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. 

It's half time, and that's a good time to review the income requirements of the owner-manager you may be working for. How should you begin this process? Here are some tips to consider: First, in determining the optimum income plan, each individual family member's total income and type will be critical. It is important to ensure that the family member has enough total income to utilize fully his or her personal credits, excluding those that can be transferred to other family members. These are discussed below. So, the total amount of income is important. The type of income is equally important. The payment of a reasonable salary, for example, will increase both net and taxable income. It will also normally attract CPP and (often) EI contributions, both of which give rise to additional personal credits and may increase the family member's Canada Employment Credit. A decision to pay additional salary must take these into account. Another key issue is the fact that a salary is earned income for purposes of creating RRSP contribution room. If it is desirable to allow family members to accumulate retirement income there may be a preference for paying a salary. Dividend income, on the other hand, increases both net income and taxable income as well, but also provides the dividend tax credit. Issues that need to be taken into account in evaluating the payment of a dividend as compensation include: the taxable amount of the dividend is greater than the cash amount, so dividends have a greater effect on clawbacks than do salary, dollar for dollar; dividend income is not earned income and does not create RRSP contribution room; dividend income is investment income for purposes of computing the Cumulative Net Investment Loss account, and the receipt of a dividend may increase access to the capital gains deduction; dividends paid from a private corporation to a minor will normally attract the kiddie tax, meaning that they are taxed at the highest possible rate; because of the dividend tax credit, the tax treatment of the dividend must be modeled closely where the taxpayer has relatively low income and may be in danger of not utilizing all of his or her personal credits. For more information on owner-manager tax planning, take The Knowledge Bureau's certificate course entitled Tax Planning for Corporate Owner-Managers.   Join us in our next edition of Breaking Tax and Investment News for some Back To School Tips for taxpayers.

.... but tax assistance is available It is an increasing expectation of the health care system across Canada today that the family will participate proactively in the care of their severely ill family members. This is a noble and honorable privilege, but it can also be exhausting and expensive, affecting workplace productivity as people leave to provide care, but also challenging the resources of the family, who may also be funding several children through university or preparing for their own retirement in a difficult environment. Fortunately the federal government has a host of tax preferences that can help. We will discuss some of them below: 1. THE HOME RENOVATION TAX CREDIT   This is a non-refundable tax credit provided to those who spend dollars for work performed or goods acquired in respect of an eligible dwelling, that is, a housing unit eligible to be an individual's principal residence at any time between January 27, 2009 and February 1, 2010, which is the time frame within which the qualifying expenditures must be made. This housing unit must be an individual's principal residence, ordinarily inhabited by the individual, the individual's spouse or common-law partner, or their children. According to the Finance Department website, this means that any dwelling that you own and use personally could qualify, including your home or your cottage. You may make renovations to both properties under the plan; however there is a maximum claim. The credit will applies to eligible expenditures of more than $1,000, but not more than $10,000, resulting in a maximum credit of $1,350 ($9,000 x 15%). To be eligible, expenditures incurred in relation to a renovation or alteration to an eligible dwelling (or the land that forms part of the eligible dwelling), must be of an enduring nature and integral to the dwelling, and includes the cost of labour and professional services, building materials, fixtures, rentals, and permits. If the eligible expenses under the Home Renovation Tax Credit also qualify for the Medical Expense Tax Credit, described below, they can in fact be claimed under both provisions. The following expenditures will not be eligible for the HRTC: the cost of routine repairs and maintenance normally performed on an annual or more frequent basis; expenditures that are not integral to the dwelling, and other indirect expenditures that retain a value independent of the renovation; expenditures for appliances and audio-visual electronics; and financing costs. 2. RENOVATIONS UNDER THE MEDICAL EXPENSE TAX CREDITS Incremental costs of building or modifying a new home for a patient who is physically impaired or lacks normal physical development where those costs are incurred to enable the patient to gain access to or be functional within the home may also qualify as medical expenses. Examples of home renovations that would be eligible are: the cost of installing entrance and exit ramps widening of doorways lowering shelves modifying kitchen cabinets moving electrical outlets. Examples of ineligible home renovations include the installation of hardwood floors or hot tubs. The types of structural changes that could be eligible are not restricted to the above examples. "Reasonable expenses" pertaining to a particular structural change may include payments to an architect or a contractor. 3. THE ATTENDANT CARE AMOUNT A deduction is available for attendant care expenses, and is available to individuals who are entitled to claim the disability tax credit.  The expenses must allow the disabled person to pursue employment or education. 4. CAREGIVER AMOUNT S. 118(1)(c.1) provides that a taxpayer who supports and lives with an infirm dependant in a home which the taxpayer maintains may claim a specified amount for that dependant as a non-refundable credit against taxes payable. To qualify, the dependant must meet these three criteria: be at least 18 years old, be either the child or grandchild of the taxpayer or the taxpayer's spouse or common-law partner, or the parent, grandparent, brother, sister, uncle, aunt, niece or nephew of the taxpayer or the taxpayer's spouse or common-law partner and resident in Canada at any time in the year, and be either the taxpayer's parent or grandparent and at least 65 years old or dependent on the taxpayer because of mental or physical infirmity. 5. DISABILITY AMOUNT S. 118.3 allows a taxpayer with "a severe and prolonged impairment in mental or physical functions" to claim a specified amount as a non-refundable credit against taxes payable. Basic Disability Amount is a non-refundable tax credit that acknowledges the expenses incurred corresponding to the treatment of a mental or physical impairment. This amount is available to all taxpayers who qualify. A supplementary disability credit is available for taxpayers who are under 18 years old. The amount of the supplement is decreased by any child care expenses claimed in respect of the child (in excess of the base child care amount) plus any portion of the disability supports deduction that relates to care or supervision of the child in excess of a base amount. CRA does not provide a separate form for the calculation of the Disability Amount, but provides a section on the Federal Worksheet to perform the calculation. The base child care amount is the legislated maximum (S. 118.3(1)(a.3)) amount of child care expenses that may be claimed in respect of a disabled minor without reducing the supplementary disability amount. 6. THE ecoENERGY RETROFIT - HOMES GRANT   This grant is administered by Natural Resources Canada and applies to improvements that reduce energy consumption and provide for a cleaner environment. Home and property owners could be eligible for federal grants of up to $5,000 to offset the cost of making energy efficiency improvements to their home or property. Most provinces and territories have complementary programs that offer additional financial assistance based on the results of the ecoENERGY Retrofit evaluation. For information on how you can qualify, please consult the ecoACTION Web site.   Educational Resources: For more information on tax planning provisions and compliance requirements subscribe to The Knowledge Bureau's online tax reference for taxpayers, financial advisors and their clients: EverGreen Explanatory Notes.    

By Guest Columnist, Gordon Pape   Ontario's plan to harmonize its provincial sales tax with the GST could end up costing investors across Canada millions of dollars unless some kind of deal can be worked out. The problem arises from the fact that the 5% GST is applied to certain financial services, including mutual fund management fees, while provincial sales tax is not. As a result, investors currently pay an additional 0.1% on a 2% management charge. If the harmonized sales tax (HST) goes through as planned, the combined rate would be 13% which would increase the tax on a 2% management fee to 0.26%. The average management expense ratio (MER) on Canadian mutual funds is already one of the highest in the world. Such an increase would only add to the costs and would come directly out of investors' pockets in the form of reduced returns. To complicate matters further, residents of other provinces also risk being hit by the increase even though it theoretically applies only in Ontario. That's because the majority of mutual fund companies are based in that province. It would be impossible for them to apply different tax standards elsewhere, raising the possibility that a Calgary resident buying an Ontario-based fund would be hit with a 13% tax on the management fee even though Alberta has no provincial sales tax. This situation would also create a tax advantage for fund groups that are based outside Ontario, such as Investors Group which is headquartered in Winnipeg. Although three Atlantic provinces (New Brunswick, Nova Scotia, Newfoundland and Labrador) moved to an HST several years ago, this issue did not arise because no major fund companies are based there. But the announcement in the March Ontario budget that the province plans to implement a blended sales tax on July 1, 2010 has changed the whole picture. "The federal government should be concerned that people outside Ontario are not subject to a harmonized tax," says Barbara Amsden, director of research and strategy for the Investment Funds Institute of Canada (IFIC). She met with officials of the federal Finance Department in Ottawa on Monday to discuss the issue but said afterwards they "did not seem impressed" with the request for some kind of relief. Applying the HST to management fees would amount to a "tax on savings" she says, noting that Canada is the only value-added tax country in the world with sales taxes at two levels. The logical solution would simply be to exempt mutual fund management fees and similar financial charges from the GST/HST. But doing so would cost cash-strapped governments hundreds of millions of dollars. As of the end of May, member companies of IFIC had $537.8 billion worth of assets under management. If we assume an average management fee of 1.5%, that works out to slightly more than $8 billion that is currently subject to the 5% GST, generating about $400 million tax dollars for Ottawa. Amsden points out this is a huge windfall for the government as the fund industry has grown by almost 20 times since the GST was first introduced. Ontario, which is also under the gun financially, would dearly love to grab a piece of that pie so their Finance mandarins are equally unlikely to be receptive to pleas for an exemption. If neither level of government is prepared to give ground, be prepared to lose a chunk of your mutual fund returns to the tax man. And you thought stock markets were the only risk in town!   Reprinted with permission from Gordon Pape's Mutual Funds Update.   Gordon Pape is a Knowledge Bureau faculty member and well-known author who specializes in personal finance and investing. He is the author of numerous books on investing and personal finance and has been called ìCanadaís Mutual Fund Guruî by the media.

CRA recently issued a news release, as mentioned in the last issue of BIN, advising all taxpayers that there are opportunities for recourse available if they aren't in agreement with assessment notices received from the Agency.   Essentially, the Canadian tax system is based on self assessment and voluntary compliance. It is also a system which strives for fairness and equity. A taxpayer's rights are enshrined in a "Declaration of Taxpayer Rights", which also includes rights relating to undue hardship and includes some leniency for taxpayers in the following situations: Undue hardship relating to the requirement for withholding taxes on salary, wages or other remuneration, superannuation or pension benefits, retiring allowances, death benefits, annuity payments, payments out of a registered pension plan, registered retirement income fund, registered education savings plan or government assistance, etc., it is possible for a taxpayer to request a reduction in withholding. This is done on Form T1213 Request to Reduce Tax Deductions at Source for Year(s) ____ and the request is considered on a case-by-case basis by CRA. Reasons can include unusual medical expenses or charitable donations or other deductions otherwise allowable to reduce net or taxable income resulting in a refund at the end of the year. A taxpayer also has the right to increase tax withholding if their income sources do not have enough withheld, resulting in a balance due at the end of the year. An example of this may be a request to have increased taxes withheld from Canada Pension Plan benefits. The Minister is allowed to refund excessive instalment amounts paid by the taxpayer, if the Minister is satisfied that the overpaid instalments will cause undue hardship. The amount to be refunded is left to the discretion of the Minister. Non-resident actors are required to pay a withholding tax to Canada. The Minister may require a lesser amount if it can be shown that the required amount will cause undue hardship. It is possible for the Minister to grant a reduction in security to be posted due to the Departure from Canada if the taxpayer can prove undue hardship Join us next time when will discuss the following: Right to Offset Interest Income. Employer's Right to Reduce Payroll Penalties Directors' Right to Limit Liability.

by John Mill LL.M.   Last year CRA announced that seniors could split Registered Pension Plan (RPP) income with their spouses. Splitting pension income provides the following benefits: Income is taxed at lower rate; access to an additional pension credit; reduces OAS clawback. For a senior couple on a fixed pension income with one spouse receiving a $100,000 annual pension and the other spouse receiving no income; the tax savings arising simply from splitting the pension income could be an additional $14,000 a year, tax free. For those with lower pensions, the savings are equally impressive.  For example, a pensioner living in Ontario earning $40,000 in pension income annually could save just over $2,300 per year in tax by taking advantage of pension splitting available for spouses and common law partners.1   Small business owners and professionals should note a difference between RPPs and RRSPs. RRSPs allow income splitting through the transferring of RRSP contributions to the spouse, this rule however does not allow RRSP income to be split. While RPP periodic pension recipients can start splitting pension income at any age, RRSP pension income recipients must wait until age 65. Unfair, particularly in view of the significant tax savings, which can build the couple's capital pool. A solution for the incorporated business owner is an Individual Pension Plan (ìIPPî). An IPP is a provincially registered pension plan often described as a super size RRSP available to corporate owner managers and professionals. But does an IPP qualify for pension income splitting? A quick survey of the internet indicates many different points of view with respect to the ability to split pension payments received from an IPP. Some say you cannot split IPP income, some say you can split IPP income if you annuitize the IPP, and others simply say you can split IPP income without any explanation. The correct position is this: - payments made directly from an IPP (a withdrawal) cannot be split; - if you annuitize an IPP, the annuity payments can be split; - if you have attained the age of 65, and transfer the IPP to a registered retirement income fund (ìRRIFî), the RRIF payments can be split. For the technically minded it appears confusion arises from ITA s. 118 which sets out the differing treatment depending on age and s. 118 (e) which tells what pension payments are not eligible to be split: (e) a payment received out of or under a salary deferral arrangement, a retirement compensation arrangement, an employee benefit plan, an employee trust or a prescribed provincial pension plan; The confusion may arise because retirement compensation payments (ìRCAsî) are excluded and IPPs are registered provincial pension plans. However, IPPs are not RCA's or prescribed. ITA Reg. 7800 tells us what a ìprescribed provincial planî is: 7800.(1) For the purposes of clause 56(1)(a)(i)(C), subsection 56(2), paragraph 60(v), subsection 74.1(1) and paragraph 118(8)(e) of the Act, the Saskatchewan Pension Plan is a prescribed provincial pension plan. Saskatchewan has the only prescribed provincial pension plan, and that pension plan has nothing to do with IPPs. The ITA confirms that an IPP pension payment qualifies in the two circumstances set out above: 118(7)(a) (i) a payment in respect of a life annuity out of or under a superannuation or pension plan,   Ö (iii) a payment out of or under a registered retirement income fund or under an ìamended fundî as referred to in subsection 146.3(11), 1 Calculation courtesy of the Tax Efficient Retirement Income Calculator available through The Knowledge Bureau     EDUCATIONAL RESOURCES: Readers are invited to learn more about retirement income planning, income splitting and simulations for planning scenarios with The Knowledge Bureau's RIS program and projection software; summer school enrolments now possible.   ABOUT THE AUTHOR John Mill LL.M. has practiced corporate law for more than 20 years. Ten years ago he decided to take his tax expertise to a new level; he completed a Master's degree in International Taxation and then wrote the text for a Knowledge Bureau certificate course entitled Cross Border Taxation. In the course of his taxation studies he noticed consistent references to life insurance which is a tax free product. Consequently he obtained an life insurance licence. He is currently working on his second book regarding the most effective use of retained earnings.

The CRA has issued a news release advising all taxpayers that there are opportunities for recourse available if they aren't in agreement wiith assessment notices received from the Agency. The Canadian tax system is based on self assessment and voluntary compliance. It is also a system which strives for fairness and equity. In fact, taxpayer's rights are enshrined in a "Declaration of Taxpayer Rights", which includes the following basic rights: Fair treatment: application of the law fairly and impartially. Courtesy and consideration: the right to be treated with courtesy, respect, and consideration. Privacy and confidentiality: the right to expect that personal and financial information is protected against unauthorized use or disclosure. Bilingual service: the right to be served in the official language of your choice at designated bilingual offices. Information: the right to get complete, accurate, and clear information about your rights, entitlements, and obligations. Entitlements: the right to every benefit allowed under the law. Formal review: the right to a formal review of a taxpayer's file and then the right to appeal to the courts if taxes in dispute cannot be resolved. Taxpayer Protection Provisions are also provided to Canadian taxpayers through the Income Tax Act. It features a number of provisions designed to protect the taxpayer's rights, as described below: Taxpayer's Right to Appeal. Taxpayer's Right to Fairness and Leniency. Taxpayer's Right to Privacy: An employee or official of CRA may only provide information about the taxpayer to that taxpayer or to another person provided the taxpayer has given written consent. This is done on Form T1013 Authorizing or Cancelling a Representative. Under S. 241(1), no CRA employee may communicate taxpayer information knowingly to any other person or allow another to have access to taxpayer information. Should this happen, S. 239(2.2) provides for a fine not exceeding $5000 or imprisonment for a term not exceeding 12 months or both. Taxpayers can file an objection to most assessments and reassessments issued by the CRA, and there are various avenues for completing the objection. They can use the online My Account service, or contact their local tax services office via phone or mail. Appeals officers who were not involved in the original decision will conduct a review of the individual's tax return. In a majority of cases taxpayers don't have to pay outstanding income tax amounts that are in dispute until the formal review is completed by CRA. To resolve a dispute with the CRA or for more information on objections and appeal rights go to www.cra.gc.ca/resolvingdisputes.     Join us next week in Breaking Tax and Investment News for Taxpayer's Rights regarding undue hardship rules and Directors' Rights.     Educational Resources: For more information on tax planning provisions and compliance requirements subscribe to The Knowledge Bureau's online tax reference for taxpayers, financial advisors and their clients: EverGreen Explanatory Notes.