Federal Government Announces that Employees will not be Taxed on Employer-Provided Health and Dental Benefits

February 6, 2017

Last week, Prime Minister Trudeau announced that the upcoming budget will not include a provision to tax employees on their employer-provided health and dental benefits. The question remains, however, whether the rumoured tax is really off the table for good or whether it is still in consideration as part of an ongoing review of tax and healthcare policy.

The current federal government never actually publically proposed the idea. Early last December a National Post reporter broke the story that, as part of a review of over 150 tax credits, the federal government was considering eliminating the current tax exemption for employer-provided health and dental benefits.

Currently, health and dental benefits paid by employers are not taxable benefits to their employees, allowing employers to provide more competitive compensation relative to its actual cost. In contrast, those who do not receive supplementary health coverage through their employers must use after-tax dollars to purchase the same benefits.

That difference in cost of coverage is one reason why many believed the government was considering eliminating the tax exemption. Minister of Finance Bill Morneau has said that some of the goals of his Ministry are to “make the tax code simpler,” to “ensure that there’s tax fairness,” and to eliminate tax credits that unevenly benefit high-income Canadians. Between September and December last year, officials at Finance Canada have been working with a panel of seven outside experts on a full analysis of current tax credits, including who benefits from them and their overall efficacy. Finance Canada has said that it will not release the final report until the federal budget, which is usually in late February or March.

In addition, the Naylor Report, commissioned by the Standing Committee of Health, has recommended that tax reforms be used to raise funds for necessary healthcare innovation, such as a possible national pharmacare system.

As a bit of history, the federal government released a budget with a $29.4 billion deficit for the 2016-2017 fiscal year but promised to find $3 billion by eliminating inefficient tax credits. For reference, the government takes in about $2.9 billion less annually than it otherwise could if it taxed all health and dental benefits.

There are a number of implications to eliminating the tax exemption:

1. This would likely reduce the number of employers providing benefits, or reduce the amount of benefits provided. According to two studies, when Quebec lowered the tax deduction on these benefits in 1993, the number of group plans provided by employers dropped by 20%.
2. The lack of coverage would disproportionately affect lower-income workers, as they would be less able to afford the cost of health and dental benefits out-of-pocket.
3. It would cause a shift in the insurance industry, as individuals would not be able to rely on the group “buying power” or leverage of their union or employer to negotiate lower rates with insurance companies.
4. Those with pre-existing conditions or who are older would have a much harder time finding equivalent coverage.
5. Many young and healthy individuals would likely forego buying insurance. The studies examining the Quebec tax concluded found that 85% of those who lost employer-provided health coverage did not purchase individual coverage.

For now, after a long period of silence on the issue, the government has committed itself to leaving the tax exemption alone in the upcoming budget in the face of widespread opposition to the move.

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