Medical Expense Tax Credit (METC) vs HSA: Which Saves More?
Benji VisserFor most incorporated Canadian business owners, a Health Spending Account saves significantly more than the Medical Expense Tax Credit. The METC is a partial tax credit with a threshold that eats into your claim. An HSA turns every dollar of eligible medical expenses into a full corporate deduction with a tax-free reimbursement. On $5,000 in health expenses, the difference can be $1,500 or more per year.
That does not mean the METC is useless. It has a real place in some situations. But if you own a corporation and you are relying on the METC alone, you are likely leaving money on the table.
What is the Medical Expense Tax Credit?
The METC is a non-refundable federal tax credit under ITA Section 118.2. You claim it on your personal tax return (lines 33099 and 33199) for eligible medical expenses paid during a 12-month period ending in the tax year.
Here is how it works:
- Add up all eligible medical expenses for a 12-month period
- Subtract the METC threshold: the lesser of 3% of your net income or $2,835 (2026, indexed annually)
- The remaining amount qualifies for a 14% federal tax credit (2026 rate)
- Provincial credits add a bit more (varies by province)
The key detail most people miss: you only get relief on expenses above the threshold. If your net income is $100,000, your threshold is $2,835. Your first $2,835 in medical expenses gives you nothing.
For full details on eligible expenses, see CRA Guide RC4065.
What is an HSA?
A Health Spending Account is a Private Health Services Plan (PHSP) under the Income Tax Act. Your corporation reimburses CRA-eligible medical expenses, typically through a third-party administrator.
The tax treatment is straightforward:
- 100% deductible to the corporation as a business expense
- 100% tax-free to the employee receiving the reimbursement (ITA Section 6(1)(a))
- No threshold to clear before you start getting value
- Coverage starts from the first dollar of eligible expenses
For a deeper look at the tax mechanics, see the HSA tax guide for corporations.
Head-to-head comparison: METC vs HSA
| METC | HSA | |
|---|---|---|
| Who pays | You pay out of pocket, then claim a credit on your return | Corporation pays the expense directly |
| Tax treatment | 14% federal credit (2026) on amount above threshold | 100% corporate deduction, 100% tax-free to employee |
| Threshold | Lesser of 3% of net income or $2,835 (2026) | None |
| Cash flow timing | You wait until tax filing to get partial relief | Reimbursed within days of submitting a receipt |
| Eligible expenses | ITA 118.2 list | Same core ITA 118.2 list (PHSPs may also cover certain connected expenses) |
| Provincial differences | Credit rate varies by province | Deduction value varies by provincial corporate tax rate |
| Administration | Self-reported on your personal return | Typically handled by a third-party administrator |
| Best for | Unincorporated individuals, sole proprietors without staff | Incorporated business owners, businesses with employees |
Worked example: $5,000 in medical expenses
Let's walk through the actual math for an incorporated professional with $95,000 in net income and $5,000 in medical expenses.
METC route
| Step | Amount |
|---|---|
| Total eligible medical expenses | $5,000 |
| METC threshold (3% of $95,000 = $2,850, capped at $2,835) | $2,835 |
| Amount above threshold | $2,165 |
| Federal credit (14% of $2,165) | $303 |
| Estimated provincial credit (~5% of $2,165) | $108 |
| Total tax savings | $411 |
You spent $5,000 out of pocket and got $411 back at tax time. That is 8.2% relief.
HSA route
| Step | Amount |
|---|---|
| Total eligible medical expenses | $5,000 |
| Corporation pays via HSA | $5,000 |
| Admin fee (varies by provider, ~8% example) | $400 |
| Total corporate cost | $5,400 |
| Corporate tax deduction at ~12.2% small business rate | $659 |
| Personal tax avoided (no need to extract $5,000 as salary/dividends) | $1,500-$2,000 |
| Total effective tax savings | $2,159-$2,659 |
The employee receives $5,000 tax-free. The corporation deducts $5,400. Nobody pays personal income tax on the reimbursement. In this Ontario example, to get the same $5,000 into your hands as salary or dividends, you would need roughly $7,500-$9,000 in pre-tax corporate earnings (varies by province, corporate tax rate, and compensation mix).
The gap
| Route | Out-of-pocket cost | Tax savings | Net cost of $5,000 in health expenses |
|---|---|---|---|
| METC | $5,000 | $411 | $4,589 |
| HSA | $0 personal | $2,159-$2,659 | $2,741-$3,241 corporate |
The HSA saves $1,748-$2,248 more than the METC on the same $5,000 in expenses. That is not a rounding error. That is real money.
Second example: higher income, same expenses
The METC gets worse as your income rises because the 3% threshold climbs with it. Here is the same $5,000 in expenses for someone earning $150,000.
METC at $150,000 income
| Step | Amount |
|---|---|
| Total eligible medical expenses | $5,000 |
| METC threshold (3% of $150,000 = $4,500, capped at $2,835) | $2,835 |
| Amount above threshold | $2,165 |
| Federal credit (14%) | $303 |
| Estimated provincial credit (~5%) | $108 |
| Total tax savings | $411 |
At $150,000 income, the threshold cap saves you here. But notice: the METC gives the same $411 whether you earn $95,000 or $150,000. The credit does not scale with income.
Now compare that to the HSA, where the full $5,000 is still a corporate deduction and the personal tax avoided on salary/dividend extraction is even higher at this income level. At a 40-45% combined marginal rate, the HSA saves you roughly $2,400-$2,900 on the same expenses.
The higher your income, the larger the HSA advantage. The METC is a flat 14% federal credit. The HSA benefit scales with your marginal tax rate.
When is the METC actually the better choice?
The METC is not always worse. Here are the real scenarios where it wins:
You are not incorporated. If you are an unincorporated sole proprietor without employees, you cannot set up an HSA for yourself. The METC is your primary option. (If you have employees, see the sole proprietor HSA guide for how an HSA can still work.)
Your expenses are very small. If your annual health expenses are under $500, the admin fee on an HSA may eat into your savings. The METC costs nothing to claim.
You have already maxed your HSA budget. If your HSA budget is used up for the year and you have additional unreimbursed expenses, claim the remainder through the METC.
You are employed and do not own a business. The METC exists for all Canadian taxpayers. If you are a regular employee without access to a corporate HSA, the METC is what you have.
Can you claim both METC and HSA on the same expense?
No. You cannot double-dip. Any expense reimbursed through an HSA is not eligible for the METC. CRA is clear on this: line 33099 only includes expenses that were not reimbursed by an employer health plan.
But here is the important nuance: you can use both systems on different expenses in the same year.
Strategic splitting
Say you have $8,000 in total medical expenses and a $5,000 HSA budget.
| Expense pool | Amount | Claim through |
|---|---|---|
| First $5,000 | $5,000 | HSA |
| Remaining $3,000 | $3,000 | METC |
The $5,000 goes through your HSA for the full corporate deduction and tax-free reimbursement. The remaining $3,000 goes on your personal return for the METC. On that $3,000, you subtract the threshold ($2,835) and claim 14% on the $165 above it. The METC value on the remainder is small ($23 federal + ~$8 provincial), but it is still worth claiming.
The mistake we see most often: business owners who forget they can claim the unreimbursed portion on their personal return. If you have expenses above your HSA budget, always check if the remainder clears the METC threshold.
What is the METC threshold for 2026?
The METC threshold for 2026 is the lesser of:
- 3% of your net income (line 23600 on your T1), or
- $2,835 (the indexed CRA cap, adjusted annually for inflation)
If your net income is below $94,500, the 3% calculation is lower than the cap, so the 3% number applies. Above $94,500, the $2,835 cap applies.
| Net income | METC threshold |
|---|---|
| $50,000 | $1,500 |
| $70,000 | $2,100 |
| $94,500 | $2,835 |
| $120,000 | $2,835 (capped) |
| $200,000 | $2,835 (capped) |
This is why the METC is not great for higher earners. At $50,000 income, you lose the first $1,500. At $95,000+, you lose the first $2,835. Either way, you only get 14% federal credit on whatever is left.
Frequently asked questions
Is the Medical Expense Tax Credit refundable?
No. The METC is a non-refundable tax credit. It reduces your federal tax owed but cannot create a refund on its own. If you owe less tax than the credit amount, you lose the excess.
Can a sole proprietor use an HSA instead of the METC?
A sole proprietor without employees cannot set up an HSA for themselves. If you are an unincorporated sole proprietor, the METC is your main tool. However, if you have arm's-length employees, you can set up an HSA for them. See the sole proprietor HSA guide for details.
What medical expenses qualify for both the METC and an HSA?
Both use the same eligibility list under ITA Section 118.2. Dental, prescriptions, vision, physiotherapy, massage therapy (province-dependent), mental health, fertility treatments, medical devices, and more. See the full eligible expenses list.
Does the METC threshold change every year?
Yes. The fixed dollar cap is indexed to inflation and adjusted annually by CRA. For 2026, it is $2,835. The 3% of net income calculation stays the same formula, but the cap changes.
Can I claim my spouse's medical expenses on the METC?
Yes. You can claim eligible medical expenses for yourself, your spouse or common-law partner, and your dependent children born in 2009 or later (for the 2026 tax year). The lower-income spouse should generally claim the METC because the 3% threshold will be lower.
How fast is an HSA reimbursement compared to the METC?
With the METC, you wait until you file your tax return to see any benefit. That could be 4-16 months after paying the expense. With an HSA, you submit a receipt and typically get reimbursed by direct deposit within days. At Frontier, reimbursements go out within 24 hours.
Is there a maximum amount for the METC?
There is no dollar cap on total eligible expenses you can claim. But the credit is only 14% federally (2026) on the amount above the threshold, so the actual tax relief is modest relative to the expense. An HSA also has no hard CRA cap, though benefits must be "reasonable" relative to the employee's compensation.