One of the perks of being an employee is the ability to participate in your employer’s group health and dental insurance plan. It’s a particularly attractive employment benefit because, under our tax rules, employees are neither taxed on the value of benefits they receive from the plan nor are they taxed on their employer’s tax-deductible contributions to the plan.
But a new report out last week by the Parliamentary Budget Officer (PBO) estimated that if the government were to treat employer-paid health plans as a taxable employment benefit, it would increase federal personal income tax revenues by $2.8 billion.
While the PBO report was prepared in response to a request by two unnamed members of Parliament who wish to remain anonymous, the issue can be traced back to the 2016 federal budget when the government announced that it would undertake a “comprehensive review of federal tax expenditures” to ensure that “federal tax expenditures are fair for Canadians, efficient and fiscally responsible.”
In early 2017, in pre-budget speculation, several news reports indicated that the federal government was considering taxing employer contributions to private health services plans and/or employee benefits received from these plans. Ultimately, this measure did not make it into either the 2017 nor 2018 federal budgets and, to date, the government has not indicated definitively whether such a change is still under consideration.
The PBO report found that, not surprisingly, the majority of the new tax burden would be borne by high-income individuals, since they are the people most likely to work in jobs that provide such benefits and they are the taxpayers facing the highest marginal tax rates. While lower income workers (or retirees) receiving such employer-provided benefits would also face a higher tax burden, it would be offset to some extent by the medical expense tax credit.
Specifically, families with earnings in the top decile (those with family income over $164,058) would absorb 26.4 per cent of the $2.8B increase in net federal income tax payable. The 50 per cent of Canadian families with family income below $53,639 would pay a combined 16 per cent of the total increase.
The non-taxability of group health benefits is an exception to the general principle that most employer-paid benefits, such as the personal use of a company car or an employer-paid gym membership, must be included in an employee’s income. Indeed, the wording in the Income Tax Act is very broad and states that an employee is required to include in his or her income from employment “the value of benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment.” This expansive wording catches nearly all benefits, including most non-cash benefits received by an employee, but there is a specific exception when it comes to group health plan benefits.
But because our tax system is so complex, the decision to tax employer-paid contributions to health plans would have repercussive effects that ripple through our tax and transfer payment system. It would affect Canada Pension Plan contributions, the Canada Child Benefit, Old Age Security benefits and the Guaranteed Income Supplement.
For example, the report found that if employer contributions were taxed, CPP contributions would increase by $532 million since taxable benefits (whether cash or non-cash) are generally considered pensionable earnings, and thus subject to CPP contributions. But, since CPP contributions are capped at maximum annual pensionable earnings of $55,900, only employees earning under this amount would be affected by including health benefits in their taxable income.
Take Sarah, an employee who earns $45,000 annually, who benefits from an extended health care plan paid for entirely by her employer. The cost of that plan to her employer is $1,400. At the current CPP contribution rate of 4.95 per cent, this would increase her annual CPP contributions by $70. (Sarah’s Employment Insurance premiums would remain the same since non-cash benefits are not insurable.)
If Sarah has kids, including the value of her employer’s health plan contributions in her employment income would increase her “net income” on line 236 of her T1 return. Net income is important as it’s used to determine eligibility for various government benefits, such as the amount of tax-free Canada Child Benefit (CCB) payments that Sarah would receive in the following year. If her income goes up, the CCB payments she will receive in the following year would most likely be reduced. The report estimates that the federal government would realize a $317-million decline in CCB payments the year after any decision to tax employer-paid health plan benefits.
By the same token, benefits for the elderly would also decrease since both OAS and GIS are income-tested. OAS payments would be reduced by $47 million and GIS by $27 million.
The report was met with criticism by the Canadian Life and Health Insurance Association (CLHIA) which claims that taxing health benefits would “raise health care costs for low and middle-income earners dramatically and put their highly valued benefits plans at risk.” The organization says that the report is based on assumptions that “do not reflect the true picture of health benefits in Canada today.”
According to the CLHIA, there are more than 13 million Canadian workers covered by employer-sponsored plans and, together with their families, this means that over 25 million Canadians depend on these plans to help them pay for their prescription drugs, dental and eye care, physiotherapy and more.
“The PBO assumptions do not take into account the past experience in Canada that many employers would drop coverage and millions of Canadians would lose access to the benefits they depend on,” said Stephen Frank, CLHIA’s President and CEO.
Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Financial Planning & Advice in Toronto.