2020-0869481E5 METC & Lump sums in lieu of coverage under a PHSP

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether a lump sum amount received by a retiree in lieu of the continuation of medical and dental coverage under a PHSP will reduce amounts eligible for the medical expense tax credit.

Position: No

Reasons: Paragraph 118.2(3)(b) does not apply to limit the retiree’s ability to claim a medical expense tax credit, namely because the lump sum amount is not considered an advance reimbursement of medical expenses (see the CRA’s change in position effective 2012). This provision applies for the purpose of subsection 118.2(1), that is, to medical expenses “that were paid by the individual […].”

Author: El-Kadi, Randa

Section: 6(3)(b); 118.2(3)(b)


                                                                                                                              Randa El-Kadi


November 19, 2020


Re:  Medical expenses and lump sum received in lieu of medical benefits


We are replying to your correspondence of October 25, 2020 and November 1, 2020 regarding the medical expense tax credit (METC). You indicate that your former employer has decided to offer a cash buy-out to its retirees to free itself of its obligation to finance its health and dental benefits program. You understand that the employer would withhold the necessary taxes on the cash lump-sum payment, and that retirees in receipt of the payment would have to disclose the latter as income on their income tax and benefit return.

You also indicate that a third party has advised the employer that retirees who accept the offer would be prohibited from claiming a METC until their cumulative medical expenses exceed the total amount of their cash settlement. You are asking us whether this understanding is accurate.

Our comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (the Act) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R10, Advance Income Tax Rulings and Technical Interpretations.

The Canada Revenue Agency’s (CRA) general views regarding the METC can be found in the Income Tax Folio S1-F1-C1, Medical Expense Tax Credit (Folio), at canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-1-individuals/folio-1-health-medical/income-tax-folio-s1-f1-c1-medical-expense-tax-credit.

As indicated in paragraph 1.16 of the Folio, paragraph 118.2(3)(b) of the Act provides that an individual shall not include as an eligible medical expense, any expense to the extent that the individual or certain other persons are entitled to be reimbursed for the expense. There is an exception to this rule to the extent that the amount of the reimbursement is required to be included in computing income and is not deductible in computing taxable income. For example, an amount reimbursed by an employer and included in an employee’s or former employee’s income would qualify for the METC, provided that the employee or former employee is not able to deduct the amount in computing taxable income.

It is the CRA’s position that lump sum amounts received prior to 2012 by employees or retirees in lieu of the continuation of medical or dental coverage under their private health services plans (PHSPs) are considered advance reimbursements of medical expenses, and therefore not taxable when received. This position also applies to amounts received at any time in connection with the termination of coverage under a PHSP provided by an employer whose insolvency arose before 2012. As such, pursuant to paragraph 118.2(3)(b) of the Act, individuals who received these non-taxable lump sum amounts could not claim the METC until their medical expenses (including those of other covered members under the plan) exceeded the lump sum amounts received.

However, for  lump sum amounts received in 2012 and later years, other than amounts received in connection with an insolvency that arose before 2012, it is the CRA’s revised position that these amounts are generally considered to be taxable as employment income pursuant to paragraph 6(3)(b) of the Act, and subject to deductions at source.

Since the CRA’s revised position does not considers such lump sum amounts to be advance reimbursements of medical expenses (that is, non-taxable), the previous restriction (which formerly prohibited METC claims until medical expenses exceeded the lump sum amount) no longer applies.

As such,  it is our view that the sole fact of receiving a taxable lump sum amount in lieu of the continuation of medical or dental coverage under a PHSP would not generally limit the recipient’s ability to claim the METC.

We trust our comments will be of assistance.

Yours truly,



Lita Krantz, CPA, CA
Tax Credits and Ministerial Issues
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch




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