Claiming Medical Expenses: Free Healthcare?

Free Health Care? Did you know that Canadians spend on average more than $1,000 on medical expenses each year? It’s estimated that government programs, via our taxes, cover about 72% of medical expenses, which means that we pay for the rest. Your clients may be over-paying on their taxes because they don’t know about medical expense deductions. 

"Uncertainty has eclipsed the world economy for a long time,î noted Jennifer Blanke, senior director and lead economist of the World Economic Forum as she introduced the WEF's Global Competitiveness Report 2012-2013 on the WEF website.  "The overshadowing sovereign debt crisis in Europe, the risk of a weak recovery in the U.S., combined with the slowdown of economic growth in China and other emerging economies has cast a cloud over the global economy,î she continued. "Within such uncertain times, a higher level of competitiveness is the best strategy to ensure resilience and sustained prosperity.î So, in it annual Competitiveness Report, the WEF assessed the "competitiveness landscapeî of 144 economies, Canada among them. The WEF defines competitiveness as "the set of institutions, policies and factors that determine the level of productivity of a country. The level of productivity, in turn, sets the level of prosperity that can be earned by an economy.î Since 2005, the WEF has based its analysis on the Global Competitiveness Index (GCI), which measures "12 pillars of competitiveness.î Those pillars are divided among three subindexes: basic requirements, efficiency enhancers and innovation and sophistication factors. Countries are ranked on their overall score, as well as their score in each of the subindexes. How did Canada score? Not strong enough to make the Top 10 and off two positions from last year but it still ranked a respectable 14 in the overall standings with a 5.27 score. (Top-ranked Switzerland scored 5.72.) In the basic requirements subindex ó which measures the pillars institutions, infrastructure, macroeconomic environment and, lastly, health and primary education, considered key factors in factor-driven economies ó Canada ranked 14, with a score of 5.72. In the efficiency enhancers subindex ó pillars five through 10: higher education and training; goods market efficiency; labour market efficiency; financial market development; technological readiness; and, market size ó Canada ranked sixth with a score of 5.41, key for efficiency-driven economies. But in the final subindex, which measures innovation and sophistication, as the title suggests, and is considered key for innovation-driven economies, Canada ranked 21 with a score of 4.74 ó which would seem to indicate the areas in which Canada needs to pull up its socks. "Although Canada continues to benefit from highly efficient markets (with its goods, labour, and financial markets ranked 13th, 4th, and 11th, respectively), well-functioning and transparent institutions (11th), and excellent infrastructure (13th),î said the report, "it is being dragged down by a less favorable assessment of the quality of its research institutions and the government's role in promoting innovation through procurement practices. "In a similar fashion, although Canada has been successful in nurturing its human resources compared with other advanced economies (it is ranked 7th for health and primary education and 15th for higher education and training),î it continued, "the data suggest a slight downward trend of its performance in higher education (ranking 8th place on higher education and training two years ago), driven by lower university enrollment rates and a decline in the extent to which staff is being trained at the workplace.î What countries did make the Top 10? Here are the overall rankings: Switzerland, for the fourth consecutive year, Singapore Finland Sweden The Netherlands Germany United States United Kingdom Hong Kong Japan "Looking forward,î says the WEF, "productivity improvements and private sector investment will be key to improving global economies at a time of heightened uncertainty about the global economic outlook.î   Additonal Educational Resource: Distinguished Advisor Conference  

Statistics show us that median family incomes decline in our retirement years to about 80% of our incomes in our mid-50s. But a recent Statistics Canada study tells us that personal consumption makes no such adjustment. In fact, seniors in their 70s consume 95% of what they consumed 20 years earlier. So, if consumption exceeds income, asks StatsCan, how do retirees manage to maintain their standard of living? In an August Economic Insights entitled "Financial Well-Being in Retirement,î Sébastien LaRochelle-CÙté looks at the role accumulated household wealth plays in allowing retired seniors to enjoy their golden years. "For many seniors, a declining employment income stream does not necessarily signal financial pressures,î he writes, "because they have built up a stock of wealth.î LaRochelle-CÙté looked at household wealth as the total value of real estate holdings and sources of financial wealth such as savings accumulated in investment funds and retirement savings plans, minus outstanding debts. Conventional replacement income considers only family income, which includes employment income, income from private pension plans, retirement pension income and personal income. He looked first at financial wealth excluding the net worth associated with the principal residence, and second at all forms of wealth including the principal residence. In the first instance, he writes, "The average value of the annual income of individuals aged 65 to 74 was 8% higher than income values obtained from the more conventional definitions used in replacement rate studies.î Take the older age group, 75 to 84, and the accumulated financial assets added an average of 20%. Add in lifetime income from the principal residence, and the measurement advances further. For the 65-74, it was 15% higher; for the 75-84, it was 35% higher. "Thus,î LaRochelle-CÙté concludes, "when financial wealth is taken into account, the ëadjusted' income becomes similar to the average income of individuals aged 45 to 64, whose financial well-being is based largely on employment income. It is, therefore, possible that asset accumulation can play a significant role in maintaining seniors' level of consumption, at least for those in the generation born immediately before the baby boom.î Therein is the caveat. The baby boomers, who are just entering retirement, are not included in the statistics. The work and savings habit of this generation could affect future results. Also, notes LaRochelle-CÙté, "the contribution of financial wealth to overall income for higher-income individuals likely differs from that for lower-income individuals.î   Additional Educational Resources: Elements of Real Wealth Management and Tax Strategies for Financial Advisors.  

Did you just drop a bundle on school supplies, ballet shoes and hockey gear? Pressure from the precious ones can be daunting at this time of year, especially if those after-school activities are not negotiable. Fortunately, tax relief is possible if you keep the right receipts. So, take a few moments now to make some notes and file your tax receipts. ï Children's Fitness Tax Credit: This federal credit recognizes eligible expenses for sports and fitness activities in which your child participates up to a maximum of $500 for each child under the age of 16. (Parents of a disabled child under 18 can claim more.) A number of activities qualify, including sailing, bowling and golf lessons, as well as hockey and soccer. ï Children's Arts Tax Credit: If your child participates in artistic, cultural, recreational or developmental activities, you can qualify for this federal tax credit which offsets the costs of participation. Costs of instruction, equipment, uniforms, facility rental and administration costs included in the registration or membership fees all qualify for the credit. It covers music, language lessons and the literary, visual and performing arts. ï Child-Care Expenses: Do no despair if the day camp in which you enrolled your little ones this past summer while you and your spouse worked does not qualify for the fitness or arts credit. Those camp costs may qualify for the deduction for child-care expenses ó which gives you more bang for your buck. To claim child-care expenses, however, both parents must generally be working or in school. If an activity qualifies for both the child-care deduction and the fitness or arts tax credits, it must be claimed as a child-care expense. ï Canada Child Tax Benefits. Child-care expenses reduce net income (line 236 of your tax return) and refundable tax credits are calculated on your net income. So, when you maximize your child-care expenses, you increase your possible Canada Child Tax Benefit, which generally must be claimed by the lower-income spouse. ï Medical expenses. The costs for private health-care insurance that are not reimbursed by your benefits plan, glasses, braces, sports medicine, travel to health-care services not available in your local community and a host of prescription drugs qualify as medical expenses on federal/provincial tax returns. To make the most of this deduction, combine all the family's expenses for the preceding 12 months and have the lower-income spouse, assuming he or she is taxable, claim the expenses. ï Public transportation. Don't forget to save those transportation travel passes for a federal non-refundable tax credit of 15% of your monthly expenditures. One parent can claim the travel pass costs for the whole family. It's Your Money, Your Life. An increased tax refund is your ticket to fast cash down the line, which is important, because any tax savings you can find will help with the financial challenges of your children's post-secondary education. With the right education and skills, your children will be financially set. Then, you can focus without guilt on your luxury retirement. Evelyn Jacks is president of Knowledge Bureau, which features "back to schoolî courses for parents who want better financial education and career opportunities in the tax and financial services. Click here for details. Additional education resources: DFA - Tax Services Specialist Designation, MFA - Investment and Retirement Income Specialist Designation programs.  

If in January you contributed $5,000 to your Tax-Free Savings Account (TFSA), then withdrew $2,000 in August to meet an unexpected expense, does that mean you can contribute another $2,000 in November and stay within your limit? After all, your annual contribution room is $5,000. If you answered, "Yes,î you are one of the reasons the Canada Revenue Agency (CRA) is sending out 76,000 letters to taxpayers who have overcontributed to their TFSAs and must pay the penalty. It is not about how much you have in your TFSA at yearend but about how much you have contributed. And withdrawals from your TFSA do not get added back to your contribution room until the following year. According to the CRA, you have an excess TFSA amount  "at any time in a year as soon as the total of all TFSA contributions you made in the year exceeds the total of your TFSA contribution room at the beginning of the year plus any qualifying portion of a withdrawal made in the year up to that time.î (The qualifying portion of the withdrawal is the amount of the withdrawal or the previously determined excess TFSA amount, whichever is less.) If you have overcontributed, you are liable to a tax of 1% on your highest excess TFSA amount in that month. In the above example, if you had mistakenly contributed that extra $2,000 on Nov. 1, your highest excess TFSA amount per month for November to December would have been $2,000. Your tax, therefore, would be $2,000 x 1% x 2 months, which is $40. If, on Dec. 1, you realized your mistake and withdrew $2,000, you would pay one month's penalty. At the start of the new calendar year, your withdrawals from your TFSA are added to that year's contribution room. "The proportion of individuals who received a [mailout warning] was less than 1% of the total number of TFSA holders,î the CRA's Philippe Brideau told the Vancouver Sun.  "This figure is significantly lower than the 1.5% who received proposed TFSA returns in the previous contribution years. While there are instances of misunderstanding, it is apparent that the vast majority of contributors understand the rules.î By the end of the 2011 tax year, 8.2 million Canadians had opened TFSA accounts, which have more than $60 billion in assets. For more information on TFSAs, go to the CRA website.   Additional Educational Resource: Elements of Real Wealth Management.  

In the recent case of Hine v The Queen (2012),  the Tax Court of Canada considered whether the taxpayer, in this case Colin Hine, was "grossly negligentî as defined by section 163(2) of the Income Tax Act in relying on his tax preparer ó in this case, his spouse ó to prepare his tax return. And, in the circumstances, it found he was not. Hine, a general contractor since the late 1990s, turned to "flippingî homes for profit in 2005. His spouse, Diane Prevost, who had a background in financial management and a reputation as competent and meticulous, kept Hine's business records and filed his tax returns. In 2006, Hine sold "Greyrock,î a house he had bought and renovated, for $319,000, but his tax return showed a loss of $131,653 for the year. In April 2008, the Canada Revenue Agency (CRA) audited Hine and found that he had failed to report $157,965 of business income on the sale of Greyrock. The CRA's June 2009 reassessment included taxes arising from the reassessment that, the court noted, was less than $5,200 and the gross negligence penalty of $28,111. Hines appealed the reassessment and the Tax Court heard the case in June 2012. Gross negligence is a phrase found in many areas of law; it is used to impose liability on those whose actions depart from the standard of reasonableness, usually viewed objectively. A high degree of negligence is required if a taxpayer is to be considered "grosslyî negligent under section 163(2) of the Act. In fact, the courts have held that the negligence involved is tantamount to acting intentionally. The jurisprudence, however, is not so clear when it comes to the work of a tax preparer or accountant. It generally must be demonstrated that the tax preparer was grossly negligent and the taxpayer was in some way involved or was suspiciously, "willfully blindî ó that is, the taxpayer acquiesced in the making of the false statements or did not act in a responsible way when a reasonable observer would have been suspicious. Under section 163(2), the CRA may impose a penalty equal to the greater of $100 and 50% of the avoided taxes when the taxpayer knowingly or under circumstances amounting to gross negligence make a false statement or omission in a return. The court found Hines and Prevost credible; it was convinced that their intentions were to report their income diligently and that the mistake was an honest one, brought on by relying on the statement of their lawyer's trust account into which the proceeds of the Greyrock sale had gone. The spousal relationship between the parties did not affect the finding. The court stated that the taxpayer's "blind faith in his wifeî was not unreasonable, even though she was not a professional accountant but merely had experience with bookkeeping. Reasonable reliance, therefore, on an accountant or tax preparer will absolve a taxpayer from a finding of gross negligence. It is interesting that the spousal relationship between the parties and the professional services of Prevost did not feature prominently in the argument. The court stated that gross negligence could not be determined in this case because the objective evidence pointed in a different direction.   Additional Educational Resource: EverGreen Explanatory Notes  

If you are under the age of 40 and looking for direction on how and when to save your money, ask yourself this important question: "What's my ëpotential income'?î Knowing that answer can lighten future financial worries, so you can escape the work world when you want and enjoy your healthy, golden years. So, what is "potential incomeî? It is the sum of income realized today and the income that will be generated in the future from your personal net worth (that is, assets minus liabilities). When you take into account the "annuitized valueî of your future net worth, you can better assess your potential retirement income. You'll also be better able to choose an "order of investingî that will deliver that income from your net worth ó that is, youíll be able to invest any new money in investment accounts in the order in which it will create the best after-tax results now and in the future. (Knowledge Bureau Report, Aug. 15.) For example, what should come first: a home, a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Account (RRSP)? It's a common question because TFSAs and RRSPs are important sources of potential income; one is tax exempt later, the other is tax preferred now. Investing more dollars in ways that protect them from tax erosion and keeping those dollars invested longer in tax-efficient accounts such as RRSPs and TFSAs is a winning recipe, especially when home ownership is included in your potential income. The equity in your home can significantly enhance your retirement fortunes, according to Statistics Canada's research paper, Income Adequacy in Retirement: Accounting for the Annuitized Value of Wealth in Canada. For example, the paper shows, the mean before-tax income per adult in households headed by seniors aged 65 to 74 is 75% of the income of households headed by those 45 to 64. However, when the wealth in the home is considered, income replacement potential increases to 88% of working income. More important, when these numbers are calculated after taxes, your income replacement potential increases to 105%. You'll actually be wealthier in retirement because of the contributions from the tax-exempt gains accruing in your principal residence. An RRSP investment can help because its Home Buyers' Plan allows you to withdraw up to $25,000 in a calendar year from your RRSPs to buy or build a qualifying home. However, don't ruin your potential income by paying too much interest on "too much home.î Mortgage interest costs are non-deductible and, if you pay off your mortgage over a long period of time, can erode your equity. It's Your Money. Your Life. Buying a home you can afford and paying down your mortgage quickly is an important cornerstone of a sound retirement income plan. Together with tax-efficient financial assets and a healthy net worth ó more assets than liabilities ó your wealth will grow exponentially, building sound income potential in retirement. Evelyn Jacks is president of Knowledge Bureau, best-selling author of close to 50 tax- and wealth-planning books and keynote speaker at the Distinguished Advisor Conference in Naples, Florida, Nov. 11 to 14.