Dues and don’ts: What health professionals can and cannot deduct from their taxes

This article first appeared in The Capsule, a publication of Pharmacists Manitoba.

Regulated health professionals are likely quite familiar with the annual dues that are imposed upon them by their regulatory college in order to maintain their practice within the profession. However, they may be less familiar with the deductibility of these dues when filing their annual taxes. While the Income Tax Act (ITA) generally allows for a deduction of these dues, there are limitations as to what is considered an eligible expense that regulated health professionals should be aware of.

Professionals may also find themselves members of groups or clubs with similar annual membership dues that may appear to be business-related. Nevertheless, these similar dues may fail to qualify as deductible expenses. Understanding these differences between eligible and non-eligible expenses can make a meaningful impact on their taxes.

The deductibility of annual membership dues

Section 8(1)(i)(i) of the ITA permits employees to deduct annual professional membership dues in certain circumstances. According to the CRA, such dues will generally be deductible if five requirements are met. In particular, they must:

1. Be recognized by statute
2. Be paid by or on behalf of an employee in the particular tax year
3. Reasonably relate to the source of a taxpayer’s income
4. Not have been reimbursed
5. Be a reasonable expense in the circumstances

Failure to satisfy any of these five requirements will result in the annual membership dues no longer qualifying as a deductible expense.

1. Annual membership dues recognized by statute

A central requirement set out by the CRA is that any annual membership dues claimed must be recognized by statute. For example, pharmacists in Manitoba have this requirement generally satisfied because the College of Pharmacists of Manitoba (CPhM) is statutorily permitted to impose licensing and registration fees, as set out in section 75(1)(j) of The Pharmaceutical Act, and pharmacists must maintain their registration to properly practice within the profession.

However, any claimed expenses must be specifically related to recurring annual membership dues, rather than one-time fees and expenses. Therefore, non-recurring expenses such as an entrance fee, special assessment fees, tuition or examination fees are not deductible expenses.

Furthermore, the CRA requires that any membership dues claimed must be strictly necessary for licensing purposes. For example, optional expenses, such as voluntary fees paid to advocacy associations within the profession, would not qualify as an eligible deduction.

2. Paid by or on behalf of the employee in the year

As an employee, a pharmacist may only claim professional membership dues for a particular tax year if the expenses claimed were paid in that same year. In addition, an employer may pay for a pharmacist’s professional membership dues on their behalf, but the expenses cannot be claimed by the pharmacist themself if the costs were not included in their T4 slip as a taxable benefit.

3. Reasonably relate to the source of income

In order to claim professional membership dues as an eligible expense, the CRA requires that there be a reasonable connection between the dues paid and the income generated by the position or job held by the employee. This requirement is interpreted broadly, such that it does not necessarily require that the dues be proven to be essential to maintain one’s employment. Nevertheless, there must be a reasonable connection between the professional membership dues and the job or position held by the employee. For example, a pharmacist who voluntarily decides to pay for their professional membership dues, despite working in a completely unrelated field, is generally ineligible to claim any deductions relating to those expenses.

4. No reimbursement received

For membership dues to be eligible for deduction, the regulated health professional must also not have received a reimbursement for the expenses, nor can they be entitled to a reimbursement. In other words, the professional themselves must bear the costs of the membership dues in some form in order to claim them.

As noted above, if an employer chooses to pay for annual membership dues on an employee’s behalf and does not include the costs associated with such payment in their T4 income, the employee is not eligible to claim the expenses on their tax return, since this would effectively qualify as a reimbursement.

5. A reasonable expense

Finally, the amounts claimed as a whole must be reasonable. This requirement largely exists to ensure that only legitimate annual professional dues are being deducted. Broadly speaking, the regular dues which are necessary to practice within a profession would qualify as a reasonable expense. However, payments that are not truly annual dues or are otherwise extraordinary charges, such as a late fee or a reinstatement fee, will fail to qualify as a deductible expense.

The deductibility of memberships in clubs and groups

Regulated health professionals might also find themselves paying for other annual membership dues associated with clubs and groups, some of which may even be related to their practice. For example, a pharmacist might maintain a club membership to build community connections or meet referral sources.

Section 8(1) of the ITA, however, only allows for the deduction of expenses which are specifically listed therein. Annual membership dues related to golf, dining, fitness and similar clubs are not specified within this list and are therefore not eligible for deduction. A key distinction as to why this is the case lies in the fact that they are not strictly required to maintain one’s statutory professional status and are instead optional or discretionary. However, some of the activities that take place at these types of clubs may still qualify as a fully or partially deductible expense, according to other sections of the ITA. For example, section 67.1 of the ITA allows for the partial deduction of a business meal with clients.

Key takeaways

When determining whether annual membership dues are eligible for deduction, it is important to consider whether they are specifically listed within section 8(1) of the ITA and otherwise satisfy each element of the five requirements established by the CRA. Regulated health professionals should also maintain their own records to demonstrate what was paid, when it was paid, whether it was reimbursed and what professional status the payment was made to maintain.

Should you or your business require guidance relating to these deductions or any other tax obligations, please contact a member of our Taxation practice group, we’d be more than happy to assist you.

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