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Why Taxable Employee Benefits Is A Lose-Lose Situation

Recent reports surfaced about how taxing employer-provided health and dental benefits would increase the federal net balance by $3.8 billion. While this might add significant figures to the government’s annual spend, it will greatly shrink the disposable income of middle-income earners across the country every year.

It’s a lose-lose situation and the long-term implications for this country are huge.

What is at stake here?

There are more than 13 million Canadian workers covered by employer-sponsored plans. So when you take all of their families into account, it means that it could be upwards of 25 million Canadians heavily relying on these highly valued benefits plans.

And while the reports initially suggest that this tax would only hit the wallets of high-income earners, there’s no telling how many millions of low and middle- income Canadians will lose out on access to prescription drugs, dental and vision, and other treatments if prices start to rise. It would have a ripple effect throughout this country by dramatically raising health-care costs.

Placing a greater burden on the healthcare system

In Ontario, it is estimated that between two and three million people have not seen a dentist in the past year because they can’t afford it, and the Ontario medical system ultimately ends up spending $38 million per year treating dental problems. This leads to serious health issues and chronic conditions that can cause stress and anxiety, which further places a strain on the Ontario economy. And how much would those numbers change if benefits were taxable?

If the government can’t sustain this current level of healthcare, they’re going to de-list more services, placing a greater impact on the healthcare system, making it worse for Canadians in the long run.

The impact on the startup ecosystem

It’s no secret that a comprehensive benefits plan is used as a tool to attract and retain top-tier talent – and in the startup space, there leaves little elbow room in the chase for talent. With that being said, I believe that startups will continue to offer coverage, but they might scale back on what they’re offering. So the plans won’t be as rich as they are now – you will see more deductibles and lower levels of coverage, just because some companies won’t be able to afford it.

Now some of the larger companies likely wouldn’t drop coverage altogether, but the smaller employers will be in the crosshairs where people are going to lose out on dental and health coverage. Smaller companies have much less wiggle room in terms of how they adjust their compensation in relation to their larger counterparts.

Smaller companies often contact me with maybe five employees looking to put a plan in place, and if this were to go through, odds are they would be holding off on getting coverage until they can scale. I truly believe everyone is going to lose if they do.

My thoughts on this report

This revisit came out of left field (it was originally discussed last year, and the federal government decided not to pursue introducing the new tax), and it’s unknown to many folks in the industry as to what triggered this dialogue. Many are looking at the trickle down effect from the macro level and are concerned that it’s even being proposed. The Canadian Life and Health Insurance Association are even going as far as creating a petition on their website encouraging people to take action against the taxation of benefits.

We saw what happened with taxable benefits in Quebec and how companies dropped their coverage when it happened – and this will likely happen again throughout the rest of the country.

I would love to think that this is all just talk and that the Canadian Government is going to wise up and not pursue this. Rather than looking at how much money they’re going to make, they need to see how much this is going to cost the economy – because the big picture is very troubling.