Crystal Ball 2004: Health & Welfare Trusts 2004 — CCRA’s Best Kept Secret

by Peter Merrick

Several years ago, just after I was married, my wife Stacey recommended that I visit her dentist, Dr Tzvi Rubinger located at the corner of Lawrence and Keele in Toronto. As I walked into his office I was immediately greeted by a quote that was posted throughout his office: “Goodbye conspicuous consumption. Hello cost per use.” It’s the rallying cry of the ’90s money mavens such as Suze Orman, a Certified Financial Planner, an Oprah regular and author of The Courage to Be Rich (Putnam). The formula is simple: When contemplating a purchase, take its full ticket price and divide by how many times you’ll use the item. The lower the final figure, the better.

Dr. Rubinger added as his addendum: “How many times will you smile today? This year? In a lifetime?”

Over the last few decades progressive dentists have been active agents in the revolution transforming the profession from being providers of ‘need dentistry’ to ‘want dentistry’. “When a patient comes to see me for their semi-annual visit and I recommend that work is needed to be done, they are not happy campers. To them this is similar to going to the mechanic for a tune up and finding out that you immediately need a new fan belt, muffler, and carburetor. It is much more gratifying having a patent visit me, wanting me to help them create a healthier smile and request cosmetic dentistry,” says Dr. Rubinger.

The main obstacle for dentists to provide ‘want dentistry” to their patients are the limits and types of services covered by traditional dental plans. Many of the restrictions placed on Patient Dental Plans usual create the barrier for the dentist to treat what their patients want or even need. Heightening this problem is many Canadian insurance companies have raised their premiums and placed further restrictions on what dental plans will cover. Dental plans are designed to address very restrictive preventive care such as 80 percent of regulator check-ups, cleanings and fillings. Plan members are usually only reimbursed on that basis. What if a client wants more than this?

Think outside the box! Use health & welfare trusts to fund and promote beautiful smiles.

In the past, individuals seeking dental orthodontic and cosmetic solutions found that they had to pay for the majority of these services out-of-pocket with their after-tax-dollars. The solution for executives/business owners and self-employed individuals is to create health & welfare trusts; these are sanctioned Revenue Canada (CCRA) tax avoidance structures. Here a business establishes a trust to pay for the trust member’s family dental and healthcare costs. All deposits in the trust are recognized by CCRA as set out in its Interpretation Bulletin IT-85R2, dated July 31, 1986. All qualified funds placed in the trust by a business are 100 percent tax deductible for the year in which they are contributed — even if the money is not spent that year and are a non-taxable benefit for the individual receiving these benefits.

Clients who establish health & welfare trust may find that CCRA will subsidize up to 46 percent of their ‘want dentistry’ costs. For many years David Chong Yen, a Chartered Accountant in Toronto, whose practice has been dedicated to serving the financial and tax planning needs of hundreds of dental professionals, strongly believes that health & welfare trusts are a wonderful tool that should be used by dentists who have established practices to reduce their own personal taxable income. He also recommends a cost/benefit analysis be done before implementation.

All traditional dental and healthcare costs, like dental, prescription drugs and vision care are eligible, but the health & welfare trust can cover the rest of an individual’s costs:

Cosmetic dental and medical treatment;

Dental care (preventative/restorative/orthodontic);

Insurance premiums paid by the executive/employee or the individual’s spouse for private health and dental plans;

Over the counter drugs, provided they are prescribed by a dentist or physician;

Drugs for conditions sometimes excluded under conventional plans;

Facilities and services — special school, alcohol/drug addiction, nursing home care, special school, institution for mental or physical handicap, licensed private hospital, semi-private or private charges in a hospital, care of a person who has been certified as mentally incompetent, care of a blind person, full-time attendants in a nursing home;

Laser eye surgery;

Professional services of a dietician, acupuncturist or psychologist, nutritionist;

Medical equipment and devices.

Earl Miller, senior tax partner at Goodman and Carr LLP, a law firm in Toronto has been involved setting up health & welfare trust for corporate clients since the mid 1980s. Miller has never seen one of these trusts challenged by CCRA on claimed expenses by sponsoring companies. Miller adds: “that claims on these plans should be reasonable.”

How good are health & welfare trusts anyway?

Dr. Rubinger relates a story about a patient who owned a successful business who came into his office and wanted to improve his smile. The total cost for all the work the client requested was approximately $5,400. Dr Rubinger recommended that the client consider having his company create a health & welfare trust for himself to avoid being burdened with using its after-tax dollars to create their enhanced smile.

Let’s consider the client’s two choices and financial outcomes. His client has a top marginal tax rate of 46 percent (see table). In Scenario 1, the client plans to pay for the entire procedure with their after tax dollars. In Scenario 2, the client has set up a health & welfare trust with their company and plans to pay for the entire procedure through the trust. In Scenario 1, the client will have to earn approximately $10,000 of personal income before taxes and $9,412 after he receives his Medical Non-refundable tax credit of $588 to pay for his dental procedures.

In Scenario 2, the client’s company, through his health & welfare trust, will only pay $5,940 ($5,400 Procedure Fee plus $540 administration fee of 10 percent). The tax savings this client will receive for setting-up a health & welfare trust is $4,060, enough to pay for a vacation to Florida.

The time has come that the ‘preventive want dentistry’ approach is widely accepted by clients, strongly promoted and widely available. Health & welfare trusts make it affordable for many Canadians to fund their long-term dental care in a cost-effective way.

The health & welfare trust is one solution that innovative dentists are promoting thus empowering their clients to fund the dental care they desire and need, by making a tax-deductible deposit one day into the trust, and withdrawing the money to pay for dental care — tax-free — the very next day.

Scenario 1 Scenario 2
Personal marginal tax rate 46% Yes Yes
Health & welfare trust No Yes
Pre-tax personal income for procedure $10,000 $0
Taxes paid to CCRA $4,600 $0
Corporate deduction & expense $0 $5,940
Cost for procedure $5,400 $5,400
Medical non-refundable tax credit $588 $0
Savings ($4,600) $4,600

Peter J. Merrick is president of Merrick Wealth Management Inc., a boutique firm specializing in tailoring health & welfare trust solutions and practice and individual executive benefit planning.