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. 

The Westminster Principle, named after the 1935 House of Lords decision in The Duke of Westminster's Case, holds that a taxpayer can legally arrange their affairs to minimize tax payable, regardless of motive. This tenet of our tax jurisprudence is seemingly contradicted by Canada's General Anti-Avoidance Rules (GAAR) which were introduced in 1988. In 1984 the Supreme Court in Stubart refused the Government's argument that transactions must have a legitimate business purpose. Following this decision Parliament added section 245 of the Income Tax Act which now provides the CRA with an opportunity to reassess taxpayers who have complied with the letter of the law, but who they feel have "misused or abusedî the provisions; uncertainty is inescapable. Fortunately, Canada retains the structure of the British common law system that upholds the rule of law and the separation of powers between the three branches of government- legislative, executive, and judicial. The independence of the judiciary is therefore a cornerstone of our system, and recent judgments from the Tax Court of Canada and the Federal Court of Appeal re-affirm that autonomy. This is good news for taxpayers challenged by creative CRA claims that they have "misused or abusedî the provisions of the Act in order to produce a tax benefit. In Lehigh Cement Limited v. Canada, 2010 FCA 124, the CRA contended that Lehigh had contravened the spirit and intention of the Act in structuring its finances; the Federal Court of Appeal unanimously disagreed and provided some valuable information. At paragraph 37 the court stated: "the fact that an exemption may be claimed in an unforeseen or novel manner, as may have occurred in this case, does not necessarily mean that the claim is a misuse of the exemption. It follows that the Crown cannot discharge the burden of establishing that a transaction results in the misuse of an exemption merely by asserting that the transaction was not foreseen or that it exploits a previously unnoticed legislative gap.îFurthermore, in Collins & Aikman Products v The Queen, 2009 TCC 299 the court cited the words of Paris J. in Landrus v. The Queen, 2008TCC274, where it was stated: "the Minister has tried to use the GAAR to fill in what he perceives to be a possible gap left by Parliament; that would be an inappropriate use of the GAAR.î These sort of judicial statements are reassuring for Canadian taxpayers and lawyers. The continuing independence of the judiciary has mitigated the seemingly limitless ambit of the GAAR and the CRA's ability to question the purpose of certain business transactions. The judiciary are bound by the legislation that Parliament enacts, but they undoubtedly strive to protect taxpayers from aggressive and asinine assertions from the CRA who attempt to claim that the GAAR is a set of ëcatch-all' provisions for any transactions that they feel provide a tax benefit unforeseen by Parliament. The GAAR creates uncertainty in the law, which is never a welcome attribute. The rule of law, the notion that all laws should be made prospectively and not retroactively, that they should be clear and available to all concerned, and that nobody should suffer a loss of liberty as a result of arbitrary governmental power, is the foundation of the Westminster Principle and our common law system. The GAAR sits uncomfortably with these long held principles and therefore the independence of the judiciary is more important than ever in Canadian tax law jurisprudence. The common law, meaning the binding and/ or persuasive judicial statements and interpretations of legislation and previous case law, will continue to be the only avenue of clarity for the nebulous General Anti-Avoidance Rules unless Parliament amends them. It will be interesting to see whether the Westminster Principle can stand its ground with the help of the judiciary or whether the GAAR will ultimately prevail; these recent comments offer a shimmer of hope for Canadian taxpayers. Greer Jacks is a research assistant with the Knowledge Bureau working out of Victoria, BC, and has been contributing to court case updates in EverGreen Explanatory Notes.   Additonal Educational Resources:   <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com🏢office" />

Evelyn Jacks, Your Money, Your Life   To read the latest blog entry by Evelyn Jacks: Following Investment Advice in Volatile Times

If recent market volatility is on the mind of investors and taxpayers, no doubt a chat about recovery time is in order, particularly when taxpayers have about a decade left before retiring. The calculations below assume that the investor's savings of half a million are in a registered account so that the earnings are not eroded by income tax for the purpose of this illustration.They have lost half their value in market turmoil. How long will it take to recover? Rate of return will matter, a lot. So will inflation protection. Doing the math, if this investor were to invest his entire remaining portfolio in 10-year government bonds, which are currently yielding 2.88%, his saving would have recovered to $332,085 at the end of 10 years. In order to make it back to $500,000 before retirement, he must add an additional $14,730 to the pot each year. He should also keep in mind that, depending on inflation rates over the next ten years, that $500,000 could have a purchasing power of less than what $400,000 has today. Astute investors will be looking to their tax and financial advisors for help with this significant challenge to find cost, tax and debt management efficiencies to help build up the fortress. Additional Educational Resources: Registered vs. Non-registered investment calculator, available in EverGreen Explanatory Notes.    

Two recent cases and a fact sheet from CRA on how it reviews returns Reviewing returns at the Canada Revenue Agency, underscore how expensive non-compliance can be, and in these turbulent times, trouble with the tax department is the last thing that frazzled investors need. The owners of Dominion Transmission Inc. have pleaded guilty in the Provincial Court of Manitoba to three charges of tax evasion for the years 2002 to 2004 and have been fined a total amount of $140,000. In this case the owner kept 2 sets of books, one for cash sales and one for non-cash sales, with the result that fines were levied on all three levels of taxationópersonal, corporate and GST. On the corporate side, the fines represented 100% of the taxes attempted to be evaded. On the personal side, a fine representing 132% of the evaded personal federal taxes for the years 2002 to 2004 on income that was not reported was levied. A third fine penalized under-reported GST. In the case of Spence v CRA, 2011 FC 426, we are reminded that it pays to double and triple check returns. The CRA is unrelenting when it comes to inaccurate returns, even if a third party makes the mistakes for you! ëThe Fairness Rules' give the CRA a wide discretion to waive or reduce some of the penalties involved in late filing or payment of taxes, but the penalties and interest charged must have resulted from circumstances beyond the taxpayer's control. Illness, accident, serious emotional or mental stress caused by a death in the family or natural disasters can trigger the fairness legislation. Unfortunately for Mr. Spence, he did not meet those criteria and so the court found in favor of CRA. This is a wake up call for all taxpayers and tax advisors- be careful because the moral is simply this: You are responsible for what's reported on your return Additional Educational Resources: EverGreen Explanatory Notes, currently updated for the most recent news in tax law, compliance and jurisprudence.  

  The Finance Department released legislative proposals for consultative purposes August 16 which include provisions of the March 22, 2011 federal budget, reintroduced on June 6, 2011. The proposals include the following: New non-refundable tax credits: The $2000 Family Caregiver Tax Credit The New Children's Arts Tax Credit which is in addition to the Fitness Tax Credit (Reviewing returns at the Canada Revenue Agency) The Volunteer Firefighters Tax Credit  The Removal of the $10,000 limit on eligible expenses under Medical Expense Tax Credit for dependent relatives. A series of changes for students who claim the Tuition, Education and Textbook Credits, and those who wish to allocate their RESPs amongst siblings without forfeiting CESGs. Changes are also introduced for a variety of retirement pension plans including RRSPs and IPPs, rules relating to corporations with interests in partnerships, the calculation of the "kiddie taxî and charitable donation compliance rules, including the "exclusivity of purpose and functionî test for registered Canadian amateur athletic associations, on which a consultation was launched on July 4, 2011. Changes for business include a variety of capital cost allowance provisions that accelerate write-offs for clean energy generation and conservation equipment, better align deduction sin the oil sands sector with the oil and gas sector, and provide for an expansion of the Mineral Exploration Tax Credit for one year to flow-through share agreements entered into before March 31, 2012. Additional Educational Resources: EverGreen Explanatory Notes, newly updated for these budget provisions and recent jurisprudence.  

There is much an astute financial advisor can do during a financial crisis. In fact, it's a great time for great advice. This is particularly powerful when tax and financial advisors work together to review the specific financial concerns their clients need to pay attention to in the short term, so that a strategy plan for disaster management can be put into place. This begins with family tax management. "Tax and financial advisors following a Real Wealth Management ô approach can replace the financial jitters by developing a concrete action plan to manage potential financial disaster,î says Evelyn Jacks, president of Knowledge Bureau, which has pioneered the approach, featured in its designation programs. "A good place to start with is a comprehensive look at current tax filing habits to do three things: tap into missed refunds through prior errors and omissions, minimize penalties and interest caused by late filing, and increase both cash flow and investment returns with a tax efficiency plan for both income and capital.î The following "baker's dozenî of do's and don'ts can start the process of tax management: Don't delay paying your balance due with CRA. The interest on the balance compounds daily at the prescribed annual rate of 5%. If you or your clients owe, best to clear it up. (It's not going to go away.) Do dig for errors on prior filed returns. Remind your clients that they can recover refunds on errors or omissions up to 10 years back (that's tax year 2001 until December 31). This is a good time to do so, to offset a current balance due, or, if in the clear with CRA, pay off credit card or other non-deductible debt. Do file your tax return. Clear that late return, as that interest clock will just keep ticking on the taxes due, the late filing penalties and the past interest accumulations. If you are a financial advisor, solicit the help of a tax advisor to speak to the collections department at CRA to arrange for your client to make payments over time, if the balance due is the reason for the filing avoidance. Tap into social benefits. Remind your clients that when income falls below certain ceiling levels, the family may begin receiving social benefits, such as Child Tax Benefits, for example. This won't happen until a tax return is filed, another reason to do so promptly. Don't overpay quarterly tax instalment payments. The next one is due September 15. Your clients probably have a pretty good idea of what their level of income will be by the end of 2011 and a formal estimation can help. If it will be less than 2010, the next two instalments may not be necessary. Work with a tax advisor on this. Don't cash in RRSP deposits, if possible. This will simply cause a tax problem next year. Look for other sources to fund immediate bills, including CRA's. Do an accrued gains balance review. Are there enough accrued gains in non-registered accounts, to offset loss selling today? Can you carry back unused losses, or do you expect to have capital gains in the future? Crystallizing losses during the current market volatility may not make sense otherwise. ADDITIONAL EDUCATIONAL RESOURCES: Financial Recovery in a Fragile World Available in December, 2011!