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Should I make a Cost Plus benefit claim for son’s orthodontist expenses?

Wednesday June 15, 2022

I am a business owner and I’m considering making a Cost Plus benefit claim for my teenage son’s orthodontist expenses of $242.00/month (approx. $7000 in total). Does this make sense from a tax perspective?

A Cost Plus benefit claim is a claim made by a company to an insurer for eligible medical or dental expenses not covered—or exceeding the coverages provided—by their group benefit plan. A Cost Plus arrangement is often set up with an insurer on a fee-per-claim basis, with the insurer normally charging an administrative fee between 10% – 15% of the claim amount, in addition to a premium equal to 100% of the claim. Depending on the insurer, the administration fee usually has a set minimum (typically $25-$50) and maximum (typically $150-$500) per claim. A premium tax (sometimes included in the administration fee) is also charged, and provincial sales tax is also applied to the claim and administrative fee in Ontario and Quebec.

As a business owner, Cost Plus claims can provide a tax-friendly method of covering dental and medical costs for yourself and your family members. A Cost-Plus claim qualifies as a ‘Private Health Services Plan’ and, as such, any premiums and fees paid by your company to the insurance company are considered 100% tax deductible business expenses. And the reimbursement received from the insurance company is considered a non-taxable benefit to the claimant.

Let’s look at how using a Cost Plus benefit claim to cover your son’s orthodontal expenses compares to spending your after tax dollars:

No claim:  You pay the $7,000 out of your own pocket and receive a tax credit of 20.05% for your total medical expenses minus the lesser of $2,421 or 3% of your net income. If your net income is greater than $80,700, then only expenses over $2421 qualify. Note that you can only accumulate and claim medical expenses for any 12-month period ending in a given tax year, so it is better to pay the total orthodontal expense within the 12-month period vs spreading it out over monthly payments. Otherwise you might be subject to the $2421 threshold three times.

Assuming your family has other medical and dental expenses that will take you over the $2421 threshold, and you pay all the orthodontal expenses within the qualifying period, your personal tax relief is $1,403.50 (20.05% of $7,000). The challenge is you likely paid personal income taxes of approximately 33% in order to net the $7,000 paid to the orthodontist. So, your company paid you a salary of $10,448 which netted you $7,000 to pay the orthodontist, for which you will get tax relief of $1,403.50. You are out of pocket $5,596.50.

Claim: You file a Cost Plus claim with your insurance company for the $7,000 orthodontal expense. Let’s assume they charge you a 10% administration fee (to a maximum of $250), a Premium Tax of 2% (in Ontario), and Ontario retail sales tax at 8%. They bill your company $7986.60 and you receive the $7,000 back personally from the insurance company as the claimant:

Total dental claim                                                                     $7,000.00

10% of claim (max of $250):                           $250
Applicable premium tax (2% of $7250)        $145

Provincial Sales Tax on total                                                   $    591.60
Amount payable to insurance company:                              $7,986.60

Under the Cost Plus claim scenario, you are reimbursed for the full amount of the orthodontic expense as a tax-free benefit and require only $7,986.60 of corporate money. This corporate expense is less than the $10,448 amount above and you were 100% reimbursed.

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