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. 

Toronto, Ontario. The Financial Forum held its first of a series of national accredited wealth management workshops by The Knowledge Bureau and its faculty Doug Nelson, John Poyser and Jim Ruta, together with President and Program Director Evelyn Jacks at the Toronto Convention Centre, playing to rave reviews from its audience. ìWe have found that investors are not looking for a cookie cutter approach; rather, they want to be able to focus on their own specific needs.î said Mrs. Jacks. ìBoomers, especially, are looking for specific answers on how to address their own problems in these difficult times, and the advisors in these sessions discovered new ways to develop inter-advisory wealth management services in the areas of retirement, succession and tax planning.î The first of the accredited advisor sessions was delivered by retirement income planning specialist Doug Nelson who played to rave reviews in his Master Your Retirement Process as he discussed tax efficient retirement income planning with attendees from the ranks of financial planning, accounting and life insurance industries: ìDoug did a tremendous job showing risk and return in a different light with a great sense of humorî. Stephen Osborne ìA powerful message, outstanding presenter!î Monica Weissmann John Poyser was also highly effective in discussing Business Issues in Succession Planning as he spoke to a highly appreciative audience of financial planners. ìVery knowledgeable. A great session.î Robert Martin. ìGreat presentation, lots to take away; appreciated humour in a complex subject.î Alison Crowdis The Financial Forum and its education partner, The Knowledge Bureau, will next deliver in Vancouver February 27 and 28 and Calgary March 13 and 14. Advisors can download a pdf to review the program (link) or enroll online or call 1-866-953-4769 for assistance.

The RDSP is a new savings plan designed to accumulate funds for the benefit of a disabled person which took effect in 2008. Generally RDSPs will function in very much the same way as RESPs do now.  This important new investment opportunity for Disability Tax Credit-eligible Canadians will generate government grants and bonds for the 2008 tax year if deposits are made before March 2, 2009. However, only a few institutions are ready to take your deposits, with BMO being the first out of the gate to do so. The Registered Disability Savings Plan (RDSP) may be established for an individual who has a severe and prolonged physical or mental impairment and qualifies for the disability tax credit during the year of establishment, or would have if the restriction for the attendant care amount were disregarded. Contributions may not be made to the plan in years for which the individual is not DTC-eligible. In that case the plan must be terminated by the end of the year following the year in which the beneficiary ceases to be DTC-eligible.   Eligibility Any person eligible to claim the Disability Amount can be the beneficiary of an RDSP and the plan can be established by them or by an authorized representative. Anyone can contribute to an RDSP ñ they need not be a family member. Tax Treatment Contributions are not deductible. Income accumulates in an RDSP tax free. Contributions withdrawn from an RDSP are not taxable, but all other amounts ñ accumulated investment income, grants and bonds (discussed below) ñ are taxable in the hands of the beneficiary as withdrawn. Contributions There is no annual limit on contributions but lifetime contributions cannot exceed $200,000. Contributions are permitted until the end of the year in which the disabled beneficiary turns 59. Withdrawal The beneficiary must start to withdraw funds from the RDSP in the year he or she turns 60. Maximum annual withdrawal amounts are to be established based on life expectancies but an ability to encroach on capital is also to be provided. Only the beneficiary and/or the beneficiary's legal representatives can withdraw amounts from an RDSP. Contributors can never receive a refund of contributions. Sweeteners. The Federal government will provide financial assistance to RDSPs in two ways.   1. Canada Disability Saving Grant will match RDSP contributions as follows:   Family Net Income Family Net Income Up to $75,769* Over $75,769* First $500 ñ 300% (maximum $1,500) First $1,000 ñ 100% (maximum $1,000) Next $1,000 ñ 200% (maximum $2,000) Therefore: $1,500 contributed to RDSP generates $3,500 CDSG Therefore, $1,000 contributed to RDSP generates $1,000 CDSG *2008 levels; to be indexed annually, based on upper income limit of the 22% tax bracket Family income is calculated in the same manner as it is for Canada Education Savings Grant purposes except that in years after the beneficiary turns 18 family income is the income of the beneficiary and their spouse or common law partner. There is a lifetime maximum of $70,000 that will be funded under the CDSG and an RDSP will not qualify to receive a CDSG from the year in which the beneficiary turns 49. 2. Canada Disability Savings Bond. Unlike the CDSG, there is no requirement that a contribution be made to a RDSP before a savings bond contribution is available. Next week: Part II of the RDSP Checklist for Investors  

On January 12th, 2009 the CRA announced the revocation of the charitable status of another organization, this time The Millennium Charitable Foundation, a Toronto area charity.   When a charity has its charitable status revoked, it can no longer issue donation receipts and is no longer considered a qualified donee under the Income Tax Act.  In addition, the charitable organization is no longer exempt from income tax and it may be subject to tax on the full value of its remaining assets (unless it is a non-profit organization).   In the recent past, several donation investment offerings have been created, many of which include the "flipping" of art or other items in return for charitable donation receipts which provide a tax benefit on the investment. The offerings usually worked like this: A promoter gives a person the opportunity to purchase one or more works of art or another item of speculative value at a relatively low price. The proposal is that the promoter will work with the person to make arrangements for donating the works of art or other items to a Canadian registered charity or other specified institution. The person donates the art or other item and receives a tax receipt from the charity or other specified institution that is based on an appraisal arranged by the promoter. The appraised value of the art is substantially higher than the cost paid by the person. When the person claims the receipt on his or her next tax return, it generates a tax saving that is higher than the amount paid for the art in the first place. CRA takes a dim view of these offerings. To date over 100,000 taxpayers have learned first hand that the Canada Revenue Agency considers the donation schemes a sham, and they want their money back. It is CRA's view that the appraisal generated by the individual associated with these schemes may not represent the fair market value of the acquired property. If it did, then the property would not be sold at the lower price. On December 5, 2003 new legislation was introduced (changes to S. 248) to limit the eligible amount of a gift made after December 5, 2003 to the cost of the property to the taxpayer if the property was acquired within three years of donating it and the property was acquired for the purposes of the donation (i.e. it was acquired under a gifting arrangement as defined in S. 237.1). CRA advises that anyone considering entering into a tax shelter arrangement should obtain independent professional advice before signing any form of documents related to the donation and: know who they are dealing with, and request the prospectus or offering memorandum and any other documents available in respect of the investment and carefully read them; pay particular attention to any statements or professional opinions in the documents that explain the income tax consequences of the investment. Often, these opinions will tell the investor about the problems that can be expected and suggest that the investor obtain independent legal advice; not rely on verbal assurances from the promoter or others -get them in writing; and ask the promoter for a copy of any advance income tax ruling provided by the CRA in respect of the investment. Read the ruling given and any exceptions in it. Individual taxpayers should be aware that their tax return can be reassessed up to three years after the date of assessment. Even if the benefits of the tax shelter were accepted upon initial assessment this should not be interpreted as acceptance of the claim, it may still be subject to audit by the CRA.   Evelyn Jacks, President, The Knowledge Bureau: www.knowledgebureau.com For free information about Breaking Tax and Investment News, self study courses on tax and personal finances, or books on personal finance. Call: 1-800-953-4769.

On January 12th, 2009 the CRA announced the revocation of the charitable status of another organization, this time The Millennium Charitable Foundation, a Toronto area charity.   In recent past, several donation investment offerings have been created, many of which include the "flipping" of art or other items in return for charitable donation receipts which provide a tax benefit on the investment. The offerings usually worked like this: A promoter gives a person the opportunity to purchase one or more works of art or another item of speculative value at a relatively low price. The proposal is that the promoter will work with the person to make arrangements for donating the works of art or other items to a Canadian registered charity or other specified institution. The person donates the art or other item and receives a tax receipt from the charity or other specified institution that is based on an appraisal arranged by the promoter. The appraised value of the art is substantially higher than the cost paid by the person. When the person claims the receipt on his or her next tax return, it generates a tax saving that is higher than the amount paid for the art in the first place. CRA takes a dim view of these offerings. To date over 100,000 taxpayers have learned first hand that the Canada Revenue Agency considers the donation schemes a sham, and they want their money back. It is their view the appraisal generated by the individual associated with these schemes may not represent the fair market value of the acquired property. If it did, then the property would not be sold at the lower price. On December 5, 2003 new legislation was introduced (changes to S. 248) to limit the eligible amount of a gift made after December 5, 2003 to the cost of the property to the taxpayer if the property was acquired within three years of donating it and the property was acquired for the purposes of the donation (i.e. it was acquired under a gifting arrangement as defined in S. 237.1). CRA advises that anyone considering entering into a tax shelter arrangement should obtain independent professional advice before signing any form of documents related to the donation and: know who they are dealing with, and request the prospectus or offering memorandum and any other documents available in respect of the investment and carefully read them; pay particular attention to any statements or professional opinions in the documents that explain the income tax consequences of the investment. Often, these opinions will tell the investor about the problems that can be expected and suggest that the investor obtain independent legal advice; not rely on verbal assurances from the promoter or others-get them in writing; and ask the promoter for a copy of any advance income tax ruling provided by the CRA in respect of the investment. Read the ruling given and any exceptions in it. Individual taxpayers should be aware that their tax return can be reassessed up to three years after the date of assessment. Even if the benefits of the tax shelter were accepted upon initial assessment this should not be interpreted as acceptance of the claim, it may still be subject to audit by the CRA.   Evelyn Jacks, President, The Knowledge Bureau: knowledgebureau.com for free information about Breaking Tax and Investment News, self study courses on tax and personal finances, or books on personal finance. Call: 1-800-953-4769.    

Planning begins with maximizing the contribution to the TFSA and then having the money available to do so. Consider the potential of making a contribution into the TFSA for each individual: $5,000 invested at the beginning of each year for a productive lifetime of 45 year (age 20 to 65) is $225,000. Assume a marginal tax rate of 30% for these examples. Add a compounding rate of return of 5% to this invested inside a tax sheltered plan and that TFSA investment will grow to $838,426 inside the plan. (If invested outside the TFSA the amount would be only $547,420) At a 3% interest rate, the savings would be $477,507 inside the TFSA, and only $376,253 outside of it. At a rate of 3.5% the TFSA savings would be $547,420 and the non-registered value would be $412,294. TFSA RULES IN PLANNING: Age limitation. Contributions can be made by/for those who have attained 18 years of age and are residents of Canada. There is no upper age limitation. Earned income limitation. There is no earned income limitation. Contribution Deductibility: Contributions to the account are not deductible Earnings accumulate on a tax free basis.óincluding interest, dividends and capital gains. Contribution room. Every TFSA holder can contribute a maximum of $5,000 per year, and this amount will be indexed after 2009, with rounding to the nearest $500. Withdrawals (distributions) will create new TFSA contribution room. Carry Forward Room. Unused contribution room can be carried forward on an indefinite carry forward basis. You can take money out, in other words, spend it on whatever you want, and then put it back in when you can because the TFSA contribution room has been preserved. Excess Contributions. Such contributions are subject to a 1% per month penalty until the amounts are removed. Withdrawals (distributions) of both earnings and principal are tax exempt. Purpose: Recipients can take the money out for what ever purpose they wish and create new TFSA contribution room; which means they can put it back in a future year to grow when the withdrawal need is met and new savings are achieved. This will be welcome news to grandparents in particular. Income Testing Not Affected. Income-tested tax preferences like Child Tax Benefits, Employment Insurance Benefits or Old Age Security pension are not affected by earnings or withdrawals. Attribution Rules. There is no attribution rule attached to the TFSA, allowing parents and grandparents to transfer $5,000 per year to each adult child in the familyófor the rest of their lives. In addition, one spouse may transfer property to the TFSA of the other spouse without incurring attribution. Have grandparents, aunts, uncles gift into the TFSA, which they can also do without attribution TFSA Eligible Investments. The same eligible investments as allowed within an RRSP will apply to the TFSA. The account holder must deal at arm's length with the asset issuer - so, you can't invest in shares in a corporation you control, for example. Interest Deductibility. Interest paid on money borrowed to invest in the TFSA is not deductible. Stop Loss Rules. A capital loss is denied when assets are disposed to a trust governed by an RRSP or RRIF. The same rule apply to investments disposed to a TFSA. Departure Tax. The TFSA is not caught by the departure tax rules. In fact, a beneficiary under a TFSA who immigrates to or emigrates from Canada will not be treated as having disposed of their rights under a TFSA. No TSFA contribution room is earned for those years where a person is non-resident and any withdrawals while non-resident cannot be replaced. The US does not recognize the TFSA therefore any realized income ought to be non-taxable when removed after emigration. Capital appreciation will be taxable. Marriage Breakdown. Upon breakdown of a marriage or common-law partnership, the funds from one party's TFSA may be transferred tax-free to the other party's TFSA. This will have no effect on the contribution room of either of the parties. Death of a TFSA Holder. When the TFSA holder dies, the funds within the account may be rolled over into their spouse's TFSA or they may be withdrawn tax-free. Any amounts earned within a TSFA after the death of the taxpayer are taxable to the estate.

In a split decision, on January 8, the Supreme Court upheld the Tax Court of Canada's decision that Earl and Jordan's Lipson strategy to deduct their mortgage interest had breached the general anti-avoidance rules (GAAR). The Lipson's strategy was an extension of the strategy commonly known as the "Singleton Shuffle", named after Vancouver lawyer John Singleton whose strategy was upheld in a 2001 Supreme Court decision.  His strategy is now commonly used by investors to convert non-deductible personal debt into deductible debt.  The strategy involves selling existing investments, using the proceeds to pay off or pay down a mortgage on the personal residence and then taking out a mortgage to repurchase the investments.  The Supreme Court confirmed that this strategy is a valid way for the taxpayer to arrange his affairs to minimize his income tax liability. The Lipson's took the strategy one step too far and, in doing so, ran afoul of GAAR.  Here was their strategy: Mrs Lipson borrowed money to purchase shares in their family investment corporation from her husband at fair market value.  (She would normally not qualify for the loan but promised to repay it the following day and replace it with a mortage on a home show would then own.) Mr. Lipson then used the proceeds to purchase a family home. Mrs. Lipson then took out a mortgage on the home to repay the money borrowed to purchase the shares. When filing his tax returns for 1994, 1995 and 1996, Mr. Lipson relied on the attribution rules to report the income on the shares in his income and deduct the interest expenses paid on the mortgage. The net result of this strategy was that Mr. Lipson was reporting the same income on his return as he would have had he not sold the shares, and he was deducting the mortgage interest on a new home.  It was this last step - the use of the attribution rules to reduce his taxes that lead the Tax Court, and now the Supreme Court, that this transaction was an avoidance transaction (as defined in S. 245(4)).  As such, under 245(5) the deduction of the interest expense on the mortgage is disallowed. Investors need not be concerned that the Lipson decision will have wider consequences - unless their strategies, too, rely on the attribution rules to transfer interest deductions on a intra-family transaction.  The "Singleton" strategy is still valid and allowable. Had Mrs. Lipson had income of her own and reported the dividends on her return and claimed the interest deduction (as is allowed as the transfer was at fair market value), the strategy would not have been deemed an avoidance transaction and would therefore have been allowed.