HSA vs. METC: How to Save Thousands on Medical Expenses

How Ontario Small Business Owners Can Save Thousands on Medical Expenses

Paying for medical expenses out-of-pocket can feel like a never-ending drain on your wallet. The good news? Canada’s tax system offers two ways to soften the blow: the Medical Expense Tax Credit (METC) and Health Spending Accounts (HSA).

Both can save you money — but one of them is a game-changer if you’re an incorporated business owner in Ontario. Let’s break it down.

What Is the Medical Expense Tax Credit (METC)?

The METC is a non-refundable tax credit you can claim on your personal tax return.

• Non-refundable means it can lower the tax you owe, but it won’t give you a refund beyond that.
  
• You can claim eligible expenses such as prescription drugs, dental care, certain medical devices, and professional health services.
  
• You can claim any 12-month period ending in the current tax year — but only once.
  
• The catch? You can only claim expenses that exceed the lesser of 3% of your net income or $2,759 (for 2024).
  
  

How the METC Works in Ontario

Here’s a real example for an Ontario resident:

Net Income: $100,000
Eligible Medical Expenses: $10,000
Ontario’s Lowest Marginal Tax Rate: 5.05% (federal lowest rate is 15%)

Step-by-step:

1. 3% of $100,000 = $3,000
   
2. Compare $3,000 with $2,759 → lower is $2,759
   
3. $10,000 − $2,759 = $7,241
   
4. Multiply $7,241 by the combined lowest federal + provincial tax rate (15% + 5.05% = 20.05%) → $1,450.42
   
   

Result: Your non-refundable credit is $1,450.42.

That’s something — but what if you could make the entire $10,000 tax-free?

What Is a Health Spending Account (HSA)?

A Health Spending Account is CRA-approved and allows incorporated business owners to turn 100% of their personal medical expenses into before-tax business expenses.

In other words: your company reimburses you for medical costs, the reimbursement is tax-free for you, and your company deducts it as an expense.

It’s like paying for braces, dental work, or physiotherapy with pre-tax dollars.

HSA Savings Example – Ontario

Let’s use the same $10,000 in medical expenses.

Marginal Tax Rate: 43% (typical for someone earning $100,000 in Ontario)
Admin Fee: 10% = $1,000

Applicable Taxes:

• HST (13%) on admin fee = $130
  
• RST (8%) on claims = $800
  
• PST (2%) on claims + admin fee = $220 (2% of $11,000)

Without an HSA:

• You’d need to earn $17,543 in gross income to have $10,000 left after tax to pay the bill.
  
• $7,543 of that is tax.

With an HSA:

• Your company pays:
  
  • $10,000 medical claim
  • $1,000 admin fee
  • $130 HST (on admin fee)
  • $800 RST (on claims)
  • $220 PST (on claims + admin fee)
• Total cost to the company: $12,150
• You pay $0 in personal tax on the reimbursement.
  
  

The Savings

$17,543 − $12,150 = $5,393 saved — a 30.7% reduction in cost.

METC vs. HSA – Which Wins?

Bottom line: METC helps, but HSA supercharges your tax savings if you’re incorporated.

Why Many Ontario Small Business Owners Choose an HSA

• Immediate Savings: Turn personal expenses into business deductions instantly.
  
• No Minimums: Claim every eligible dollar.
  
• Broad Coverage: Includes dental, vision, physio, massage, prescriptions, and more.
  
  

💡 Important: You can’t claim the same expense for both the METC and an HSA — you have to choose one.

Final Word

If you’re an incorporated business owner in Ontario, a Health Spending Account (HSA) can save you thousands more than the METC. It’s one of the most effective (and CRA-approved) strategies to reduce your tax bill while covering essential healthcare costs.