian Medical Association Journal, 167(2): 143-147.

Fuchs, Victor R., 1976. “From Bismarck to Woodcock: The ‘Irrational’ Pursuit of National Health Insurance,” Journal of Law and Economics 19(2): 347-359.

Hurley, Jeremiah, 2000. “Medical Savings Accounts: Approach with Caution,” Journal of Health Services Research and Policy 5(2): 30-32.

Hurley, Jeremiah and G. Emmanuel Guindon, 2008. “Private Health Insurance in Canada,” CHEPA Working Paper Series 08-04 (subsequently published in Private Health Insurance and Medical Savings Accounts: Lessons from International Experience, edited by S. Thomson, E. Mossialos and R. G. Evans. London: Cambridge University Press).

MacInnis, Angus, 1942. “Collective Bargaining,” Quarterly Review of Commerce 9(2): 101-111.

Naylor, C. David, 1986. Private Practice, Public Payment: Canadian Medicine and the Politics of Health Insurance, 1911-1966. Toronto: University of Toronto Press.

Office of the Parliamentary Budget Officer, 2015. The Tax-Free Savings Account. Ottawa: Feb. 24, 2015.

Quadagno, Jill, 2005. One Nation Uninsured: Why the U.S. Has No National Health Insurance. New York: Oxford University Press.

Sanmartin, Claudia, Deirdre Hennessy, Yuqian Lu and Michael Robert Law, 2014. “Trends in out-of-pocket health care expenditures in Canada, by household income, 1997 to 2009,” Health Reports 25(4):13-17. Catalogue no. 82-003-X Statistics Canada

Stabile, Mark, 2001. “Private insurance subsidies and public health care markets: evidence from Canada,” Canadian Journal of Economics 34(4): 921-942.

Taylor, Malcolm G., 1957. “Financial Aspects of Health Insurance,” Canadian Tax Papers, December, no. 12. Toronto: Canadian Tax Foundation.

Research Papers