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. 

Over the past 125 years, whenever Canada has faced a recession or depression, exports have led the country into recovery. But this time around, says Mark Carney, governor of the Bank of Canada, exports have not measured up. "During the most intense phase of the Great Recession ó a nine-month period beginning in the fall of 2008 ó the level of Canadian exports plunged more than 16%, or more than twice the total drop during the previous two cycles,î Carney recently told an audience in Waterloo, Ont. "By the end of last year, exports still remained roughly 8% below their pre-recession peak.î To put that in perspective, considers the Canadian international trade merchandise numbers recently released by Statistics Canada.  In 2011, Canada's exports totalled $457.6 billion, an increase of 13% from 2010, as prices rose 8.6%. Imports increased 10.3% from 2010 to $456.4 billion, mainly on the strength of volumes, which were up 8.3%. That gives Canada a 2011 trade surplus of $1.2 billion, Canada's first annual trade surplus since 2008. So, Canada may be on the right track but it is not there yet. Indeed, Canada has steadily lost global market share. "Our performance has been the second worst in the G-20,î Carney said in his speech. "Our share of the world export market fell from about 4.5% to about 2.5% and our manufactured-goods export market share has been cut in half. Consistent with this drop, employment in Canada's manufacturing sector has fallen by more than 20%, representing nearly half a million jobs.î So, what is to blame for Canada's export challenge? Certainly the strong Canadian dollar has played a role but it seems Canada has also been selling the wrong products in the wrong markets. Our exports are concentrated in slow-growing advanced economies, particularly the United States, rather than fast-growing emerging markets. Since the recession, emerging economies have accounted for about two-thirds of global economic growth and half of the growth in global imports. In Emerging Asia, says Carney, "a massive new middle class is being formed, growing by 70 million people each year and representing a fast-rising share of global demand for all types of goods.î StasCan figures suggest some movement in the right direction. Although exports to the U.S. increased 10.4% year over year to $330.1 billion in 2011, the U.S. accounted for 73.7% of total exports in 2011, down from 87.1% in 2002. Exports to the United Kingdom increased 14.8% in 2011 to a record high of $18.8 billion and exports to China reached $16.8 billion, up 26.9% from 2010. Crude petroleum dominated exports to the U.S., up 32.3% to a record $68.4 billion. Precious metals and alloys represented more than 60% of Canadian exports to the United Kingdom and in trade with China, exports of iron ores and concentrates recorded the largest gains. Wood pulp and similar pulp remained the top export for a second consecutive year. Carney's prescription for reversing Canada's export record? Refocus, retool and retrain, he told his business audience. To read Carney's speech in full, click here .   Additional Educational Resources: Financial Recovery in a Fragile World  

The latest economic numbers are displaying a spring-like optimism. Businesses surveyed for the Bank of Canada's Business Outlook Survey  are clearly positive about the next 12 months, March employment figures have far outdistanced expectations and corporate Canada is "fit as a fiddle,î as CIBC's March 27 Economic Insights reports. And that is good news for an economy that has been struggling with household debt and government cost-cutting. "Even with public-sector retrenchment underway, and indications that consumers may not have the same appetite to spend as earlier in the recovery,î write CIBC economists Benjamin Tal, Andrew Grantham and Avery Shenfeld in A Corporate Health Check: Fit as a Fiddle, "corporate Canada could be positioned to pick up the mantle and drive economic growth in the years ahead.î The only persistent risk to global growth is escalating oil prices. Writes Shenfeld: "Crude's fate is tied up in the tricky geopolitical dance taking place between Iran and the West, and given the lack of transparency in Iranian politics, a more disruptive misstep is a risk.î But even then, there is cause for subdued optimism. "As a net exporter of oil, and a more significant consumer of renewable energy, Canada is much better positioned than the U.S., Europe or Japan to weather such a storm,î he adds. "A given oil price jump results in a 50% greater hit to growth in the U.S. than in Canada.î Certainly businesses are optimistic about the year ahead. According to the Spring Business Outlook Survey, sales grew over the past 12 months and are expected to grow at an even faster rate over the next 12, based on order books and new contracts. That spills over into increased investment in machinery and equipment and rising employment. "Most firms expecting to expand their workforces cited the need to support current or expected sales growth,î reports the Survey. Statistics Canada's release of March employment numbers was another harbinger of an economic spring. It wasn't just that the 82,000-increase followed four months of little change and knocked the unemployment rate down 0.2 percentage points to 7.2%; it was more the composition of the jobs that created the excitement. "The underlying details of the employment report were extremely positive,î writes TD Bank economist Sonya Gulati in a report, "with gains being broad-based across sectors and industries. The majority of the gains were in full-time positions (more than 70,000), and part-time job creation was a more modest 12,400. Private sector job creation led the way with 42,600 net new positions, the public sector came next with 20,900 and last but not least, the self-employed sector created 18,800 net new jobs.î Dawn Desjardins, assistant chief economist at Royal Bank of Canada, reviews the past 12 months and notes a healthy trend: full-time employment was up 181,300 with part-time employment up a smaller 15,900. As well, average hourly wages for permanent workers were up 2.5% in March compared to a year earlier. Adds Gulati: "With private sector employment creation starting to put together a string of healthy positive numbers, we see that the economic growth baton is, indeed, being shifted from the public sector to the private sector.î Certainly, Canadian businesses have never been in a better position, according to CIBC's composite indicator of corporate strength. Based on nine indicators ó debt-to-equity ratio, cash-to-credit ratio, profit margin, return on equity, return on capital, export diversification by commodities and by countries, business bankruptcy rate and business confidence ó the composite is signaling robust growth: ï Debt-to-equity ratios are below long-term averages and have risen only slightly from 2007 lows. ï Cash as a proportion of corporate credit is at an all-time high of almost 60% (vs. 20% in the 1990s), providing "a considerable cushion.î ï Profit margins ó despite a backward slide during the recession ó are again "within shouting distanceî of their 2008 peak. ï Return on equity took a hit during the recession but has quickly bounced back. That rebound, reports CIBC, has been held back somewhat by two of Canada's strongest-growing sectors ó oil & gas extraction and construction. The accommodation & food sector, on the other hand, posted a return on equity three times its historic average. ï Business confidence finished 2011 slightly above long-term averages, despite global volatility. ï The bankruptcy rate is at its lowest in at least 30 years at only three per 1000. The long-run average is closer to 10. ï On the diversification front, exports to developing countries are increasing after a long history of focusing on the U.S. But diversification by commodity is not as impressive, although Canada is not as heavily reliant on oil as it once was.   Additional Educational Resources: Debt and Cash Flow Management and Elements of Real Wealth Management Courses.  

If the federal budget brought home one lesson about our post-crisis reality it is the importance of being financially self-reliant. If you were born on or after Feb. 1, 1962, you will not qualify for Old Age Security (OAS) benefits until you are 67. That means you need to create another $13,000 in retirement savings to replace those benefits. Yet, economists forecast negligible net returns after inflation and taxes over the next five years ó and that's going to make filling the gap more challenging. Fortunately, your tax return is one vehicle that can propel your efforts forward. That begs the question: are you taking tax rules into account when you are planning your family's investment strategy? Tax-efficient investment-income planning uses available tax rules to shift income among family members in order to equalize the amount reported by each family member, thereby reducing taxes for the unit as a whole. That helps your family create more "redundant income,î allowing you to save more money for the future. Done well, an effective tax strategy will also temper future tax erosion on the accumulated capital pools dispersed among family members. The first goal, then, is to create taxable income in the hands of each family member by using the progressive nature of the tax system ó that is, all the tax credits and deductions to which you are entitled as a family unit ó to average down the tax burden for the family as a whole. Be sure to discuss the following elements of a successful and tax-efficient family investment plan with your tax and investment advisors: ï Recover errors and omissions. First and foremost, always use the Taxpayer Relief Provisions to recover taxes owing to each family member as a result of errors or omissions on previously filed returns. This includes filing omitted returns, which is critical if you are to maximize RRSP contribution room as well as carry forward investment provisions such as capital losses which can reduce future taxes payable. Errors and omissions that end in recovered tax refunds also provide new capital for investment purposes. However, be audit-proof, as opening prior returns invites a check-up by the taxman. ï Maximize access to family tax-free zones. Begin with the Basic Personal Amount by taking advantage of family income-splitting opportunities. Also, by transferring important tax credits from one family member to another ó such as tuition, education and textbook amounts ó those tax-free zones are increased, reducing taxes for everyone.  Again, leverage those tax savings by investing refunds in the right tax-exempt or tax-deferred investment vehicle. ï Put capital in the right hands. Know how to transfer assets among family members. Inter-family investment loans, for example, can shift money to the lower-income family member from a higher income-earner during lifetime and at death. To do so legally, however, you'll need to transfer income and capital within the confines of the Attribution Rules, which can allocate investment income back to you on certain assets transferred to family members. You can avoid the Attribution Rules by putting money into tax-exempt assets for family members, such as Tax-Free Savings Accounts or a principal residence. ï Use tax-deductible debt. Understand what debt is tax deductible and how to shift capital losses from one spouse to another. In addition to interest expenses, other deductible carrying charges include safety deposit box fees, investment counsel fees as well as accounting fees for investment-income calculations. Itís Your Money. Your Life. Tax-efficient investing increases income, which leads to the more effective accumulation, growth, preservation and transition of family wealth. Tax-filing time is a great time to educate yourself and family members: ask your tax and investment advisors the questions for which you need answers. They can help you set up your 2012 tax year to benefit from tax-efficient investing. Evelyn Jacks, president of Knowledge Bureau, is author of Essential Tax Facts 2012 and co-author of Financial Recovery in a Fragile World. To purchase your books, visit www.knowledgebureau.com/books.asp Follow on Evelyn on Twitter @evelynjacks  

Business owners, prepare to have your vexation factor reduced. The March 29 federal budget ó the Economic Action Plan 2012 with the subtitle Jobs, Growth and Long-term Prosperity ó promises to continue the government's battle against "red tape,î making your working life easier. "Red tape hampers economic growth and erodes trust between government and citizens,î says the budget plan. "The Government is committed to removing bureaucratic obstacles to businesses' efforts to create jobs and growth.î So, this year's budget promises to implement the recommendations of the Red Tape Reduction Commission as well as reduce the tax-compliance burden for businesses. The Red Tape Reduction Commission was an offshoot of the 2010 budget and came into being in January 2011. After a year of country-wide consultations, the commission delivered its Recommendations Report  in January 2012. The feds responded by introducing the "One-for-Oneî Rule, whereby the government will eliminate one existing regulation for each new one it introduces. So, when a new or amended regulation increases the administrative burden on business, the government will offset from existing regulations an equal amount of administrative burden. The budget promises the government will develop an action plan to address the commission's other recommendations in the coming months. The budget also promises to reduce tax compliance burdens by: ï doubling the thresholds for eligibility to use the GST/HST streamlined accounting methods ó which simplify compliance for small businesses and public service bodies ó increasing access; ï amending the Income Tax Act so that a single designated partner of a partnership can sign a waiver on behalf of all partners; ï allowing corporations to pay a single dividend and designate a portion of that as an "eligible dividend.î Under existing rules, if only a portion of a dividend is eligible for an enhanced dividend tax credit, that portion must be paid as a separate dividend; ï consolidating and clarifying the administrative policies pertaining to the Scientific Research and Experimental Development (RS&ED) tax incentive program that are currently contained in about 70 documents. These initiatives will complement the SR&ED Policy Review Project, according to the budget plan; ï allowing the Canada Revenue Agency (CRA) to reply electronically to questions submitted by businesses using the My Business Account portal. The CRA's written responses will increase businesses' confidence in the information provided by the CRA; ï enhancing businesses' electronic access to the CRA's web forms and to the secure My Business Account portal. As well, an improved business section on the CRA's website provides a "one-stop shopî for businesses and a clear path to available electronic services with a new task-based web page; ï introducing a new administrative policy to ensure that the CRA's penalty structure for late-filed information returns is both fair and reasonable. When a business is unable to comply in a timely manner with its reporting obligations, the CRA will reduce the penalties when the number of late-filed returns is small; ï adding information on recourse mechanisms to CRA notices of assessment and reassessment. The CRA is also updating publications related to tax fairness and developing new content and new types of content such as webinars on redress mechanisms. For more information on the March 29 federal budget, please see Knowledge Bureau Report's Special Report: Budget 2012. Additional educational resources: EverGreen Expanitory Notes  

Every so often a budget makes historic changes; the March 29, 2012, federal budget or Economic Action Plan 2012 is such a document. It will be remembered for three milestones: Moving the age eligibility for Old Age Security (OAS) to age 67 from age 65 starting in 2023, Eliminating the penny, Celebrating Canada as a world leader. Indeed, today Canada leads the G-7 countries ó the U.S., UK, Germany, France, Italy and Japan ó in economic growth, and has the distinction of being voted the "#1 Best Country for Businessî by Forbes Magazine (2011) among 134 countries. Certainly, the most important provision from the point of view of tax and financial advisors and their clients is the age eligibility for OAS. This is a "heads upî change for the 45- to 54-year-old crowd and one that is hugely unpopular, judging from the 77% of Knowledge Bureau Report poll respondents who were against the move.   However, if we are to understand the full effects of the changes, there are substantive details to explore, including one provision that starts soon. Effective July 1, 2013, Canadians will be able to participate in a voluntary deferral of the OAS pension for up to five years in order to receive a higher annual pension later. Healthy seniors, therefore, may be able to supplement the returns on their investments by postponing the OAS. It speaks to the need for a highly skilled retirement income planner well versed in tax efficiencies. The phase-in of the age eligibility of 67 is a good decade away and this allows for a savings period in which to fill the gaps left by the OAS. However, today's budget forecasts continued low interest rates and increasing inflation for at least half that period. Achieving the shortfall may be difficult, given the investment climate predicted by private sector economists in the budget. The size and effect of that OAS capital gap will also depend on who you are: (a) The highest-income earners will not be affected at all. If your income is more than $69,562 in 2012, for example, your OAS is already being clawed back. (b) Clearly low-income pensioners will suffer the most; for this constituency, an alternative to the OAS and Guaranteed Income Supplement (GIS) will need to be developed. Like the OAS, the eligibility age for the Allowance and the Allowance for the Survivor will also gradually increase, from 60 today to 62 starting in April 2023. (c) Middle-income earners — those with incomes today that fall under the claw-back threshold of $69,562 — will need to plan now. They may plan to work longer before retiring. If they work until 67, this will give them two additional years to compound savings and earn pension credits. However, if they decide to retire at age 65 or before, they will need to withdraw more money from private savings. Those withdrawals will come at the beginning of the retirement period, which has a big impact on capital accumulations for the entire period. The budget tells us that those who were born on or after Feb. 1, 1962 will have an age of eligibility of 67. Those who were born between April 1, 1958 and Jan. 31, 1962 will have an age of eligibility between 65 and 67. Someone born in April 1960 will be eligible for OAS/GIS at age 66 and one month, as illustrated below:   OAS/GIS Age of Eligibility by Date of Birth     1958 1959 1960 1961 1962 Month of birth                Jan. 65 65 + 5 mon. 65 + 11 mon.   66 + 5 mon. 66 + 11 mon. Feb. – Mar. 65 65 + 6 mon. 66 66 + 6 mon. 67 Apr. – May 65 + 1 mon.   65 + 7 mon. 66 + 1 mon. 66 + 7 mon. 67 June – July 65 + 2 mon. 65 + 8 mon. 66 + 2 mon. 66 + 8 mon. 67 Aug. – Sept. 65 + 3 mon. 65 + 9 mon. 66 + 3 mon. 66 + 9 mon. 67 Oct. – Nov. 65 + 4 mon. 65 + 10 mon. 66 + 4 mon. 66 + 10 mon. 67 Dec. 65 + 5 mon.    65 + 11 mon.    66 + 5 mon. 66 + 11 mon.   67     Note: mon. = months Source: Table 4.2 March 29, 2012, Federal Budget So, how do you fill the gap? Consider the following case: a pre-retiree who will have $500,000 in savings when he retires at age 65 by which time the new rules are fully phased in. He will not receive OAS until age 67. That requires $6,500 more be withdrawn (using today's dollars and OAS pension levels) in each of first two years of an average 20-year retirement period. Here's what this means to you: If your plan is to live off the return earned on the capital and protect the $500,000 for your heirs, the loss of $6,500 in the first two years of retirement will result in a depletion of capital of about $26,5001 — you'll only have $473,500 at the end of the 20 years instead of the planned $500,000. Alternatively, if you were not withdrawing but rather saving your $6,500 OAS receipts each year in the two-year period and the money was invested at 3% return for 20 years, you would be giving up after-tax growth (taxes at 22%) of $23,767. For a couple, that amounts to $47,534. This is not small change. The run-up time is also going to be plagued by low interest rates. So, just how much you need to save depends on how much time you have to do so, and the rate of return. The young have it easier: to recover the full $13,000 over a 20-year period and assuming a constant rate of return, compounding and no adjustment for inflation, the chart below speaks for itself. Rate of return   Investment required 1%   $10,654 2%   $8,749 3%   $7,198 4%   $5,993 5%   $4,900 6%   $4,053 7%   $3,359   Formula: Future value/ (1+R)t = $13,000/(1.01)20 =$10,654 A Tax-Free Savings Account (TFSA) is the logical place to turn. Astute investors will be developing a completely tax-free pension plan for themselves, propelling their wealth much further than the heavily taxed generations of the 90s, for example. How much can a TFSA Help? This depends on the rate of return in the TFSA. What do retirement savers today need to know? (A special thank you to Robert Ironside's finance class at Kwantlen Polytechnic University, Vancouver, B.C., for these calculations). Assume that: You are currently 40 years old; The average annual inflation rate is 2.5% over the next 25 years; The real rate is 3% a year that time frame; The nominal rate is 5.5% a year. Then: a) To replace $6,000 of today's purchasing power will require $11,124 of income in 25 years; b) To replace the lost two years of OAS, you will need to save an additional $21,285; c) The 40-year-old will need to save an extra $416 a year (or $35 a month) for 25 years (based on a nominal yield of 5.5%). The additional savings will drop as the current age of the future retiree drops. For example, a person who is 20 today will need to save an extra $189 a year to replace the lost OAS of $18,227 a year for two years starting 45 years from today. However, if economic forecasts are accurate, achieving those required rates of return will not be easy, particularly on interest-bearing investments: Interest rates will remain relatively low over the next five years: three-month Treasury bills are expected to pay 0.9% in 2012, 1.3% in 2013 and an average of only 2.3% a year in the period 2014-16. Ten-year government bond will pay only 2.2% in 2012, 2.8% in 2013 and 3.5% on average in that same period. Inflation, however will exceed those returns in the near future: consumer price index inflation is expected to be 2.1% in 2012 and 2% in 2013, averaging 2% for the period. GDP inflation is higher: 2.4% in 2012 and 2.0% in 2013 leveling off to 2.1% for the period 2014-16. In other words, real returns, for investors will be nil. The growth in the Canadian economy will fall behind that of the U.S.: for the period ending 2016; Canada's average growth is expected to be 2.3%; for the U.S., the number is 2.6%. 1 Calculation based on return rates of 1% in the first year, 2.5% in the second, 3.5% in the third year and 4% in subsequent years.  The original plan for $14,518 withdrawal in the first year increased by 2.7% annually.  The original plan results in maintenance of $500,000 investment.  By removing $6,500 extra in the first two years to cover missing OAS payments results in a reduction in ending capital to $473,500. Evelyn Jacks, president of Knowledge Bureau, is author of Essential Tax Facts 2012 and co-author of Financial Recovery in a Fragile World.   To purchase your books, visit www.knowledgebureau.com/books.asp Follow on Evelyn on Twitter @evelynjacks   Additional Educational Resource: Distinguished Advisor Conference 2012 - Navigation: Charting a New Financial Course  

The federal government's budget, Economic Action Plan 2012, may be ground-breaking both for its changes to the eligibility age for Old Age Security (OAS) and the disappearance of the penny. But for a government that wants to get its fiscal house in order yet build long-term prosperity, it is a balancing act. And that will require some balancing, too, on the part of professional financial advisors as they work with their clients to build their long-term prosperity. "It is clear that wealth advisors and tax and retirement planners must pay much more attention to the combined effect of taxes and inflation on returns, after fees, given the numbers in the budget,î says Evelyn Jacks, president of Knowledge Bureau, which teaches Real Wealth Management strategies in its designation programs. "With personal tax increases of 6.5%, GDP inflation rates of 2.4% and three-month Treasury bills returning only 0.9%, careful investment choices will be required,î she adds, "especially given today's changes to the OAS.î In her story below, Jacks looks at how pre-retirement income planning has changed. "Its not what you earn that counts,î concludes Jacks, "it's what you keep and what that's worth in the future that matters.î Knowledge Bureau Faculty Member Alan Rowell, DFA-Tax Services Specialist, and contributor to this Budget 2012 Special Report agrees: "This is the point at which financial advisors need to look across the board and do what needs to be done, not with regards to return on investment alone, but with in-the-pocket net cash when you need it.î Rowell tackles the changes Budget 2012 has made to the corporate tax regime in his story below. Advisor Douglas Nelson, MFA and author of Master Your Retirement: How to fulfill your dreams with peace of mind, puts it this way: "In the study of Real Wealth Management, we learn that how well an inter-advisory team of financial professionals coordinates all aspects of a family's financial affairs into one strategic plan is often the greatest contributor to the financial success achieved by that family. "When the ripple effect of every financial change is weighed, the financial outcome is often much more positive and highly predictable,î he adds. "When changes in a federal budget affect tax rates, inflation rates, government benefits and rates of return, the importance of the Real Wealth Management approach is underscored. This is about how well the advisory team and the client respond to these changes.î In this Special Report, Nelson assesses the changes Budget 2012 have made to the retirement system in Canada. Also, for more on the impact of the budget on personal income taxes, see the story below by Walter Harder and Greer Jacks.   Additional Educational Resource: EverGreen Explanitory Notes