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. 

Canadians may be well served by their banks but even so, at some point or other, we have all had a disagreement with our bank. The federal Bank Act requires banks to have a procedure for handling customer complaints but how that is done has become the subject of hot debate recently. Now, the Department of Finance has waded in with proposed legislation and it is looking for comments from interested parties. In 1996, what was to become the Ombudsman for Banking Services and Investments (OBSI)  was established to provide a free and independent service for resolving small-business owners' disputes with their banks. Over the next few years, OBSI's mandate expanded to include consumers of banking and investment services. Securities regulators require investment dealers to be members of OBSI, but the Bank Act has no such requirement. It is not mandatory for banks to be members ó and therein lays the problem. Two of the Big Five banks have withdrawn from OBSI ó Royal Bank of Canada in 2008 and TD Bank in late 2011 ó and hired a company called ADR Chambers Banking Ombuds Office to provide their dispute-resolution services. The feds responded with proposed legislation, first in 2010 and again in July. The 2010 legislation said banks could belong to only federally approved external complaints bodies and it gave the Financial Consumer Agency of Canada (FCAC) the authority to monitor and enforce compliance. The legislation  now proposed seeks to establish explicit standards that external complaint bodies must meet ó including standards for independence, timeliness and transparency. "These proposed regulations will also require banks to cooperate with their external complaints body,î says the Department of Finance press release, "by, for example, informing customers of the name and contact information of their external complaints body so that consumers clearly know who to contact when a dispute arises.î But many in the financial services industry feels the legislation doesn't go far enough. The government should simply legislate that all banks be members of OBSI. The Canadian Foundation for Advancement of Investor Rights (Fair Canada)  points out that the proposed legislation falls short of the G20 Principles on Financial Consumer Protection. "Banks will be able to entertain bids from approved service providers and choose the one that gives them the best deal and serves their interests,î FAIR pointed out in a recent newsletter. "This could result in severe risks to independence and impartiality, two principles which are fundamental to effective dispute resolution for consumers.î Furthermore, FAIR notes the difference between a private external complaints body and an ombudsman: "An ombudsman, such as OBSI, has a responsibility to assist consumers with the complaints process, including the articulation of their complaint. Current private, for-profit external complaints bodies typically do not provide this support to consumers. Vulnerable consumers, including seniors and immigrants, may abandon legitimate complaints due to the barriers they will face in articulating their claims.î The 30-day comment period began July 13 with the publication of the regulations in Canada Gazette. Comments must cite the Canada Gazette, Part Ⅰ, and its date of publication and be addressed to Jane Pearse, Director, Financial Institutions Division, Department of Finance, L'Esplanade Laurier, 15th Floor, East Tower, 140 O'Connor Street, Ottawa, ON K1A 0G5 (fax: 613-943-1334; email: finlegis@fin.gc.ca).   Free Trials: Certificate Self-Study Courses - Earn CE/CPD Credits, Too!  

You have prepared for many aspects of retirement but you have one nagging concern: how much will you be able to withdraw from your non-registered investments each year and still have enough to last as long as you do ó and possibly leave a legacy? To help you sort through the options, Knowledge Bureau has built the Fixed vs Variable Income Calculator, part of the Knowledge Bureau's Client Relationship Toolkit. Generally, you are well-prepared for retirement: you have several sources of cash flow; you know how much you need to cover daily costs; and you know how much is coming in each month from fixed income sources such as Canada Pension Plan (CPP), Old-Age Security (OAS) and your RRIF. But what it comes to your savings, you are stymied. If you withdraw too much each year, you're liable to run out of money; if you take too little, you may not be able to meet your lifestyle goals. There are three options to consider: you can live off the earnings from your investments and leave the capital to your children; you can take a fixed amount each year and leave the capital to your heirs; you could take the maximum fixed amount each year using some or all of the capital to finance your desired lifestyle. Using the using the Fixed vs Variable Income Calculator, letís examine the three options using the calculatorís defaults: $500,000 in mutual or segregated funds (income will be taxed and the adjusted cost base (ACB) of the funds will be reduced);) life expectancy 20 years from now; 45% marginal tax rate; 2.7% inflation; returns on your investments of 1%, 2.5%, 3.5% in years one, two and three, respectively, then 4% annually thereafter. Option 1: Fixed income: Optimize for capital preservation Given the above rate of returns and you withdraw only the income earned by your investments, you can withdraw an annual cash amount of $14,518 (before taxes, indexed at 2.7% for inflation) for 20 years. At the end of that time, your nest egg will be $500,049. Option 2: Variable income: Use 1% of capital annually If you withdraw cash earned by your investments at the above rate plus 1% of capital a year, at the end of 20 years, you will still have $408,953. Option 3: Fixed Income: Optimize for Income If you want to maximize withdrawals to use up all your capital, you can withdraw an annual amount of $27,873 (before taxes, indexed). At the end of 20 years, your nest egg will be depleted to $47. The calculator allows you to enter your own beginning capital, marginal tax rate, inflation adjustment, life expectancy and expected rates of return. You can also look at RRSP/RRIF investments (income is not taxed but withdrawals are) or other investments (such as GICs) where the income is taxed but no tax liability accrues due to ACB adjustments. If you've not taken a look at this powerful calculator, sign up for a free trial today.

It isn't just the weather ó the record-high temperatures, the lack of rain, the surplus of rain ó that has made this summer chaotic. The economic environment has played its part, as well. Record-low interest rates, euro zone uncertainty and unusually volatile markets continue to take their toll on Canadians' accumulated wealth. Yet, since the 2008 start of the financial crisis, some Canadians have fared better than others ó those who have stayed true to their investment strategy and made the most of tax-efficient investing. Consider these numbers from Statistics Canada. In 2010, the latest year for which statistics are available, the number of taxfilers reporting investment income (7.5 million) and the amount of investment income they reported ($50 billion) declined. (Investment income is the sum of dividend income from taxable Canadian corporations and interest income from investments in non-tax-sheltered vehicles.) But those with dividend income fared dramatically better than those with only interest income. ∑ The number of savers ó those who report interest income ó declined 15.3% to slightly less than 3.8million taxfilers. Total interest income reported decreased 24.2% to$6 billion. ∑ Investors, those who report both dividend income and interest income, held their ground, or even showed marginal gains. In this case, 3.7 million investors reported $44 billion in income. Although the number of investors declined by 0.3%, the total dividend and interest income reported increased 0.4%. Clearly, in a low-interest rate environment, if you are counting on interest-bearing investments to provide the bulk of your future income, you're losing ground ó even before the eroding effects of inflation and taxes. Bring taxes into the mix and, again, investors make out better than savers. As the table below demonstrates, dividend income is subject to significantly lower marginal tax rates (MTR), providing an important hedge against inflation. The source of your income, then, makes a difference in how much you keep ó and that's what tax-efficient investing is all about. As the table below shows, depending on the taxpayer's province of residence, a taxpayer in the middle-income tax bracket pays a MTR anywhere from 29.7% to 36.95% on "ordinary income,î that is, income from employment, pensions and interest. The lowest MTR, however, is on "eligible dividends,î those earned from investments in publicly traded companies and certain large private corporations. The marginal tax rates that apply to various categories of income:     Province   2012 taxable income range ($)   Ordinary income (%)   Capital gains (%)   Dividends: small bus. (%)   Eligible dividends (%)   British Columbia  Alberta  Saskatchewan  Manitoba  Ontario  Nova Scotia                        42,708 to 74,028<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com🏢office" /> 42,708 to 85,414 42,708 to 85,414 42,708 to 67,000 42,708 to 68,719 42,708 to 59,180  29.70   32.00 35.00 34.75 31.15 36.95 14.85 16.00 17.50 17.38 15.58 18.48 16.21 18.96 22.08 24.58 16.65 19.90 6.46 9.63 12.39 16.19 13.42 18.05 Source: Knowledge Bureau's EverGreen Explanatory Notes Indeed, the difference between the highest and lowest MTR is 30.49 percentage points. You would be further ahead, for example, to earn eligible dividends in British Columbia than interest in Nova Scotia. It's Your Money. Your Life. Today, the negligible returns on money put into savings accounts are erased by taxes and inflation. Indeed, some will turn negative. Statistics suggest that those who have made even slight headway in building financial wealth have had investment portfolios that contained suitable exposure to equities. Particularly in these uncertain times, you need a strategic plan that will allow you to grow your wealth and manage your  risk. Tax and investment professionals can help with that planning as well as help mitigate behavioural responses that can reduce your long-term wealth accumulation. 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. Additional Educational Resources: Financial Recovery in a Fragile World and EverGreen Explanatory Notes.  

There is no doubt where readers of Knowledge Bureau Report stand concerning July's poll question,  "Should governments have regulated exorbitant credit card rates instead of mortgage amortization periods?î Of the 72 readers who responded, 83% believe governments should regulate the interest rates charged by credit card companies. In fact, regardless of how readers voted, they are in agreement on one thing: interest rates on credit cards ó be it 20% for bank credit cards or 30% for department store credit cards ó are way too high. And the economic reality is very few people can afford to pay their balances in full each month so the high-interest debt piles up. They are paying interest on interest. Where readers differ is on the cure. The "Noî vote thinks credit card debt is the individual's responsibility; if you don't have it, don't spend it. Consider Rosalind's comment: "Credit cards are intended to provide short-term credit. One should pay off credit cards every month, thus avoiding paying any interest charges at all. If you can't do that, don't make the purchase.î Some members of the "Yesî contingent put forward another solution: they suggest credit card rates bear some relationship to prime. As one reader pointed out: "They bear no correlation to prevailing rates in the marketplace!î As Ken White commented: "I know it's not that simple but I feel credit card rates should at least fluctuate with prime. "I have always felt that by dropping credit card rates,î White adds, "you will put cash into consumer's hands and increase their net worth within 30 days of doing so.î Other readers blame the easy availability of credit. Many Canadians have multiple cards and credit-card issuers are happy to raise the credit limits on those cards, taking the enthusiastic consumer further into debt. Then, in this environment of low-interest rates and high house prices, many consumers are consolidating their credit card debt in lower-cost lines of credit or mortgages. "It is too easy to get large credit card limits,î wrote a reader, "and have several credit cards. With the interest rates so high a lot of people take their cards up to the limit and then find they will never pay them off without getting a loan, consolidating with their mortgage.î Added Darren: "The problem goes far beyond mortgages and credit cards. It occurs when the individual rebuilds a debt load on top of existing 'consolidated' debt loads. What needs to be regulated is how the lenders of money can extend people too far. We consolidate, then keep the credit cards and line of credit 'just in case' and reconsolidate again. The serious issue will come when there is no more room for consolidation.îOne solution, suggested by yet another reader: set at a maximum credit card limit of 20% of the card holder's annual net income. There were certainly a few readers who were vocal about the government shortening the amortization periods. Granted, over the term of the mortgage, the mortgagee pays less interest and saves more. But in the short term, mortgage payments are higher with mortgages with 25-year amortization periods than with 30-year periods. "It is much more difficult to purchase a home without going into debt,î wrote Rosalind, "and with the cost of housing as high as it is, many families will find it harder than ever to afford the increased mortgage payment which results from the shortened amortization period.î Added another reader: "Longer amortization periods can definitely work in favour of a mortgage holder if he or she knows how to take advantage of the ability to continue to make the payments they can afford, and by doing so, pay down principal much quicker.î Knowledge Bureau Report would like to thank readers for responding to July's poll question and sharing their comments. August's poll asks: "Should Canadiansí retirement plans include leaving a legacy for their children?î We look forward to your comments. Additional Educational Resource: Debt and Cash Flow Management  

On July 25, the Department of Finance released draft legislation that aims to curtail the use of "stapledî securities in Specified Investment Flow-Through entities (SIFTs) and real estate investment trusts (REITs), thereby increasing the fairness of Canada's tax system. As Finance explains in its Explanatory Notes  to the legislative proposal, "a stapled security involves two or more separate securities that are ëstapled' together such that the securities are not freely transferable independently of each other.î Stapled securities allow SIFTs and REITs to take deductions that "frustrateî the policy objectives of Canada's Income Tax Act. The federal proposal, which was deemed to have come into effect on July 20, 2012, introduces two new sections to the Act that operate in conjunction with one another: section 12.6 and section 18.3. The latter introduces a regime that denies deductions for amounts that are paid or payable in respect of certain types of stapled securities. To avoid the application of section 18.3, an entity ó such as a SIFT or REIT ó must "un-stapleî its affected securities. The effect of section 12.6 is to disregard any un-stapling that is not permanent and irrevocable, explains the notes. When the federal government announced the Tax Fairness Plan in 2007, it indicated that, if structures or transactions that were clearly devised to frustrate policy objectives emerged, they would be subject to change. These amendments are meant to close some loopholes that clever tax planners have been using and, thus, the rules retain their tax fairness initiative. The proposed amendments to the SIFT rules are technical in nature, but not extremely complicated. Sometimes a corporation or a SIFT (alone or with a subsidiary) would issue equity and debt instruments, at least one of which was publicly traded, that are stapled together. Notwithstanding the general rules applicable to the deductibility of interest, the proposed amendments provide that interest that is paid or payable on the debt portion of such a stapled security will not be deductible in computing the income of the payer for income tax purposes. Arrangements that involve shares issued by publicly traded corporations, the distributions of which are treated as dividends for tax purposes, are not intended to be affected by this recent amendment. The amendments apply to the stapled securities of a trust, corporation or partnership, if one or more of the stapled securities is listed or traded on a stock exchange or other public market and any of the following applies: the stapled securities are both issued by the entity, one of the stapled securities is issued by the entity, and the other by a subsidiary of the entity, or one of the stapled securities is issued by a REIT or the subsidiary of a REIT. Overall, the amendments have placed SIFTs in a similar tax situation as public corporations. Prior to these amendments SIFTs were largely treated the same way individual taxpayers were ó having to pay tax instalments, for example. From now on, however, SIFTs will be required to estimate tax instalments and pay them on a monthly basis, just like corporations. In the backgrounder information relating to this news release the government stated that it "will continue to monitor Canadian tax planning for structures and transactions that might frustrate the policy objectives of the Tax Fairness Plan and will, as necessary, take appropriate corrective action.î Greer Jacks is updating jurisprudence in the EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.

The Canadian Securities Administrators (CSA), the umbrella group for provincial securities commissions, recently submitted a proposal for review that would require all mutual fund dealerships to provide an annual summary to each client of the fees and commissions paid to the dealer and to the client's advisor as a result of the client's account. The goal is clear and open disclosure ó and a better-informed client. For many years now, fee disclosure has been hotly debated and Canada has joined the discourse. In Australia and the United Kingdom, for example, imbedded trailing commissions in mutual funds have been banned or significantly modified. But, although the CSA proposal to disclose these fees appears practical in comparison, some advisors may take exception to the proposal. After all, in many businesses, the consumer is never privy to the profit margin or commissions paid to the salesperson. A classic example is a car dealership. While a consumer can negotiate the price of the car with the dealer, the consumer never really knows how much profit the dealer is making. Alternatively, when working with a real estate agent, it is clear from the start what the commission is likely to be should the agent sell your home for you. So, what are the implications of the CSA proposal? Regardless of your viewpoint, there are some interesting implications: ï The 80/ 20 rule. I fully expect that fee disclosure will be a non-issue for the vast majority of investors. The reason for this is simple: small to mid-sized investors are being subsidized by the largest investors. For example, Investment Executive research found that the average assets invested per family household was $190,000. Assuming that was invested in mutual funds, for which the advisor received a 1% trailing commission from the fund company, the account brought in $1,900, of which the advisor typically receives $1,425 or 75% with the rest going to the dealer. Although this is the average, 85% of the assets overseen by the advisors surveyed were in accounts of less than $500,000 and only 15% of their client accounts held investments greater than $500,000. Applying the 1% commission, the gross fee on a $500,000 account is $5,000, of which about $3,750 goes to the advisor and $1,250 goes to the dealer. But with 85% of accounts less than $500,000, the advisor would be making considerably less than $3,750. So, is the fee associated with the client reasonable given the size of the investment account? The answer to this question will be different for each client, but looking at this fee in the context of a professional, hourly wage, the fees could be increasingly difficult to justify the larger the client account. For example, based on a professional hourly fee of $300 an hour, $3,750 represents 12 hours of work on this client's file each and every year. Can this amount of time be easily demonstrated to the client, particularly in a sideways- or downward-moving market? In this same survey, 32% of the advisors' clients had investments valuing less than $100,000. This means that the advisor would receive $750 or less a year for each account. To go back to my original point, it appears larger client accounts have been subsidizing the smallest client accounts. The good old 80/20 rule is alive and well in the financial services business with the largest 20% of clients providing 80% or more of the advisor's income. But what happens to the advisor's business model when the largest 20% no longer feel comfortable with the fees they are paying? ï The impact on financial planning services. Today, many advisors provide financial plans to clients free of charge.  Although this appears to be of great value to the consumer, in fact, it can be argued that it causes greater confusion. The "freeî financial plan is really being subsidized by the trailing commissions paid by the fund company to the advisor for money invested on the client's behalf. So, what is the real cost of providing professional financial advice? Is the cost of this financial plan a couple of hundred dollars or is the real cost several thousand dollars? Based on the figures above, if the client has more to invest, then it would seem that this client is paying more for the same financial plan than the investor with less money to invest. You could also argue that, by providing a "freeî financial plan, financial services firms are placing less value on their own advice. Whether a plan costs $500 or $5,000, this value is something that should be easily demonstrated to the client. ï The impact on the discount brokerages. Some discount brokerage firms on occasion allow clients to purchase only mutual funds or exchange-traded funds that have imbedded trailing commissions, those same commissions the CSA wants dealers and advisors to disclose. As a result, the client pays a higher annual management expense ratio (MER) than he or she would if the client had access to a low-cost, "f-classî mutual fund. With an f-class unit, the client escapes the imbedded mutual fund commission that, in this case, is flowing to the discount brokerage to subsidize the cost of trading. By disclosing these fees, one outcome may be increased trading costs at discount brokerage firms. In other words, we may very well see once and for all what the real cost of transacting in this environment is. Over the past 10 years, I have been associated with Evelyn Jacks and the Knowledge Bureau and have been involved in the development of several self-study courses. The main theme of each course is the "systemizationî of important processes that will add hundreds of thousands of dollars of wealth to clients over time. In other words, the actual rate of return on the portfolio pales in comparison to the benefits of structuring your own or your clients' affairs on a tax-efficient basis. By paying attention to the "eroders of wealth,î by layering income tax-efficiently, by following important rules and principles year in and year out, and by focusing equally on the four elements of Real Wealth (accumulation, growth, preservation and transition), you can build an amazing amount of wealth over time with considerably less risk. For those clients with more than $500,000 to invest, these services and strategies will mean the difference between success and failure. As I have implemented these strategies with my clients in my practice, I have found that clients simply do not need to take as much portfolio risk as they do today. While the proposed disclosure of imbedded commissions may be a short-term disruption to some advisors and a non-event to the majority of investors, the good news is that this change may also trigger a revolution in financial-advice giving. As the saying goes, "Be wary of discounted advice when i) buying a parachute, ii) getting your brakes fixed and iii) receiving financial advice.î Douglas Nelson, CFP, CLU, MFA is the author of Master Your Retirement: How to fulfill your dreams with peace of mind. A financial planner in Winnipeg, Nelson specializes in Real Wealth Managementô in the areas of retirement income planning, business succession and portfolio construction.