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. 

If you have not been totally forthcoming with Canada Revenue Agency (CRA), you should take advantage of the CRA's Voluntary Disclosures Program (VDP) and set the record straight. The CRA is making it very clear it will not tolerate taxpayers shirking their responsibilities. Take, for example, tax advisor Christopher Patterson of Toronto. According to the CRA, Patterson was selling false charitable donation receipts to clients. When he prepared their tax returns, he duly claimed those charitable donations as deductions on line 144 of the income tax return. For the 2004 to 2008 taxation years, he claimed more than $1 million in false charitable donation deductions, reducing the amount of taxes payable by his clients. Overall, unwarranted refunds totaling $313,992 were issued to Patterson's clients. Patterson has pleaded guilty to fraud and received an 18-month conditional sentence and 200 hours of community service; he is also prevented from preparing or filing tax returns for anyone but himself. Tax protestors in Saskatchewan may have received even harsher punishments. (Tax protestors commonly use the "natural personî argument to claim that they are not legally required to pay taxes, a claim the CRA does not accept.) Douglas Amell was sentenced to 16 months in jail and fined $189,796 for tax evasion. Heidi Keyzer was sentenced to five months in jail and fined $33,106, and Robert Amell was sentenced to three months and fined $20,334. The offences occurred during the taxation years 2003 to 2006.The fines represent 100% of the taxes sought to be evaded and benefits received. But you may avoid these penalties if you make a valid disclosure. A valid disclosure meets four conditions: it must be voluntary, complete, involve the application or potential application of a penalty, and generally include information that is more than one year overdue. You must complete form RC199, Taxpayer Agreement ñ Voluntary Disclosures Program. If the CRA accepts the disclosure as valid, you may only have to pay the taxes or charges owing, plus interest. 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.  

When the federal government tables its 2012-2013 budget tomorrow, the emphasis will be on reduced spending and deficit reduction. And, by all indications, the feds may be in a good position to put the brakes on federal spending without bringing the recovery to a screeching halt. ï Growth in real gross domestic product (GDP) has met expectations. According to Statistics Canada, real GDP rose 0.4% in the fourth quarter of 2011, after advancing 1% in the third quarter, with consumer spending and exports contributing the most to fourth-quarter growth. Economists are now pegging 2012 growth at 2.2% and 2013 growth at 2.4%-2.5%, which is pretty much in line with Bank of Canada expectations. "The catalyst behind this positive adjustment,î wrote TD Bank economists in a recent report, "is an improvement in the near-term environment for the global economy and financial markets, which is expected to pay off in terms of higher world commodity prices, more robust exports and stronger confidence at home.î ï Federal government revenues have steadily increased quarter after quarter with fourth-quarter 2011 revenue up 4.8% year over year, according to StatsCan's Government Finance Statistics. TD economics forecasts revenue of $244.5 billion in 2012 and $256.7 billion in 2013. The upshot? Report TD economists: "Improved economic assumptions and lower than-anticipated spending numbers suggest that the federal govern­ment is enjoying a brighter fiscal outlook than just a few months ago ó the deficit is now estimated at $26 billion (1.5% of GDP) for fiscal 2011-12.î That is a $5-billion improvement on the Bank of Canada's fall update. ï Inflation is within the range the Bank of Canada has targeted, with the February consumer price index (CPI) advancing 0.4%, taking annual inflation to 2.6%, a slight edge upward from 2.5% last month. As has been the story lately, energy prices ó more specifically, gasoline prices ó and food prices pushed CPI higher. Core inflation also rose 0.4% in February, boosting the underlying rate of inflation to 2.3% from 2.1% in January. Doug Porter, deputy chief economist at Bank of Montreal, notes core inflation is running a "bit hotterî than the 2.1% the Bank of Canada expected. But, he says in a recent report, "Even with some further upward pressure from gasoline prices in next month's reading, inflation should begin to recede in March thanks to some very favourable year‐ago comparisons for both headline and core.î Adds Paul Ferley, assistant chief economist at Royal Bank of Canada, in a report: "With the Canadian economy continuing to operate with unused capacity, as evidenced by a still high unemployment rate, inflation is expected to drop back below 2% during the course of 2012. Under this scenario, the Bank of Canada can focus on sustaining the recovery.î ï Interest rates are low ó the Bank of Canada overnight rate is 1% ó and are expected to stay that way until mid-2013. In the short to medium term, that should support Canada's housing market and consumer spending. ï Unemployment is expected to hold around 7.5% this year, before easing to 7% in 2012, note TD economists. Although national employment growth has stalled over the past six months, economists expect the labour market to snap out of its recent lull. But prospects for job creation in 2012 are not great, with governments at all levels reducing payrolls and businesses able to meet increased export demand through higher productivity. ï Consumer debt as a percentage of disposable income has breached the 150% barrier. Since much of this debt is real estate-related ó either mortgages or home equity lines of credit ó the spectre of a collapse in the housing market strikes fear in the hearts of economists and policymakers. Estimates of just how overvalued the Canadian housing market is range from 10%-15% to 25%. Throw in higher interest rates and many Canadian households will be stretched to the limit. Yet, consumer spending is a mainstay of our economic growth ó and thus constitutes a potential, longer-term problem. So, the government is in a position to move forward with deficit reduction while keeping the economy on a firm footing. But it is not without its challenges, as Evelyn Jacks notes below. The government needs money to meet its commitments to Canada's aging population. It will definitely require some juggling.   Additional Educational Resources: Debt and Cash Flow Management and Financial Recovery in a Fragile World.  

Canada Revenue Agency (CRA) is putting some high-flying Tax-Free Savings Accounts (TFSAs) and their "unusualî transactions under its microscope. It seems the ability of some TFSA holders to turn a $5,000 annual contribution into, for example, $300,000 in one year has attracted Ottawa's attention. The CRA recently sent questionnaires to selected TFSA holders and is threatening a penalty of close to 100% of the value of the TFSA for any missteps. Since the introduction of TFSAs in 2009, some TFSAs have grown beyond what the CRA believes are the TFSAs' natural limits using "qualifiedî investments ó that is, investments in properties, including money, guaranteed investment certificates (GICs), government and corporate bonds, mutual funds and securities listed on a designated stock exchange. Indeed, the CRA believes holders of some TFSA have employed complicated, and prohibited, "swap transactions,î transferring properties or assets ó such as thinly traded securities with large differences in "bidî and "askî prices ó between the TFSA and the holder of the TFSA or a person not at arm's length from the holder. When those securities are swapped out of a TFSA into non-registered accounts, they may triple in value; repeated swaps can quickly turn $5,000 into $300,000. But, says CRA, such "aggressiveî tax planning gives rise to unfair advantages. On that basis, the CRA is going after certain TFSA holders. (Most need not worry: the CRA is only after those who have misused TFSAs in order to gain unfair advantages through circuitous transactions and prohibited investments.) How to identify an improper TFSA advantage. An advantage is any benefit, loan or debt that depends on the existence of a TFSA. An improper advantage is any benefit that increases the fair market value (FMV) of a TFSA that can reasonably be attributed, directly or indirectly, to one of the following: ∑ a transaction, event or series of transactions that would not have occurred in an open market between arm's length parties acting prudently, knowledgeably and willingly, one of the main purposes of which is to enable the holder (or another) to benefit from the tax-exempt status of the TFSA; ∑ a payment received in substitution for services rendered by the holder of the TFSA or a person not at arm's length with the holder, or a payment of a return on investment or proceeds of disposition for property held outside of the TFSA by the holder or a person not dealing at arm's length with the holder; ∑ a swap transaction; ∑ specified non-qualified investment income that has not been distributed from the TFSA within 90 days of the holder of the TFSA receiving a notice from the CRA requiring them to remove the amount from the TFSA; ∑ any benefit that is income (including a capital gain) and is reasonably attributable to deliberate overcontribution or a prohibited investment.   Prohibited investments. These are investments to which the TFSA holder is closely connected and include: a debt of the holder; a debt or equity investment in an entity in which the holder has a significant interest (generally 10% or greater); and a debt or equity investment in an entity with which the holder or an entity does not deal at arm's length.   Not included in this prohibited designation are mortgage loans that are insured by the Canada Mortgage and Housing Corporation (CMHC) or by an approved private insurer. Most TFSA holders need not worry about these audits; they pertain only to aggressive and abusive use of the TFSA. But those faced with audits should seek professional advice as soon as possible. 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.  

Once all the members of your family — including minors and young adults — have filed their tax returns, you can turn your attention to teaching the next generation the long-term benefits of investing their returning social benefits and refunds wisely. Contributing up to $5,000 to a Tax-Free Savings Account (TFSA) each and every year is one way young adults can build a tax-free pension for retirement. Investment income earned in a TFSA accumulates tax-free, which means that future withdrawals from the TFSA are not taxed. This is extremely powerful. Imagine, future generations not needing to pay taxes on their retirement savings! But to make this a reality, your young adults must make maximum TFSA contributions part of a disciplined annual savings program. Contributing to a RRSP is also very important and may, in fact, come before a TFSA in order of investing if your adult children have net or taxable income and sufficient contribution room. An RRSP deduction reduces net income, which increases refundable tax credits (such as the GST/HST credit) and enables the transfer of tuition, education and textbook amounts. Putting money into an RRSP early not only helps your young adults reduce taxes but will also create a three-part savings plan — for home ownership, life-long learning and retirement — all within the same vehicle. If you wish to add to your child's nest egg, you can generally loan funds for investment purposes to your adult child without invoking the Attribution Rules in Section 74.1 of the Income Tax Act, which attribute resulting interest and dividends back to the lender. But beware of Section 56 (4.1) of the Act, which can attribute income back to the lender if it is reasonable to assume that the lender made the loan, or the recipient incurred the indebtedness, to reduce or avoid taxes. The Section 56 (4.1) rules are broader than the Section 74.1 rules and relate to all income earned on transferred property. It's important to stay clear of the tax auditor. So, be sure to structure your affairs properly. It's Your Money. Your Life. By filing audit-proof tax returns for all family members at the same time, starting with the lowest-income earner and moving to the highest, you can increase after-tax results for the family as a unit. Then, leverage any tax windfalls by teaching young adults the proper order for investing, so that they can maximize their opportunities to build tax-efficient, million-dollar futures with their tax-sheltered accounts. Evelyn Jacks, president of Knowledge Bureau, is author of Essential Tax Facts 2012 and co-author of Financial Recovery in a Fragile World. Knowledge Bureau also publishes The One Financial Habit That Could Change Your Life by Robert Ironside and Edwin Au Yeung and The Smart, Savvy Young Consumer by Pat Foran, both good guides for young investors. To purchase your books, visit www.knowledgebureau.com/books.   Follow Evelyn on Twitter @evelynjacks    

On Thursday, March 29, after the federal Minister of Finance Jim Flaherty presents his 2012-2013 federal budget in the House of Commons, Knowledge Bureau Report will issue a Special Report, analyzing and assessing the impact of Budget 2012 on your finances. Tax expert and Knowledge Bureau President Evelyn Jacks will weigh in on the tax consequences, while other Knowledge Bureau experts will comment on the economic and financial and retirement planning implications. So, watch your email for this Special Report.   Additional Education Resources: Financial Recovery in a Fragile World and Debt and Cash Flow Management  

At tax time, Canada Revenue Agency (CRA) releases a steady stream of bulletin and notices to help taxpayers. Recently, the publication T4060 CRA Collections Policies ó Individual Income Tax (T1) and Notice 270 concering elimination of the HST in British Columbia in 2013  appeared on the CRA website. There are few changes to report in T4060, which sets out the procedures for taxpayer remittance and CRA collection of taxes. But worth noting is the Frivolity Penalty, found in section 179.1 of the Income Tax Act. If you are planning on appealing a CRA assessment or reassessment, make sure your appeal has legs. The Frivolity Penalty allows the CRA to impose a penalty of 10% of tax owing if your appeal proves to be frivolous or groundless and you launched an appeal only to defer paying taxes. Notice 270 is a meatier document detailing the ramifications of the April 1, 2013, elimination of the 12% HST. As of that date, HST will no longer apply on taxable supplies or services made in B.C. or to taxable property or services imported to B.C. As of that date, B.C. reverts to the 5% GST. The key date, then, is April 1, 2013. Consider the following CRA example: In December 2012, a consumer buys a refrigerator on a layaway plan. According to the written agreement, the consumer must make six equal, monthly payments starting in January. Possession and ownership of the refrigerator will be transferred to the consumer after the final payment is made in June 2013. HST at the rate of 12% applies to the monthly payments made before April 1, 2013. Payments made on or after April 1, 2013, are subject to GST at the rate of 5%. As you can see, the CRA intends to draw the line at April 1, 2013, so that any payment obligation arising on or after that date will be a GST payment obligation, notwithstanding contractual relations that take into account taxes payable. Additional Educational Resources: Knowledge Bureau ToolKit and Master Your Retirement 2012 Edition.