Capitalize on your home’s equity and maximize your tax credits
Healthcare costs occupy a significant mindshare amongst most Canadians, especially when you are close to, or already in your golden years. Post-retirement, it is natural to worry about rising medical expenses, particularly those that are not covered under your provincial health insurance programs. In order to bridge the gap between a limited budget and the ever-increasing healthcare costs, why not look at the combined benefits of reverse mortgage and CRA medical expenses claims.
- When you need a steady cash flow to manage your recurring, out-of-pocket medical expenses, use some of your home’s equity through a reverse mortgage and create tax-free, cash-in-hand (you can receive monthly payments, or you cash in one lump sum – the choice is yours)
- At the end of the year, earn back what you spent, in the form of non-refundable Medical Expense Tax Credits (METC) -maximize the recovery through CRA allowable medical expenses claims.
When used together, these smart solutions will boost your retirement finances and reduce the burden of ever-increasing healthcare costs.
The provincial health insurance programs may not be able to cover your prescription drugs, mobility aids, physiotherapy and other medical expenses. Financing these expenses can be difficult for retirees but there are ways to pay for these additional expenses not covered by federal programs. Find out how!
Medical expenses in Canada: breaking down the costs
Canadian healthcare cost inflation continues to rise rapidly with each passing year. While newer data isn’t available yet, between 2004 and 2014, medical expenses rose by 54%, significantly higher than housing (41%), clothing (33%) and food (16%). However, in Canada, public healthcare covers only about 70% of the total medical expenses, while the remaining is split between private insurance and self-contribution. A recent report shows that those without private coverage spend over $5,000 per year on out-of-pocket medical expenses. This may include:
- Prescription drugs: the average Canadian household spends $450 per year on prescription drugs and another $550 on private health plan premiums, a combined average of over $1,000. As per Statistics Canada, Canadians spend 27.3% of their healthcare budget on this item. Which means, many of you may spend as much as $1500 a year on prescription drugs alone!
- Mobility aids: for individuals with a mild disability, there may be a requirement for canes or walkers ($150 – $400) and scooters ($2,400 – $5,000) or wheelchairs ($4,000 – $5,000). The cost of electric wheelchairs, or other high-end mobility aids ranges from $2,000 – $10,000. You may also have to look at home modifications, such as chair lifts ($1,200 and up) and ramps ($200 – $8,000). At certain income levels, you may qualify for financial assistance to make modifications to your home, through the federal or provincial government assistance programs.
- Caregiving costs: Statistics Canada indicates that by age 55, there is a 10% chance that you will need long-term care, whereas by age 75, that probability increases to 50%. Since long-term care is excluded under the Canada Health Act, most of the associated expenses will be borne by you individually. In certain provinces, based on your annual income, home care expenses may be partly or fully covered.
- Hiring a personal care worker will cost $16 – $30 an hour, while the services of a registered nurse may cost upward of $24 – $76 an hour.
- Up until 2015, most home healthcare agencies charged approximately $25.75 per hour for a 3 to 8-hour shift. For overnight care or live-in arrangements, the cost ranges from $58,000 to $75,000 per year, whereas for 24-hour in-home care service, you may have to pay over $200,000 per year.
- If the disability is so severe that in-home care is not possible, you may have to consider long-term care in a nursing home. As per a 2017 Cost of Care Survey, the median cost for nursing home stay (including accommodation, medication and care) was $85,776 per year for a semi-private room, and $97,452 per year for a private room.
- Other Medical Expenses: Your provincial health insurance plans may also exclude other services, such as dental care, physiotherapy, prescription glasses and ambulance services. Unless you have purchased private insurance to cover these services, these costs will add up to your out-of-pocket medical expenses.
With steep healthcare bills, many Canadians choose to cash in their retirement savings early or rely on financial support from their children or extended family. In fact, a 2016 Sunlife Canadian Health Index suggests that half the surveyed Canadians experienced one or more serious health issues, and 42% of them suffered some degree of financial hardship.
Claim CRA medical expenses to manage your post-retirement healthcare
- Do you know that the Medical Expense Tax Credit (METC) can make a big impact on your tax bill?
- Are you familiar with the list of eligible medical expenses allowed by the CRA?
- Are you aware of the amount of CRA deductible medical expenses you can claim each year?
Although many healthcare costs are not covered in the provincial insurance programs, you may find them in the list of eligible medical expenses provided by CRA under the Income Tax Act. On your tax returns, METC is applicable to certain types of medical equipment, drugs, hearing and vision aids, treatment-related travel, renovations to aid or support mobility, and more.
Process for claiming CRA medical expenses
In your Schedule 1 tax return, you will find two areas where you can claim METC for CRA deductible medical expenses. Unsure about who should claim medical expenses through CRA? Follow these simple steps:
- Use line 330 for yourself, your spouse, your common law-partner and your dependent children under 18. If both you and your spouse have taxable income, try to claim CRA medical expenses on the return that has lower income, as that will be more beneficial. In order to calculate your total claim, use the total amount of your CRA allowable medical expenses for that year, minus 3% of your net income, or $2,302 – whichever is the lesser of the two amounts.
- Use line 331 if you are claiming for other dependents, such as close family members, or older children you care for. Follow the same calculation as above, but remember to calculate the 3% on your dependent’s net income and not yours.
For example, let’s assume you spent $3,000 in eligible medical expenses in a year. Here are two scenarios to help you understand the calculation better.
- If your net income (the amount on line 236 of your return) was $40,000, deduct 3% of that amount (i.e. $1,200) from $3,000. Accordingly, the total credit on your CRA medical expenses claim will be $1,800.
- If your net income was $80,000, 3% of that will amount to $2,400. Hence, in this case, from your $3,000 spend, deduct $2,302, and claim $698 as METC on your tax returns.
While you do not need to send any supporting documents with your tax return, make sure you keep the relevant items handy, in case the CRA asks to review them later. These include:
- Receipts: save the receipts of all CRA deductible medical expenses that you claim under METC. The receipts must clearly show the name of the individual or company to whom you made the payment.
- Prescriptions: if you are claiming the cost of prescription drugs mentioned in the CRA medical expense guide, ensure that you have the relevant prescription copies available with you. If you are missing a copy, an authorized medical practitioner can re-issue one, on request.
- Certification in writing: certain items in the CRA medical expense guide require a certification in writing. You can ask your primary healthcare provider, or an authorized medical practitioner to provide one, if needed.
- Form 2201 Disability Tax Credit Certification: for expenses related to nursing home care, or personalized therapy, you may need the CRA to approve Form 2201, Disability Tax Credit Certificate. You can find detailed information about this requirement here.
If you are a small business owner, you can use either METC on your personal tax returns, or a Health Spending Account (HSA), while filing your business taxes. A competing alternative to METC, HSA shares the same objective; help in reducing your personal medical expenses. Basically, HSA turns your after-tax personal medical costs into before-tax business deductibles, which means, you can eliminate 100% of the taxes on your medical expenses. Learn more about HSA, and check whether your business qualifies for its benefits.
CRA allowable medical expenses that you can claim
While the complete list of CRA allowable medical expenses is quite extensive, here are some of the common medical expenses that most Canadians 55+ will qualify for.
- Medical treatment: claim treatments that are part of the eligible medical expenses list by CRA, but not covered by your provincial insurance plans. As long as you were treated by an authorized medical practitioner, in a public or licensed private hospital, it doesn’t matter if you received the treatment in Canada, or abroad.
- Care facilities: If you, your spouse or dependent are in a nursing home, or any other institution that provides full-time care, you can claim all the fees, including food and accommodation. However, if you are receiving in-home care, or staying in a retirement home, you can only claim the salaries or wages of the attendant care services.
- Hearing and vision assistance: most of the hearing and visual aids are part of the CRA allowable medical expenses. Claim the expenses that you have incurred on hearing aids (including batteries and repairs), audible signal devices, as well as captioning equipment. Similarly, claim all the expenses related to vision issues, including eyeglasses, laser eye surgery, contact lenses and reading services.
- Medical and non-medical equipment: include your expenses for all qualifying medical equipment (including repairs). This includes heart monitoring devices, kidney machines, catheters, phototherapy equipment, and more. You can also claim CRA medical expenses for non-medical items, such as assisted breathing devices, electrotherapy devices, air purifiers, air conditioners, lifts or transportation equipment, and several others.
- Mobility aids: scooters, wheelchairs and wheelchair carriers are all CRA-allowable medical expenses, as are walking aids. You can also claim up to 20% of the cost of a van to transport wheelchair users (maximum $5,000).
- Drugs: prescription drugs and vaccines are eligible. However, you cannot claim for over-the-counter drugs or most vitamin supplements.
- Medical expenses for travel: the CRA allows you to claim transit expenses (taxi, bus, or train) if you travel over 40 kilometres for medical treatment. If you travelled over 80 kilometres, you can also claim the accommodation, meals and your own vehicle expenses, including parking charges.
- Renovations and household mobility aids: several mobility-related aids such as bathroom rail or stair chairs are eligible. You may even be able to claim costs for structural renovations made to accommodate wheelchairs.
Keep a check on your medical expenses as you age
While healthcare costs will continue to rise, during your retirement years, you want to take all the necessary steps to keep your medical bills in check. This includes:
- Preventive healthcare: it’s important to follow good eating habits, work out regularly, take care of your overall health, and maintain your schedule of annual checkups, immunity shots and vaccines.
- Get ahead of chronic conditions: if you have diabetes, arthritis, or other chronic conditions that may worsen over time, speak to your health care providers for proactive steps to manage the ailment. This may go a long way in preventing sudden, or huge medical expenses later.
- Think of long-term financial assistance: consider insurance policies or funds that cover unexpected medical costs, as these are more likely to occur as you age. Look at financial products for disability insurance, critical illness cover, as well as long-term care insurance.
If your budget does not permit buying an insurance policy or investing in a fixed or variable annuity, check if you qualify for some of the government provided income assistance programs and benefits. If you don’t qualify, or need more cash you should consider one of the several borrowing options available to you, including:
- Personal loans: ideal for covering a one-time expense, such as a specific medical procedure that is not covered by your provincial insurance program (for example, laser eye surgeries or dental surgeries). Borrow lump sum funds and repay in monthly installments at market-led interest rates.
- Life insurance policy related conversions: convert your existing life insurance policy into a long-term care benefit plan or collect a lump sum by cashing in your policy. Keep in mind that in both cases, your beneficiaries will not get the full value of your policy on your death.
- Home equity line of credit (HELOC): As long as you have 20% equity in your home and a good credit score, you may be eligible for a low-interest line of credit secured against the value of your home, with repayments beginning as soon as you borrow the funds.
- Reverse mortgage: if you are 55 years or older and own your home, you can access some of the value of your home in tax-free cash. There are no monthly payments required and you only have to pay back the amount when you decide to move or sell, or after you pass away.
Learn more about dealing with expenses in retirement:
- One Tax Credit You May Not Know About That Could Save You Thousands
- What to Use Reverse Mortgage Funds For
- How Much Money do you Need to Retire?
Reverse mortgage will cover you between the CRA medical expenses claims
Although you may be able to make the most of your CRA allowable medical expenses by claiming credits for them through your Income Tax returns, that is an annual process. You may still need funds at your disposal to pay for ongoing expenses throughout the year. Not to mention, we all know that there are always those unfortunate unexpected medical expenses that can arise over time and eat into your limited, post-retirement, healthcare budget.
While you have several financial assistance options, such as insurance policies, loans, and lines of credit, there are certain downsides. The good news is, there’s a better option! If you own a property and are 55+, you can cash in on some of your home’s equity in the form of tax-free cash. The CHIP Reverse Mortgage® allows you to remain self-reliant and financially stress-free about you or your loved one’s ongoing healthcare needs. Tailored to the needs of aging individuals, reverse mortgages offer many advantages:
- As long as you are above 55 years of age, there is no minimum income or credit score requirement
- You can get up to 55% of your home equity in a lump sum or as part disbursal, with the balance amount paid over time, or as and when needed
- Your repayments do not start immediately after borrowing. You have the flexibility to repay and only have to repay when you decide to sell
- During the tenure of the mortgage, you continue to retain the ownership of your home
- If you move out or sell the home, you can use the sale proceeds for repayment
- The borrowed amount is tax-free and does not affect your eligibility for Old Age Security (OAS) or Guaranteed Income Supplement (GIS)
To see the other benefits and see why CHIP is the perfect solution for Canadian homeowners, click here.
A reverse mortgage is a great way to use your home’s equity for covering routine healthcare costs, or to retrofit your home for your aging needs.
Want to know how a CHIP Reverse Mortgage can help you meet your ongoing medical expenses? Call us at 1-866-522-2447 or use our reverse mortgage calculator to get a free estimate of how much tax-free cash is available to you. Still not sure? Check out which reverse mortgage product suits your need.