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. 

Manitobans will pay more taxes following the April 17 Manitoba budget, thanks to increased user fees, broader application of retail sales taxes and a 3.5% hike in income taxes for the province's 680,000 taxpayers. The government of Canada's central province will also cut spending in a determined effort to reduce its deficit; the deficit will drop to $460 million in the fiscal year ending March 31, 2013, from $1 billion in 2011/12. Debt is weighing down provincial governments across Canada and Manitoba is no exception. Debt service costs on Manitoba's $16-billion net debt is 6.2¢ for every $1 of revenue. And debt servicing costs will increase by $45 million in 2012/13, which represents 5.9% of all expenditures. Family services, by comparison, represents 7.4% of expenditures; education, 25.7%; health, 38.5%; community, economic and resource development, 16.1%; and, justice and other expenses, 6.4%. The budget assumes real GDP growth in Manitoba of 2.4%, in line with Canada's rate, and nominal GDP growth of 4%. Here are the budget's highlights: It's going to cost more to drive in Manitoba. Drivers will pay 2.5¢ a litre more in taxes when they fill up their tanks; diesel fuel will increase by the same amount and marked gasoline used by farmers will increase by 3¢ a litre. As well, car registration fees will increase by $35. Smokers will now pay 25¢ a cigarette in taxes, up from 22.5¢; taxes on fine cut tobacco will increase to 24¢ a gram, up from 21.5¢; and raw leaf tobacco will be 22.5¢, up from 20¢ a gram. Services such as spa services and haircuts over $50 are now subject to the 7% provincial retail sales. Risk management will cost more, with insurance premiums for property, liability, group life insurance premiums, trip cancellation and baggage insurance all subject to 7% provincial sales taxes. The basic personal amount of Manitoba income taxes will increase $250 to $8,634 in 2012. In real dollar terms that amounts to 10.8% or $27. The dividend tax credit for eligible dividends from corporations subject to the general tax rates will decrease to 8% from 11%, adding $13.5 million to provincial revenues. In some cases, those collecting and remitting the PST will have to file their returns less frequently: if collections are more than $5,000, you will file monthly; if collections are between $500 and $5,000, you will file quarterly; and if they are less than $500, annually. It will cost more to owe the province money on provincially administered taxes or repayments of refundable tax credits: the prime rate plus 6%, up from prime plus 4%. Bouncing a cheque will cost more: service fees are increased to $25 from $20 for each occurrence.  The Corporate Capital Tax will increase to 4%. There are also a number of changes to tax credits available to corporations: A new Data Processing Investment Tax Credit will allow a 4% credit on the capital cost of new buildings and 7% on the capital cost of machinery and equipment purchased or leased for use in data-processing centres after budget date and before 2016. Costs to replace or improve property will be eligible, too. Accommodation costs for up to $250 a night will be allowed as eligible costs under the Film & Video Production Tax Credit after April 17, 2012. After 2012, the Co-op Education & Apprenticeship Tax Credit will expand for apprentices and journey people outside of Winnipeg. For Early Level Apprentices the credit is enhanced to 15% of wages to a maximum of $3,000 (up from 10% to a maximum of $2,000); for Advanced Level Apprentices, the credit doubled to 10% of wages to a maximum amount of $5,000; the same is true of credits on wages for journey people. The Nutrient Management Tax Credit provides for a credit of 10% of capital cost of prescribed nutrient management equipment, used to clean up lakes and water systems. Starting in 2012, half of the Manitoba Research & Development Tax Credit of 20% will become a refundable tax credit for companies that do in-house R&D. New economic initiatives in the budget include the first bilingual World Trade Centre to provide Manitoba businesses with access to a global network, $1.5 million to the Metis Economic Development Fund and a new Mining Academy to open in Flin Flon. When ranked across all other provinces, Manitoba boasts an ideal standard of living for single graduates who earn $50,000. Total personal costs and taxes for that person amount to $15,535, when graduate tax credits are taken into account. Only New Brunswick's costs are lower at $13,634. By comparison, costs in British Columbia are $32,959; in Ontario, $26,576; and in Alberta, $20,316. Evelyn Jacks is president of Knowledge Bureau and covered the budget for province-wide news station CJOB with host Richard Cloutier. Additional Educational Resources: EverGreen Explanatory Notes and Financial Recovery in a Fragile World.  

Across Canada, provincial governments are cutting spending in a concerted effort to reduce deficits generated during the recession-fighting years. But as one after another present their Spring budgets, it is clear the challenges are greater for some provinces than others.   Saskatchewan is the only one of the eight provinces that have presented their budgets ó Prince Edward Island and Newfoundland & Labrador are due later this month ó that is in the black. For the fiscal year ended Mar. 31, 2012, it reported a surplus of $56 million; that is expected to grow to $95 million in fiscal 2013. The rest are battling deficits but British Columbia, Alberta, Manitoba, Quebec and Nova Scotia forecast balanced budgets in 2013/14. New Brunswick is back in the black in fiscal 2015 but Ontario ó with a chart-topping deficit of $15.3 billion in 2011/12 ó does not expect to see a balanced budget until fiscal 2018. Provincial budgets 2012 ($mil.) 11/12 est. 12/13 13/14 14/15 15/16 16/17 17/18 British Columbia -2,497 -968 154 250 Alberta* -1,318 -886 952 5,193 Saskatchewan* 56 95 131 146 168 Manitoba -1,120 -460 23 Ontario -15,283 -15,153 -13,300 -10,700 -7,800 -4,200 0 Quebec* -2,452 -589 1,041 700 1,155 1,629 New Brunswick -471 -183 -99 6 Nova Scotia -261 -24 15 20 23 * The figures are net transfers from the three provinces' surplus or rainy-day funds. Source: Bank of Montreal and provincial budgets Certainly the western-most provinces have the rosiest outlook. Even given governments' conservative estimates, resource-rich B.C., Alberta and Saskatchewan can look forward to healthier growth in GDP than their eastern counterparts. Alberta expects growth of 3.8% this year; Ontario and Quebec, by contrast, are looking at growth of 1.7% and 1.5%, respectively. That translates into healthier revenues. Thanks in part to the oil sands, Alberta can expect to outpace the other provinces with a 4.6% increase in government revenue to $40.3 billion. According a Bank of Montreal report entitled, "Provincial Budgets: Fiscal Repair Underway,î combined provincial revenue growth will be 3.9% in 2012/13, a modest "pick-upî from the previous year. "Across the provinces,î say the report's authors Michael Gregory and Robert Kavcic, "revenue outlooks are based on starkly different economic climates, with high commodity prices fuelling strong growth in the West, while depressed manufacturing and fiscal restraint weigh in much of Central and Atlantic Canada.î Lacking burgeoning growth in revenues ó except, perhaps, Alberta ó provincial governments have turned to cost cutting to reduce deficits and, generally, increases in program spending have been low to moderate with the average in fiscal 2012/13 at 1.9%. The outliers are Alberta at 3.3% and Nova Scotia at 3.2%. It an all out effort to tame its deficit, Manitoba's April 17 budget froze or cut spending in 10 departments while putting money where it perceived it was needed ó health, education, family services and infrastructure ó a trend that is apparent in a number of provinces. Deficit-fighting is one thing ó assuming the provinces continue on their prescribed paths. But it doesn't address the provincial governments need for funding and their accumulated debts. Report the BMO economists: "Net debt ratios are proving slow to stabilize overall. Provinces tend to account for their capital spending programs ëoff budget' and the financing of these programs leads to net new debt issuance.î In fact, borrowing requirements for the provinces surpass the aggregate deficits. Ontario, alone, will add another $22.8 billion in net debt in the 2013 fiscal year. Debt reduction is still to come and while the provinces may be addressing their deficits, there is still a lot of heavy lifting to be done if provincial governments are to pay down their debts.   Additional Educational Resources: Free Trials in Debt and Cash Flow Management, Basic Bookkeeping for Business and Elements of Real Wealth Management.  

The facts of Ruff v The Queen (2012) are unusual, to say the least. Charles Ruff, a lawyer in Calgary whom you would expect to be more skeptical than most, was a victim of fraud. But the issue is not the fraud, but whether in computing income from his legal practice, Ruff could deduct the amount lost to the fraud. Ruff's troubles began in April 2005 when he received an email from Purity Adams asking for his help. Purity's father, "a wealthy cocoa and gold merchant in South Africa,î had been assassinated, she told Ruff, but not before he had left US $8.5 million in a container with a security company in Abidjan, CÙte d'Ivoire, during a business trip. The remaining members of the Adams family needed financial assistance to obtain the release of that container and Purity was soliciting Ruff's help. Most people who receive emails from people in far-off lands asking for money simply delete them. Ruff, however, was convinced this was genuine ó notwithstanding some rather embarrassing observations made by the court during the hearing. The court took note of the purported security company's website: "One obvious observation in looking at the page in colour is that of the five pictures at the top of the page, two of the pictures are clearly taken in an area where there is snow. One picture is of a house with snow in the driveway and snow on the roof and another is of a dog standing on a roadway that is snow-covered. The security company was supposedly located in Abidjan, CÙte d'Ivoire, which is very close to the equator. Given the proximity of Abidjan, CÙte d'Ivoire, to the equator, one would have expected that the climate would be a tropical climate and not one where one would find snow-covered houses or roads. The Appellant stated that he had not noticed this until it was brought to his attention during argument following the hearing.î There were other troubling aspects that should have alerted Ruff to the suspicious nature of the request. After Ruff had paid numerous charges to have the container released and shipped, Aeroground Diplomatic Courier Services notified Ruff that the container had arrived in London but the freight had not been paid and additional funds were required. According to this letter: "During the random checks, we discovered the delivery charge has not been paid from the origin (Cote d'Ivoire). Please see the reverse side of your Airway bill shipment document. It was stated that on no account we should not deliver any diplomatic consignment to any customer on credit. This is part of our company policy.î The double negative in "on no account we should not deliver,î should have alerted Ruff the lawyer. But it did not and Ruff continued to slide further into the trap ó divesting himself of even more money in the pursuit of the elusive container. In total, Ruff spent $398,995, which he then wanted to deduct from his law practice income as a business expense. The Canada Revenue Agency (CRA) took issue with this and the matter ended up in the Tax Court of Canada. The CRA claimed that since this was fraud there was no source of income. Ruff counterclaimed that his law practice was his source of income and he was pursuing profit through those means. This argument became futile when the court decided that all of the expenses were unreasonable and that the CRA had properly disallowed the expenses under Section 67 of the Income Tax Act. What makes this decision doubly interesting is that the tenor of the court seemed to imply that if the losses to fraud had been reasonable, the losses could have been deducted from Ruff's income. The fact that every aspect of Ruff's transaction would seem unreasonable to almost any observer denied him any prospect of deducting these losses against his income. As the judge remarked: "It seems to me that there are simply too many inconsistencies and too many questions about the story for the appellant to have a reasonable belief that the container existed.î This case reveals that losses to fraud may be deductible if they are lost from a "sourceî of income (business, investment, etc.) and they are reasonable. 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.  

Tax time is a good time to evaluate the tax-efficiency of your investment strategy. This is especially true if the market volatility of recent years has spooked you into replacing the equities in your portfolio with "saferî investments that guarantee your principal and interest.  In the Knowledge Bureau Report of April 11, I promised you a look at the eroding effects of both taxes and inflation on your investment returns. The picture is not pretty. Recall that reporting interest on your income tax return follows two basic tax rules: ï You report interest in the tax year in which it is actually received or receivable. ï You report interest accrued from compounding investments on the debt's anniversary date, even though you haven't received the cash. What effect do those rules, and the annual inflation rate, have on your real returns? Consider the following chart, which analyzes the real return on a $1,000 Canada Savings Bond. In this scenario, we are assuming a 1.8% interest rate, 3% annual inflation and a 10-year hold period. The taxpayer is in the 31% tax bracket. Amounts shown are in current-year dollars (i.e. adjusted for inflation from year 0). Real after-tax return of $1,000 Canada Savings Bond, compounding interest Year Interest earned (1.8%) Taxes (31%) Inflation adjustment(3%) Principal and earnings left Real after-tax return Principal $1,000.00 0 Plus: Less: Less: 1 $18.00 ($5.58) ($30.00) $982.42 (1.76%) 2 $18.32 ($5.68) ($29.47) $965.59 (1.71%) 3 $18.65 ($5.78) ($28.97) $949.49 (1.67%) 4 $18.99 ($5.89) ($28.48) $934.11 (1.62%) 5 $19.33 ($5.99) ($28.02) $919.43 (1.57%) 6 $19.68 ($6.10) ($27.58) $905.42 (1.52%) 7 $20.03 ($6.21) ($27.16) $892.08 (1.47%) 8 $20.39 ($6.32) ($26.76) $879.39 (1.42%) 9 $20.76 ($6.44) ($26.38) $867.34 (1.37%) 10 $21.14 ($6.55) ($26.02) $855.90 (1.32%) Total $1,195.30 ($60.54) ($278.86) $855.90 (14.41%) Source: Essential Tax Facts, 2012 by Evelyn Jacks   After 10 years, your return after taxes and inflation is actually a loss of 14.41% in real dollar terms. Was this a safe investment? At the outset, you may have said "Yesî because the principal is guaranteed. Unfortunately, your principal has lost purchasing power because it could not compete with the eroding factors of annual taxes and inflation. Both time and money are precious. Always consider the real rate of return ó after taxes, after inflation and after taking into account the costs associated with the investment ó that you must earn to create purchasing power when you need it. And be sure to discuss the role of interest in your overall portfolio with your advisors. Evelyn Jacks is president of Knowledge Bureau and author of Essential Tax Facts 2012 and co-author of Financial Recovery in a Fragile World with Al Emid and Robert Ironside. Follow her on twitter @evelynjacks  

As of early April, taxpayers have filed slightly more than eight million tax returns, with more than 80% of filerschoosing one of three electronic filing methods ó netfile, efile or telefile. This is a remarkable uptake of the electronic filing options that were pioneered in the early 1990s. The Canada Revenue Agency (CRA) also reports that the average refund on returns filed as of that date is $1,533. Of the 10% of filers who owed a balance, the average paid was slightly more than $3,187, which, unfortunately, may require some of those taxpayers to pay quarterly tax installments. Twenty per cent of those filing returns had no income, which means they filed in order to receive social benefits. The tax-filing deadline for most individuals is midnight April 30. For proprietors and their spouses, the deadline is June 15, although interest on any balances owing by those proprietors begins accruing on May 1.   Additional Educational Resources: Introduction to Personal Tax Preparations Services course and Essential Tax Facts 2012 Edition.  

It really is time to do that income tax return, with the April 30 deadline for individual filers fast approaching. And reporting interest income deserves particular attention this year, if you are among the worried investors who exchanged stocks for the "safeî havens of interest-bearing debt obligations such as guaranteed investment certificates (GICs) and Canada Savings Bonds. Indeed, the guaranteed return of principal and income resulting from the government using your money is attractive. But it is not all it appears to be: these interest-bearing investments are neither tax-efficient nor inflation-proof. If you take taxes and inflation into account, over time, you will actually lose both principal and purchasing power. Consider the tax filing rules. Interest reporting follows two basic tax rules: ï You must report the interest in the taxation year in which it is received or receivable. ï Compounding allows you to earn interest on interest during the term of the contract. On your income tax return, you must report all interest income that accrues in the year ending on the debt's anniversary date. So, you pay taxes on income you haven't received as you've effectively reinvested the pre-tax interest at the same rate as the principal pays. The issue date of the debt instrument is important because reporting stems from that date rather than the date of ownership. For example, because of the annual reporting rules, which apply to investments acquired after 1989, an issue date of Nov. 1, 2011, does not require interest reporting until the following year, that is 2012. In other words, the accrual of interest for the two-month period of Nov. 1 to Dec. 31 is not reported in the 2011 tax year. Things get even more tricky when investment contracts have unique features, such as: ï they do not bear interest and are sold at a discount to their maturity value; ï the interest rate of the instrument is adjusted for inflation over time; ï the rate of interest may increase as the term progresses; ï interest payments may vary with the debtor's cash flows or profits; ï if the instrument is transferred before the end of the term, a reconciliation of interest earnings must take place. Interest received or accrued each year must be reported as investment income on Schedule 4 ñ Statement of Investment Income and Line 121 of the tax return. Remember: you must report interest income earned even if you did not receive a T slip. Get help from your tax advisor in the trickier situations.  Next time ó Evaluating CSB returns: Taking inflation into account   Evelyn Jacks is president of Knowledge Bureau and author of Essential Tax Facts 2012  and co-author of Financial Recovery in a Fragile World. Follow her on twitter @evelynjacks