Taxation of health benefits unpopular with experts

Implementation could have had ‘very disruptive effect’: Lawyer
By Marcel Vander Wier
|Canadian HR Reporter|Last Updated: 02/21/2017

Late last year, as part of a comprehensive review of the tax system, the federal government said it was considering taxing private health and dental plans across Canada. But the proposition had lawyers and industry experts waving caution flags.

The move would have had “significant ramifications” for workers, said Sheryl Smolkin, a Toronto-based lawyer and journalist.

“It’s a bad idea,” she said. “(Benefit plans) are a way that employers can provide additional compensation to employees on a tax-effective basis… Once they become a taxable benefit, it’s not as valuable in the employees’ hands. If employers say they’d be less inclined to make benefit plans available, at the end of the day, they could end up with sicker employees and they would lose a valuable compensation tool.”

Implementing such a tax would have raised $2.9 billion in additional revenue for the government, according to the National Post. Currently, 13.5 million Canadians have lower tax bills due to health and dental benefit packages.

However, on Feb. 1, Prime Minister Justin Trudeau said the tax would not go ahead.

Trouble on the horizon

The urge to even the playing field is understandable, said Dale Barrett, principal of Barrett Tax Law in Vaughan, Ont.

“On one hand, anything that you give to an employee in lieu of money is taxable,” he said.

“Taxing employee benefits does keep things even in terms of making sure that people pay tax on what they receive. If you start talking about not taxing employee benefits in general, there’s going to be all kinds of abuse. Certainly employee benefits have to be taxed, or else employers stop paying their employees cash and give them benefits instead.”

But, if taxed, employees may have been more apt to decline benefits in lieu of monetary compensation — an action that could lead to bigger problems. People on the lower-income levels may be more inclined to ask for cash, said Barrett.

“And that may have a very disruptive effect in terms of getting their kids’ teeth done, getting medication, that sort of thing… And they’re the ones who can probably least afford to make that decision.”

If benefits were taxed, employers would have also seen extra charges in terms of employment insurance and Canada Pension Plan fees, said Barrett.

“It’s probably a poor policy decision to start taxing these benefits,” he said. “Is the couple billion dollars they’re going to generate going to be worth all the difficulties, and all the people who may end up not getting benefits as a result?”

“That’s a terrible position to put people in, because you’re going to get people who are making the decision for the wrong reasons and foregoing their health.”

The number of Canadians who are covered by employer plans has steadily grown for the last 30 years, according to Stephen Frank, senior vice-president of policy at the Canadian Life and Health Insurance Association in Toronto.

“In 1990, only about 50 per cent of people had employer coverage, and today we’re up to 75 per cent. The vast majority of people have very high-quality health coverage at work.”

A loss of group coverage and a shift to individual packages is typically accompanied by a decline in the quality of coverage and a rise in price, he said.

“It will almost certainly result in fewer people having coverage than we do today. That just feels like the wrong way to be going, so we have to be very cautious and we would certainly urge them not to move in this direction,” said Frank.

“There’s no way to replicate what you lose in an employer benefit by shifting everyone to the individual side. We don’t see it as closing any gaps or addressing fairness. We see it as a really significant impact for the majority of people, if this were to happen.”

Access to health care

The move would have impacted a significant portion of the population, said Ondina Love, CEO of the Canadian Dental Hygienists Association, one of 12 private health organizations behind the website, which urged citizens to share concerns with their political representatives. As of Feb. 2, 80,000 Canadians had accessed the site to send an e-letter to their MP as well as the finance minister — a total of 160,000 emails.

“The associations are most concerned with access to care for Canadians,” she said.

“People may question if that’s self-serving, but it’s really not. Without health and dental benefit coverage through employers, people would not access these kinds of preventative services like mental health or dental hygiene or dental services. That is a concern. Taxing these issues is going to really hurt the middle and lower classes the most.”

When available to employees, benefit packages grant funding to preventive care not covered under publicly funded provincial health services — such as prescription drugs, vision care, mental health services, dental care, and more.

So, any taxation could also see the public health system experience strain as a result, said Love. For example, a worker who declines benefits and then doesn’t seek out preventative care for her teeth could end up in a hospital emergency room with an oral issue.

“How many people, because they don’t have access to health and dental benefits, are going to end up in the publicly funded health-care system, costing that system more money which the federal government and provincial government pay for? They really have to assess the total impact of that cost.”

“Your employer pays for the premiums because they want you to be a healthy employee,” she said. “They want you to stay well.”

Additionally, lesser benefits would expose workers to the risk of financial catastrophe in the event they faced a medical emergency, all while workers reduce their amount of time at the dentist or forego prescription drugs as a cost-saving measure, said Frank.

And if younger workers choose to decline benefit plans en masse, that could have created a “very unfortunate dynamic,” he said.

“The older people — or people who are sick and really rely on their plans — end up having more expensive coverage in the end, and the whole sustainability starts to be impacted… This creates some of that tension and that’s one of the things we would really worry about. Employers would be under pressure to make changes because of that.”

While health and dental plans are the most common benefit for working Canadians, their taxation wouldn’t have had much effect on the payroll department, said Patrick Culhane, president of the Canadian Payroll Association.

“If they taxed it similar to some of the other more common taxable benefits like insurance, it would show up as a benefit on your T4, and that’s how it would be taxed,” he said.


Lessons from Quebec

Quebec introduced taxation on private health and dental benefits 20 years ago, with one in five employers immediately ceasing to offer the packages due to cost. That should serve as a stark warning to policymakers, said Dale Barrett, principal of Barrett Tax Law in Vaughan, Ont.

“It’s pretty clear, if you look at the before and after there, that there are a lot of people now who can’t get certain treatments or can’t get their meds paid for,” he said. “The federal government should probably do a study to see ‘Has this affected the health of Quebecers?’”

Additionally, more than half of small employers ceased offering benefits packages after the province levied its tax, said Stephen Frank, senior vice-president of policy at the Canadian Life and Health Insurance Association in Toronto.

“That experience gives us a lot of pause,” he said. “We would anticipate a similar reaction if they were to do it on a national level. It feels to us that it’s a really poor policy.”

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