Travel Insurance Tax Tips*

It is not widely known that travel insurance is tax deductible. And although the individual allowance is quite small, some interesting strategies are emerging for taking full tax advantage.

Ten years ago, when travel insurance was relatively inexpensive, the tax treatment of travel insurance premium was not a consideration in financial planning.

Now, with premiums for long range plans measured in thousands, not hundreds of dollars tax treatment should form part of your buying decision.

In most respects, travel health insurance and domestic health and dental insurance are treated similarly by Revenue Canada. Which is to say it constitutes a 'pre-paid medical expense'

The key differences are in the area of non-medical benefits provided by travel insurers such as trip cancellation or baggage insurance.

Additionally, these non medical benefits may trigger provincial sales taxes.

As a result many insurers separate these benefits (and premiums) to simplify tax reporting. As a Snowbird, it makes sense to do the same i.e. purchase travel health insurance separately from trip cancellation coverage.

(Most industry experts agree that 'stand alone' baggage insurance is NOT a good investment)

The simplest tax benefit is available to all individual Canadian taxpayers.

If  medical expenses for the year exceed a base threshold amount, then the expenses are deductible at the lowest marginal tax rate 17%.

For the purposes of illustration and to keep the math simple, we use 17%. In fact it's very slightly less than that because the threshold has to be satisfied before the deductions kick in.

This means that the after tax cost of $1000 of insurance premium is $ 830. It's not a huge amount of money to save, but it offsets the cost of having a tax professional prepare your returns.

One other thing that tax impacts is how to evaluate the cost of coverage, and acceptable risk when considering deductibles.

An example:

5 months coverage $0 deductible = $1000 (net $830)

5 months coverage $500 deductible = $800 (net $664)

Net Savings = $166

In the event of a claim, the deductible would generate medical expenses. In other words the $500 nets out after tax to $415.

So the evaluation is: Is it worth it to me to have a guaranteed savings of $166 vs. the possibility of being out of pocket $415 ?

Everyone has different risk tolerances, so that's answered on an individual basis and in our example the deductible is quite small so the tax impact is small. But for large deductibles the after tax cost can't be ignored.

If you have a close relationship with a corporation or are self employed.

Then you have more flexibility when it comes to tax planning.

The simplest strategy is to accept travel health insurance as part of your payment/benefits package.

To the corporation or sole proprietor, the cost is fully deductible. However, receiving this benefit can trigger personal income tax for the individual Snowbird (get professional help if you are going to do this)

Health Spending Accounts

One interesting strategy which is gaining popularity is group benefits program called a 'health care spending account'. They need to be set up properly to abide by the proper regulations, but the basic principal is as follows:

A discretionary amount is set aside in trust at the beginning of the employment year.

This amount can be used by the employee throughout the year to pay for elective medical supplies and services (the definition of health services is extremely broad)

The virtue of this approach is that the employer still gains the full deduction, but because the discretionary amount set aside is taken "from the top" of the individual's employment income.

...the elective health services are paid using pre tax dollars! A substantial savings

To be fair, setting up one of these programs is not all that simple and you will need an insurance agent or broker with group benefits experience to help.

But it does make sense if your travel insurance premiums are high and/or if there are some elective procedures you have been considering.

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*The need for professional advice

This article was written based on the best available information, and provided for general information purposes only. It is no substitute for professional advice.

You should consult a financial planner, a tax specialist, or a group benefits expert before deciding on your personal tax/travel insurance strategy.

As you know, many of these professionals can easily be contacted through Snowbird.Net

Resources:

Revenue Canada,  Insurance Brokers,  Financial planners,  Accountants