Feds reviewing METC eligibility

Clarification on over-the-counter drugs might put Quebec PHSP sponsors in impossible position

The federal Department of Finance has released draft legislative proposals to provide clarification on which over-the-counter (OTC) medications will be eligible for the Medical Expense Tax Credit (METC), but some worry the new criteria will only breed further confusion and problems.

“In a way there is a problem that has emerged because of the change, but it’s a problem not in the rules themselves, but how the rules are applied by the Canadian Revenue Agency (CRA). It’s right now a question of how you fix it,” said Karen DeBortoli, director of the Canadian Research and Innovation Centre at Watson Wyatt Canada in Toronto.

The issue first came to light after the release of the 2008 federal budget when the wording of the Income Tax Act was changed so OTCs were no longer eligible for the credit, with the exception of oxygen, insulin and vitamin B12 for pernicious anemia.

The clarification was released on July 17 with a three-part test. Over-the-counter medication will only qualify if:

• it is manufactured, sold or represented for use in the diagnoses, treatment or prevention of a disease, disorder or abnormal physical state, or its symptoms, or in restoring, correcting or modifying an organic function;

• it is prescribed for a patient by a medical practitioner; and

• it may, in the province in which it is acquired, be lawfully acquired for use by the patient only with the intervention of a medical practitioner.

The main conflict in implementing the system is the lack of consistency across Canada regarding which OTCs are available behind the counter and therefore require the intervention of a medical practitioner to obtain, said DeBortoli. The National Association of Pharmacy Regulatory Authorities’ manual, Canada’s National Drug Scheduling System, classifies drugs according to three schedules. (See table on page 21.)

But since drug classification is a provincial responsibility, not all provinces have adopted the manual and while the Department of Finance considered developing a schedule of OTCs eligible for the METC, it was not able to formulate one due to provincial differences.

The province of Quebec has its own issue due to its provincial drug plan published by the Régie de l’assurance maladie du Québec (RAMQ). The province states any private health-service plan must cover the same drugs as the provincial public plan.

This will pose a problem to sponsors as many Schedule III drugs are covered under Quebec’s public health plan, but would not be eligible for the METC under the new changes, said DeBortoli. A sponsor that fails to comply with the provincial plan could be found non-compliant with the province’s prescription drug insurance legislation. It is not known how RAMQ plans to address any infractions.

There are also significant consequences when a private health-service plan (PHSP) does not comply with the CRA policy. The plan could lose its PHSP status, which would make employer contributions taxable income to the employee, and employee contributions would lose eligibility for the METC. The CRA could also charge penalties for non-compliance.

“Employers in Quebec are looking at a position where they are going to run afoul of somebody,” said DeBortoli. “It’s either Quebec or it’s the feds.”

Quebec companies are not the only ones that could be adversely affected. Any employer within Canada that currently offers coverage for lifestyle medications as part of a competitive compensation package will also have to change the policy or offer the medications as a taxable employee benefit, said DeBortoli.

“By making this decision, (the Department of Finance) is actually restricting the employer in plan design if it chooses to offer OTC drugs as part of a greater wellness initiative.”

The Department of Finance is currently doing a consultation on the proposed changes. With the federal election on Oct. 14, it’s hard to know when a decision will be made, said a spokesperson for the department. If the proposed legislation moves forward, METC provisions will be effective retroactive to Feb. 27, 2008.

In the meantime, PHSP sponsors should look into the company health plans to see if any Schedule III drugs are covered and flag them, said DeBortoli. If the changes are approved, employers can choose to subsidize these drugs outside the PHSP as a taxable benefit, but should also consider how to communicate the issue to employees.

Melissa Hamelin is editor of Canadian Compensation & Benefits Reporter, a sister publication to Canadian HR Reporter. For more information, visit www.hrreporter.com/ccbr.



Drug Classifications

Canada’s national drug scheduling system

RequirementsMETC/PHSP eligible?
Schedule IAvailable only by prescription and provided by a pharmacistYes
Schedule IINo prescription required, but only available from a pharmacistYes
Schedule IIINo prescription required and available without the intervention of a pharmacistNo

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