Taxation of employer health and dental plans

In recent months, there has been speculation that the federal government might be considering a major change in tax rules in the next federal budget that would make employer contributions to extended health and dental plans taxable to employees, similar to the current practice in the province of Quebec. Such a concept is not new and has been contemplated by the Department of Finance for about a decade; however, the attention on this subject has been highlighted due to greater media awareness and lobbying efforts within the insurance industry.

It may be assumed the main intent of introducing such a tax rule would be to generate additional tax revenue, which is estimated to be in the range of $3 billion; however, opponents have argued the tax would affect lower and middle income Canadians the most and potentially result in employers reducing or eliminating healthcare programs altogether. Another possible consequence could be greater employee awareness of the cost of health and dental benefits, resulting in higher overall claims (and premiums) due to behavioral changes of employees. Such behaviour would be comparable to disability plans where incidence and claims costs tend to be higher when employees pay premiums for those plans.

The taxation of employer-paid healthcare plans could also cause unintended cost shifting if it brings a greater number of uninsured workers to rely on provincial plans, at a time when provinces can ill afford it. And since the provincial plans do not provide extensive coverage of prescription drugs to those workers, this could increase public pressure on the federal government to fund a national drug plan.


Conclusion

On February 1st, Prime Minister Justin Trudeau ended all speculation by announcing his government would not change tax rules for employer paid extended health and dental care benefits. He stated during question period: “we are committed to protecting the middle class from increased taxes and that is why we will not be raising [those] taxes”. So ends the need, for the present, of lobby efforts fueled primarily by life and health insurers. While the Prime Minister’s announcement is related to this year’s federal budget, it remains uncertain whether such a tax change may be introduced in the future.


News & Views - February 2017 (PDF)