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. 

Lengthy Wrongful Dismissal Suits Can Produce Lump Sum Averaging <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com🏢smarttags" />Opportunity<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com🏢office" />   Itís a tough time for certain employees today.  As unemployment rises in response to the financial meltdown and global recessions, job loss is a reality in North America, with many receiving termination notices and often, that comes with wrongful dismissal suits.   Once settled, amounts are paid after the fact, with the result that taxable lump sums must be added to income in some cases.  Taxpayers receiving certain lump sum payments, including damages for loss of wages and pension benefits may qualify for special averaging provisions under the Income Tax Act.  The lump-sum payment must have been paid after 1994 from one of the following sources: income from an office or employment received under: judgment from a court or other competent tribunal; an arbitration award; or a lawsuit settlement agreement (including damages for loss of office or employment); benefits from Unemployment Insurance or Employment Insurance; benefits from a superannuation or pension plan (other than non-periodic benefits such as lump-sum withdrawals); spousal, common-law partner or taxable child support payments; or benefits from a wage-loss replacement plan. Amounts not qualifying include: an amount under normal collective bargaining, such as negotiated back pay (although an amount from an arbitration award does qualify); severance and bonuses that are accepted as paid (that is without a dispute); legal expenses; salary reimbursements; reimbursement of top-up payments; repayment of pension benefits; deduction of social assistance payments, workers' compensation, etc. The averaging treatment is allowed under S. 120.31.  Definitions of qualifying amounts are in S. 100.2.  The qualifying amount received by the individual in the particular year (as outlined above) is deducted if that total is $3,000 or more.  The income is then added back into income for the year to which it applies.  The taxes for each year are then recalculated and if the averaging method results in a reduction in taxes, the current-year taxes are reduced accordingly. Taxpayers with income that qualifies for this special averaging treatment will receive a Form T1198 from the payor.  The form should be attached to the tax return and the full amount received included on the return.  CRA will perform the special averaging and reduce the current-year taxes if the averaging results in savings.   Educational Resources:  Now is a good time to look at retirement income plans, family succession and estate plans in an attempt to better understand financial needs for a future which could certainly include tax increases on both income and capital.  To learn more consider the following Educational Resources available from The Knowledge Bureau: Tax Efficient Retirement Income Planning    Master Your Retirement       Master Your Taxes Tax Efficient Investment Income Planning                      Master Your Real Wealth      Master Your Investment in the Family Business  

<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com🏢office" /> The Government of Canada has introduced some proposed legislation under the Fairness for the Self-Employed Act which could provide the opportunity for self-employed individuals to access many of the same employment insurance benefits as employees.  The legislation, recently announced by the Minister of Human Resources and Skills Development, The Honourable Diane Finley, forms part of the pledge for helping self-employed taxpayers with some much needed income protection for life events such as the birth of children, sickness and compassionate leave.   With over 2.6 million Canadians in the ranks of the self-employed and many more turning to starting their own businesses as they are facing lay-offs, the opportunity to receive employment insurance benefits for this sector of the work force couldn't be better timed.   In the January 27, 2009 Federal Budget, the Government brought forth a proposal to review alternative methods of providing those self-employed Canadians with access to benefits that, in the past, have only been available to those who were working for an employer.   Under the proposed legislation in the Fairness for the Self-Employed Act, in order to access the benefits, those workers who are self-employed would be required to earn a minimum of $6,000 from their business in the previous calendar year.  There would be an ìopt inî requirement to the EI program, and those who enrolled would be required to pay premiums into the plan for at least one year before they would be allowed access to the benefits available.  With a proposed start date of January 2010, those who chose to enrol in the plan at the beginning of the program could have access to the benefits beginning in January 2011.   The benefits that could be provided under the plan would include the following:   ∑         Up to 15 weeks of sickness benefits to be provided if a person couldnít work due to injury or sickness   ∑         Up to six weeks of compassionate care leave to those who need time away in order to care for members of their family who are at risk of death through illness   ∑         Up to 35 weeks of adoptive or parental benefits available for parents with a newborn baby or an adopted baby in their care   ∑         Up to 15 weeks of maternity leave benefits for mothers or those about to give birth to a child   As mentioned, premium payments to the EI benefits plan under the proposed changes  would be required for a minimum one-year period, after which benefits could be applied for.  If program benefits are accessed by the self-employed person, the individual would be required to continue making premium payments on their income for as long as they continued to be self-employed.  There would be an opportunity for the self-employed person to opt out of the program if EI benefits were not applied for or received.    The EI premium rate paid would be the same as that of a salaried person.  In 2010 the amount remitted to the plan would total $747.36, based on maximum insurable earnings of $43,200. The employer side of the payment would not be required as the benefits available to the self-employed would be restricted in that there is no access to regular employment insurance benefits.   More information on the proposed measures is available at the Human Resources and Skill Development website at www.hrsdc.gc.ca.   For Advisors and Their Clients: The MASTER YOUR PERSONAL FINANCE series of books provide financial education for decision makers. Published by The Knowledge Bureau, they help investors and their advisors have better conversations about their money and the decisions required to accumulate, grow, preserve and transition it to the next generation.

The Department of Finance has released a proposal for improvements to the framework of private pension plans that are federally regulated. The reforms are the end result of a process begun by Minister of Finance Jim Flaherty in January 2009. A review of the shortfalls in pension funding, which some estimates put as high as $50 billion dollars, was needed to deal with the meltdown that occurred within the financial markets over the past year. It is estimated that approximately 7% of current pension plans would fall under this category of plans in Canada. The reform proposals would have an impact on the following areas: Plan members would have increased protection as solvency deficits are dealt with and upon plan terminations companies will be required to fully fund the pension benefits. Disclosure requirements within the plan will be enhanced and annual member statements will include expanded information, which will provide important details for plan members. Minimum funding requirements using average solvency ratios to determine the market value of the plans. Pension surplus thresholds will be increased to 25 percent under the Income Tax Act, an increase from the current 10%. Funding arrangements will be made for pension plans that are in distress and the plan sponsor would be provided with a period of time where payments are not required. Changes would be negotiated to the pension arrangements and representation would be provided all plan members. A framework for defined contribution plans that would implement measures to provide explicit information on responsibilities and accountabilities to employers, members and administrators. The Minister of Finance, the Honourable Jim Flaherty said "These reforms will provide enhanced benefit security for workers and retirees while allowing pension plan sponsors to better manage their funding obligations as part of their overall business operations.î For the full background paper on the Modernized Federal Pension Framework link here.     Subscribe to EverGreen Explanatory Notes for more information. Or attend The Knowledge Bureau's November Year End Tax Planning Workshop coming to a city near you November 24 to 30.

By Evelyn Jacks What's happening with the value of the Canadian dollar? Should investments be pulled out of US currencies? Concerned investors may have these and other questions on their minds as they attempt to make decisions on buying property and investments south of the border and hedging on currency values. The Governor of the Bank of Canada, Mark Carney, has attempted to address some of these issues in a presentation October 28th to the Standing Senate Committee on Banking, Trade and Commerce. He brought a cautious acknowledgement of improvement including the view that a global recovery from the financial crisis is beginning. However, Mr. Carney noted also that ìsignificant frailties remain.î One of these significant frailties is the strength of the Canadian dollar, which is working against economic recovery in Canada, causing a drop in net exports. The bank now projects that the Canadian economy will contract by 2.4 per cent this year and then grow by 3.0 per cent in 2010 and 3.3 per cent in 2011. Another is predictions around inflation. The Bank expects both core and total inflation to return to the 2 per cent target in the third quarter of 2011, in the meantime rising from a negative position to 1 per cent this quarter. These issues point to volatility in currency valuations. Specifically, the Governor stated: The main upside risks to inflation relate to the possibility of a stronger-than-anticipated recovery in the global economy and more robust Canadian domestic demand. On the downside, the global recovery could be even more protracted than projected. (Editor's Note: . . .particularly in light of the H1N1 pandemic?) In addition, a stronger-than-assumed Canadian dollar, driven by global portfolio movements out of U.S.-dollar assets, could act as a significant further drag on growth and put additional downward pressure on inflation. ìWhat ultimately matters,î says Mr. Carney, ìis the exchange rate's impact in conjunction with all other domestic and foreign factors on aggregate demand and inflation in Canada. To put it simply, the Bank looks at everything through the prism of achieving our inflation target.î And that target is the reason why the Bank reaffirmed its conditional commitment to maintain its target for the overnight rate at 1/4 per cent until the end of June 2010 with a view to achieving a 2% inflation target. ìThe exchange rate should be seen in this context,î says Mr. Carney. ìIt is an important relative price, which the Bank monitors closely.î Evelyn Jacks is Founder and President of The Knowledge Bureau and Program Director for the Distinguished Advisor Conference, which will be covering these global issues of concern with Robert Ironside, Richard Croft and other leading advisors in tax and financial services from Canada and the U.S. in Tucson, AZ November 8-11.

By Alan Rowell, DFA, Tax Services Specialist   As you may be aware, legislation was introduced on September 18, 2009 to put the Home Renovation Tax Credit into effect. As of this writing, it has passed first reading with two more to go, plus the Senate. On October 19, 2009, CRA held an information session in Hamilton, Ontario with representatives regarding the HRTC. At issue is when a qualifying expense is actually incurred and if it is deductible if the expense has been incurred but the work has not been completed before February 1, 2010. The Issue CRA has not, as of yet, issued a clarification on their interpretation of the proposed legislation but does admit that it is "greyî. There are three interpretations of the proposed legislation at issue: A qualifying expenditure will be eligible when a contract is signed, regardless of the installation date, or A qualifying expenditure will be eligible when a contract is signed and paid for, regardless of the installation date, or A qualifying expenditure will be eligible when paid for and all installation and work is completed before February 1, 2010. CRA's representative, an auditor from the "underground economyî section, has one suggestion ñ contact your MP so that clarification can be implemented directly into the legislation and avoid the differences of opinion that will ultimately become an issue. The Mechanics Putting aside the legalese of the situation, the mechanics of filing and claiming the HRTC is also going to be a challenge, especially for professional tax services who will be under the April 30th time constraints. A new schedule will be introduced for claiming the home renovation expenses. The draft version of the schedule, a copy of which was provided by the CRA representative, looks much the same as a medical expense schedule, with one notable difference. The GST/HST number of each receipt needs to be input into the return. Any expense claimed that does not have the GST/HST number on the new schedule  may trigger a pre/post assessment review. This review could require taxpayers to send in their receipts. In the meantime, this hugely popular program initiated in the January 2009 Federal budget is now running into trouble for legitimate contractors. The popularity of the program has created sales, helping to stimulate our economy. With these sales also comes the need to complete the work and have installations completed. Some contractors are already booked through January 2010.  Do they need to finish on time for the claims to be deductible? This needs to be clarified as soon as possible. Canadians need to know - no one wants to spend a couple of years working through objections and appeals waiting for the Courts to interpret the legislation. This needs to be clarified now ñ have the legislation state the intent so that everyone knows where he or she stands and can plan accordingly.   Alan Rowell, DFA, Tax Services Specialist is President of The Accounting Place.

EXPERT OPINION: KNOWLEDGE BUREAU FACULTY Knowledge Bureau asked three of its Distinguished Faculty members about their views on these latest developments and specifically, resulting currency issues. Here is what they say: Richard Croft I believe that the Canadian dollar will reach par and then likely move above par in time. I think the question for the Bank of Canada (BoC) is not whether it will move higher, but the speed at which it moves higher. Of note is Prime Minister Harper's answer to a question about the Canadian dollar poised by a reporter. Mr. Harper - who is an economist by trade - said (and I am paraphrasing) that he felt a rapidly rising Canadian dollar would dampen the pace of the recovery and then went on to say that he had full confidence that Mr. Carney at the BoC was handling the Canadian dollar in an appropriate fashion. The key point is the rapidly rising comment. There is very little any government can do to manage their currency against the momentum of currency traders. You can talk down the dollar temporarily as the BoC did recently. But over time, it will move back to its base case driven by momentum, and that points to a stronger Canadian dollar - much stronger. The fundamental principle underpinning this has to do with a simple proposition as put forward by Dennis Gartman, editor of the Gartman Letter. Canada has things (commodities, oil, precious metals) that the world wants and Canada is willing to sell those things at very high prices - all of which translates into a stronger dollar.   Gordon Pape I think it should be obvious to everyone at this point that trying to predict currency movements is like trying to catch the wind. If the global recovery gathers momentum in 2010, then we should see upward pressure on the Canadian dollar. The extent to which the Bank of Canada is willing to back up its words with actions will determine how fast and how far it will rise. But if we slip back into recession and commodity prices weaken, especially oil, then the loonie will fall back to perhaps as low as 80-85 cents. The bottom line is that the fate of the loonie is closely tied to the health of the international economy. ROBERT IRONSIDE, ABD, Ph.D. (Finance) My take on this is that the US dollar is now the currency of choice for the carry trade, whereby you borrow in the low cost market and invest in higher returning assets abroad. As long as this continues, there will be downward pressure on the US dollar. A counter argument could be made if there were a significant movement back to risk aversion, as this would drive the US dollar higher, much as it did a year ago. Once the Federal government starts to tighten monetary policy, I expect a sharp upward movement in the US dollar, as the carry trades are unwound and the dollar loans are repaid. Of course, if this occurs after other Central Banks have started their monetary tightening cycles, this effect would be significantly weakened. A rapidly rising US dollar could also have a large dampening effect on asset prices, much as the unwinding of the yen carry trade a year ago caused major disruptions in both currency and asset markets. It now appears that we have a rapidly inflating global asset price bubble starting to form, while deflation remains the predominate force in both goods and labor markets. Asset price inflation is being driven by extremely loose monetary policies in all major economies, while goods and labor market prices are being driven lower by high and rising unemployment in most Western economies. Moving to the Canadian dollar, it still appears to be closely tied to the price of oil. At the time of writing this article, oil had weakened somewhat over the past few days, as had the Canadian dollar. It will be very interesting to see what happens to oil prices when US interest rates start to move higher, as there will be two competing forces at play. On the one hand, that should signal that US economic growth is returning, tending to push prices higher. This will be offset by a strengthening US dollar, which will tend to push the price of oil down. I have no data to suggest which force will predominate. Does anybody else care to either agree or disagree with me? I would appreciate hearing your views. Good question, Robert. Please send your thoughts by clicking on the Add Your Thoughts button below: Evelyn Jacks is Founder and President of The Knowledge Bureau and Program Director for the Distinguished Advisor Conference, which will be covering these global issues of concern November 8-11 with top advisors from Canada and the US in Tucson, AZ.