Principal Issues: What is the impact of when medical expenses are paid for the purposes of calculating the medical expense tax credit (« METC ») in subsection 118.2(1)?)
Position: If services are provided in the taxation year in which the expenses were incurred, fees paid to a dentist for dental services would be medical expenses under paragraph 118.2(2)(a). We are of the view that, for the purposes of calculating the METC in subsection 118.2(1), an individual’s medical expenses must be paid during the period chosen by the individual.
Reasons: For the purposes of 118.2(2)(a), an individual’s medical expenses must, among other things, be provided in the taxation year in which the expenses were incurred. In this subsection, we are of the view that the moment when the fees are paid is not a determining factor in establishing whether the fees are medical expenses for the purposes of the METC provided that they are paid. For the purposes of Element B of the formula in subsection 118.2(1), the medical expenses that are subject to the calculation of the METC for a particular year must be paid by the individual or the individual’s legal representative in any 12-month period ending in the year, for an individual who did not die in the year.
XXXXXXXXXX Anna Dagenais
Counsel, M. Fisc., B.A.A.
2015-058904
December 6, 2016
Dear Mr. XXXXXXXXXX,
Subject: Prepaid medical expenses
This is in response to your fax of May 26, 2015. You wish to know what impact the timing of payment of medical expenses has on the computation of the medical expense tax credit ("METC") in subsection 118.2(1).
You provided an example of medical expenses described in paragraph 118.2(2)(a). In this example, fees are paid on January 1, 2015 for a dental treatment plan under which the services would be rendered in 2015 and 2016.
Pursuant to subsection 118.2(2.1), medical expenses referred to in subsection 118.2(2) do not include amounts paid for medical or dental services provided purely for cosmetic purposes, unless necessary for medical or reconstructive purposes. We have assumed that the amounts paid for dental services are not excluded by subsection 118(2.1).
Furthermore, you refer in your request to the interpretation we gave on November 9, 2005, bearing our number 2005-013326. This opinion states in particular the following principle:
"In the situation where an individual enters into an agreement with a dentist to pay for dental care on a monthly basis, the amounts paid for these services will qualify as medical expenses provided that the monthly payments are made in the same 12-month period in which the services have been rendered."
All legislative references are references to the provisions of the Income Tax Act (the "Act").
Our comments
This technical interpretation provides general comments on the provisions of the Act and related legislation, where referenced. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
Subsection 118.2(1) provides, under certain conditions, that an individual may claim a METC for the medical expenses they have paid. The METC is computed using a formula set out in this paragraph. In addition, subsection 118.2(2) defines medical expenses for the METC.
Subsection 118.2(2)(a)
In summary, under paragraph 118.2(2)(a), for the purposes of subsection 118.2(1), an individual's medical expenses include expenses paid to a dentist which are for dental services provided to the individual in the taxation year in which the expenses were incurred.
We are of the view that, to qualify as a medical expense in paragraph 118.2(2)(a), the medical expenses of [sic, related medical services to?] an individual must be provided in the taxation year in which the expenses were incurred.
A court (footnote 1) has stated that, according to the consistent jurisprudence of the Federal Court of Appeal, an expense is "incurred" within the meaning of paragraph 18(1)(a) only where there is an obligation to pay a sum of money. We are of the view that this conclusion could apply for the purposes of paragraph 118.2(2)(a). Since expenses cannot be considered to be incurred by an individual if the individual is not obligated to pay a sum of money, we are of the view that a fee paid is not necessarily an expense incurred. This could mean that it is to be regarded as a prepaid fee. With respect to an amount paid for medical expenses, it must therefore be determined whether it is an expense incurred or a prepaid amount.
The question of whether the fees paid were incurred is a mixed question of law and fact which must be resolved in the light of all the relevant facts. In particular, the terms of the contract between the dentist and the individual and the applicable private law must be taken into account.
If the services were provided during the taxation year in which the expenses were incurred, the fees paid to the dentist for dental services would be medical expenses under paragraph 118.2(2)(a). We are of the view that, under this paragraph, the time at which expenses are paid is not a determining factor in determining whether the expenses are medical expenses for the purposes of the METC, provided that they are in fact paid. For example, if it is established that that the services are provided and the expenses are incurred in 2016, the expenses paid to a dentist for dental services would be medical expenses under paragraph 118.2(2)(a) as long as the expenses were paid at some time. The time of payment may be before or after 2016.
Subsection 118.2(1)
The METC that an individual may claim for medical expenses paid by the individual is computed in accordance with the formula in subsection 118.2(1).
Briefly, according to element B of the formula in subsection 118.2(1), medical expenses that are the subject of the METC computation for a particular year must in particular have been paid (footnote 2) within any period of 12 months that ends in the taxation year in the case of an individual who did not die in the year.
For the purposes of computing the METC, we are of the view that an individual may choose any 12-month period ending in the year. In addition, we are of the view that for the purposes of this computation, an individual's medical expenses must have been paid (footnote 3) during the period so chosen. Thus, for the purposes of computing the METC, it is necessary to determine whether the expenses paid to a dentist, which are otherwise medical expenses under paragraph 118.2(2)(a), were paid during the period chosen by the taxpayer.
For example, where an individual chooses the period from January 1 to December 31, 2016 as the period of 12-months that ends in the year, the expenses that are the subject of the METC computation must have been paid (footnote 4) during the same period. For example, if a dental service is rendered on January 15, 2016 and the expenses are incurred at that time, the fees paid for that service would be medical expenses under paragraph 118.2(2)(a). If these fees were paid on December 31, 2015, they would not be eligible for the METC computation for the 2016 taxation year as they would not have been paid during the selected period. However, these fees paid on December 31, 2015 could be included in the computation of the METC for a selected period that included December 31, 2015. If this were the case, we are of the view that the individual could if so desired file an application to amend his or her 2015 income tax return to include those expenses in the computation of the METC for the selected period that included December 31, 2015. Such a request should be made in accordance with the rules applicable to requests for adjustments by reassessment to a personal income tax return.
In addition, the fact that an individual is paying for medical expenses as a result of obtaining funding from a third party will not preclude an METC claim for those medical expenses, within the meaning of paragraph 118.2( 2)(a), if all of the conditions set out in subsection 118.2(1) are met. In particular, those medical expenses must have been paid. (Footnote 5)
Furthermore, an individual who applies for an METC must ensure that the requirements of subsections 118.2(2) and 118.2(1) are met.
Finally, the position set out in Interpretation 2005-013326 regarding prepaid expenses may be confusing. Therefore, we consider that it does not represent the view of the Canada Revenue Agency.
We trust that our comments will be of assistance.
Michel Lambert, CPA, CA, M. Fisc.
Manager
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and
Regulatory Affairs Branch
FOOTNOTES
Due to the requirements of our systems, the footnotes contained in the original document are reproduced below:
1 Fédération des Caisses Populaires Desjardins de Montréal v. Canada, 2001 FCA 27
2 The expenses must be paid by the individual or their "legal representative" within the meaning of subsection 248(1). The question of whether the costs were paid by one of these persons depends on the agreements and the applicable private law. We cannot resolve this issue in a request for technical interpretation.
3 Id.
4 Id.
5 Id.