One of the most important aspects of a job offer is the benefits package, and for good reason. Health care is expensive. A report by the Fraser Institute notes an average Canadian two-parent family with two children have annual medical expenses in excess of $11,000; and when you also consider Albertans pay up to 30 per cent more for dental care than residents in other Canadian provinces, it all adds up to sticker shock.
So why aren’t Albertans speaking out about these high costs? It’s because we simply don’t see them. Thanks to taxes and employer-sponsored health and dental benefits, Albertans’ out-of-pocket costs for health care are negligible. That means most Albertans flock the dentist for checkups and cleanings, book appointments with doctors and don’t think twice about handing over a $10 co-pay on a $90 round of medication.
Now, for a moment, imagine a province in which employer-sponsored benefits ceased to exist or were drastically reduced. Thanks to report from a Government of Canada (Health Canada) advisory panel, we know this could have been a reality.
The panel released Unleashing Innovation: Excellent Healthcare for Canada, a report that took a long, hard look at the federal government’s role within the existing Canada Health Act. One of the suggested initiatives was to shift employer‐paid premiums for health and dental benefits from its current model to a taxable benefit to the employee while permitting employees to claim those medical expenses under the new refundable health tax credit (RHTC) or medical expense tax credit.
Record scratch. What?
The Johnston Group, who, in rebuttal, produced the Report on the Importance of the Tax Exemption for Employer Health Benefits in Canada noted:
“It is the opinion of some that the elimination of this exemption would lead to greater fairness. Their view is that a tax exemption that only applies to those that have an employer benefit plan is supported at the expense of those that do not. The perception is those that have private and individual benefit plans that pay tax on those plans are subsidizing those that receive the exemption. It is further assumed that those on their own plans are typically of a lower income bracket and the exemption favours high income Canadians.
“The push to eliminate the credit is based on the perception that lower income Canadians do not receive employer‐based benefits and are left to invest in private and personal plans. One proposal is to institute a re‐invented Medical Expense Tax Credit that will allow all Canadians to receive a tax benefit equally as long as they meet a certain income test.”
Johnston Group’s report went on to list detailed arguments opposing the elimination suggestion and in even better news, Justin Trudeau recently stated his government had no plans to start taxing employee health benefits. For now, Canadians can breathe easily knowing employer-sponsored plans (along with taxes) will still absorb the brunt of our upfront medical costs, but if this were to change in the future, the consequences would be far reaching.
“Most employees don’t realize that their health and dental premiums are tax exempt,” explains Ken Willoughby, regional marketing director for Chambers of Commerce Group Insurance Plan. “But anyone that has an employer-sponsored plan would be impacted if they brought the tax in.” Willoughby says that the average amount of additional tax would be approximately $1,200 per year per employee. “For most families that’s a lot of money.”
And the tax would apply to all employees in group plans including government, corporate and not-for-profit workers. “In this province, there’s approximately 30,000 to 40,000 government employees – they would all be affected,” Willoughby says.
Tony Stirling of Stirling Benefit Plans Inc. argues that if employee benefits became taxable, many companies would cancel them altogether. “Companies work on budgets, and goods and services are based on expenses,” he says. “If those expenses go up one of two things has to happen: either the cost of those goods has to go up to pay for that increase or the employer has to cut back on expenses.” He says one of the first things employers cut is the benefit program. “Because if they have the choice between keeping an employee or keeping the benefits, the benefits go (or get reduced) and they keep the employee.”
Even though benefit plans may be cut back or scrapped altogether, benefit costs must still be paid. “Many of these private plans cover off a lot of the health-care needs of working Canadians,” Willoughby says. “If you took this coverage away, the need is still there but it’s going to be downloaded onto the public health-care system.”
“Private insured health-care plans help relieve the burden on the medical system,” adds Stirling. “They cover anything not covered under the current program. So if I don’t have those type of benefits, I have to go back to the social system to get those needs covered, somehow or someway.”
The report’s proposed RHTC is an inadequate replacement, Willoughby says. “We have people that have tens of thousands of dollars of prescription costs a year. The cap of $3,000 per year wouldn’t come anywhere close to covering off the needs of some of these people that rely on coverage from these private plans.”
He thinks the advisory panel was originally trying to target the high-paid executives of large corporations who have generous benefit programs. “But the way that they were thinking of applying it would impact every single employee in Canada,” he says. “And I can pretty well guarantee that close to 99 per cent of employees in Canada aren’t executives with gold-plated salaries and benefit packages.”
Jack Mintz, the president’s fellow of the School of Public Policy at the University of Calgary, sat on the advisory panel on healthcare innovation and in fact wrote the chapter that contains the proposal to tax employee benefits. He says the RHTC would have been good for many low- and middle-income individuals. “It would be tremendous help because a lot of low-income people don’t have anything, and because they don’t pay taxes they can’t use any medical expense credit anyway,” he explains. “It was more than just taxing employer benefits. It was also using the money to provide more support for non-medicare expenses, especially for lower-income families.”
The taxation of employer benefits, he says, would be almost equivalent to the RHTC, making the change revenue-neutral. Stirling is skeptical. “They said ‘let’s tax employee benefits and put that tax income into a program that helps all Canadians.’ Well we all know how those work – it goes into general revenues and you never see it again.” The 65 per cent of employees in Canada who currently enjoy employer benefits will be worse off, he argues.
While Mintz accepts that taxing benefit plans might lead to their cancellation altogether, he makes another point. “You can argue that they are very popularly used because people can get tax-free income this way, rather than get wages and salaries. It’s a non-taxable source of income and still a deduction for the employer. So from a tax point of view, it’s a good deal.”
He agrees that group insurance plans are cheaper than individual ones. “But would it be the end of group insurance? I’m not sure.”
“Quebec did it provincially and the impact was quite significant,” Willoughby says. “About 20 per cent of the private plans were basically withdrawn or terminated whey they implemented that tax.”
For now, employer health benefits are free from the federal taxman’s grasp. In the future however, they may be easy targets for either level of government to tax. It’s an issue to keep an eye on.
 Report on the Importance of the Tax Exemption for Employer Health Benefits in Canada – Johnston Group