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 already time to start your tax planning for NEXT year! Employers should include a copy of the new TD1 forms to all employees with their year end pay cheques in order that the correct source deductions are deducted for 2009. Form TD1, Personal Tax Credits Return, is to be completed by employees and provided to their employers. The forms are used by the employer to determine the amount of federal and provincial or territorial tax that is to be deducted or withheld from the employee's employment income. Generally employees will complete a Federal TD1 plus a TD1 for the province or territory of employment. The federal TD1 has been revised to include the increased non-refundable tax credits available to taxpayers at the end of the year. The basic personal amount and spousal amount have now been increased to $10,100 and the amount that may be claimed for every child born in 1992 or later is now $2,089. For a link to the CRA website and the TD1 form click here. Form T1213 is to be completed by taxpayers when requesting reduced tax deductions at source for deductions or non-refundable tax credits that don't appear on Form TD1, Personal Tax Credits Return. For example, if there are registered retirement savings plan (RRSP) contributions being made outside of contributions made through your employer or there are support payments made and tax deductions at source should be lowered due to these deductions, it is appropriate for a taxpayer to use Form T1213 to request reduced tax deductions at source for the tax year. For a copy of Form T1213, click here. For more tax tips, purchase a copy of Essential Tax Facts written by The Knowledge Bureau's President, Evelyn Jacks, to learn how to ace your 2008 tax return and save money all year long. 

Beginning in 2008, CRA will no longer produce form T2124 Statement of Business Income or form T2032 Statement of Professional Income.  These two forms have been replaced with new form T2125 Statement of Business or Professional Income.  The new form will not be released by CRA until January 7. The new form has been rearranged to accommodate both types of income but does not ask for any additional information than was asked for on the old forms.  It may be used for either business or professional income but if a taxpayer has both, separate T2125 forms will need to be prepared, one for each type of income.  Reporting on the T1 General return has not changed. Although not yet available from CRA in electronic format, T4002 Business and Professional Income (2008 version) is available in EverGreen Explanatory Notes. Check it out today.

Don's incredulous. His half a million dollar portfolio is now worth $250,000. How much does it take to accumulate $250,000 over the next ten yearsóthe time Don has left until retirement? Simple math would tell you that's $25,000 in new savings every year, and that's a lot of new moneyóimpossible for most, unless a lottery or inheritance suddenly falls out of the sky. What can be done? At one point Don had decided to "stop the bleeding" and sold his stocks. Now he's looking at safer fixed income investments to recover his losses. Trouble is, with a 50% decrease in value, he'll need a 100% increase in his remaining capital just to get back to square one - and that's not even taking into account that inflation will have eroded the purchasing power of his savings during the recovery process. Let's take a look at recovery times at various income levels and how much additional capital will be required to recover within Don's 10-year window. See the following table.  These calculations assume that the savings are in a registered account so that the earnings are not eroded by income tax.  For non-registered accounts, to adjust for taxes, use an interest rate that is equal to the actual rate x (1 - MTR).  Thus, for example if you invest at 5% and your marginal tax rate is 40%, the equivalent yield is 5% x (1 - 0.4) = 3%.  Interest Rate Years to recover Value after 10 years Additional Capital Required Annual Deposits Required 2.50% 28.07 $320,021 $179,979 $16,064.69 3.00% 23.45 $335,979 $164,021 $14,307.63 3.50% 20.15 $352,650 $147,350 $12,560.34 4.00% 17.67 $370,061 $129,939 $10,822.74 4.50% 15.75 $388,242 $111,758 $9,094.71 5.00% 14.21 $407,224 $92,776 $7,376.14 5.50% 12.95 $427,036 $72,964 $5,666.94 6.00% 11.90 $447,712 $52,288 $3,966.99 6.50% 11.01 $469,284 $30,716 $2,276.17 So, if Don were to invest the entire $250,000 in 10-year government bonds, which are currently yielding 3.17%, his saving would have recovered to $341,566 at the end of 10 years. In order to make it back to $500,000 before retirement, Don would have to add an additional $13,712 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. Tips on short term, tax efficient recoveries: Make RRSP Contributions Make TFSA Contributions (January 1) Reduce tax withholding and the December 15 instalment payment Increase this year's tax refund: dig for every tax deduction and credit you are entitled to Transfer winning stock: make charitable donations before year end Carry losses back to offset taxes paid on previously reported capital gains Buy assets before year end to increase deduction for Capital Cost Allowances Reduce mortgage interest and credit card payments, invest savings Take a second job or consulting contract Rent out a room in the house Stop feeding the kids cheese. . .

Many folks seem to be chronic late filers when it comes to their personal tax returnónever a good idea when CRA owes you money, as you have continued to give the government an interest free loan. Worse, however is when you owe them; and yes, they will be charging you interestócompounded dailyóand more. Voluntary compliance can really pay off when you file a tax return to clear up your guilty conscience. CRA will not charge penalties if you tell them about your tax indiscretions before they tell youócheck out the potential list below if you are a chronic late filer. There are several layers of penalties that can be invoked including interest, compounded daily, at the prescribed rate of interest, plus 4%. OUCH! To comply voluntarily, see your tax advisor with details regarding all under-reported income, over-reported deductions or credits and file form T1ADJ to correct your errors or omissions. Remember, tax filing year 1998 will be statute barred after the end of this year, so if CRA owes you a refund, you'll lose it if you don't claim it in December. In fact, this could all turn out well if you hurryóan unexpected refund from an adjustment or late filed return could help with the credit card payments in January! NON-COMPLIANCE PENALTIES FOR TAXPAYERS Late filing penalties ó first time: 5% of unpaid tax plus 1% per month for 12 months; second time within a three year period after demand to file: 10% plus 2% per month for 20 months Failure to file a return ó for each such failure, the greater of $100 and the product obtained when $25 is multiplied by the number of days, not exceeding 100 during which the failure to file continues. Gross negligence ó false statement or omission of information in the return - 50% of tax on understated income with a minimum $100 penalty. This penalty will also apply to a false statement relating to the GST Credit. Failure to provide information on a required form ó $100 for each failure Failure to provide Social Insurance Number ó $100 for each failure unless applied for within 15 days of the request to file False statements or omissions with regard to foreign properties ó 5% of the fair market value of contributions made to the property, minimum of $24,000 Failure to provide information with regard to a foreign-held property ó $500 per month for a maximum of 24 months; $1,000 a month, maximum of 24 months if there is a failure to respond to a demand to file plus an additional penalty of 5% in some cases. Effect of carry back of losses ó Penalties assessed may not be offset by the carry back. Late or insufficient instalments ó 50% of interest payable exceeding $1,000 or 25% of interest payable if no instalments were made, whichever is greater. Misrepresentation by a third party ó the greater of $1,000 and the total of gross entitlements from the scheme or in all other cases, $1,000 Third party participation in make of false statements ó greater of $1,000 and the lesser of the penalty to which the taxpayer is liable above and the total of $100,000 plus the person's gross compensation Failure to deduct or remit source deductions ó1 to 3 days: 3% penalty; 4 or 5 days: 5% penalty; 6 or 7 days: 7% penalty; more than 7 days: 10% penalty Second such failure in same year if grossly negligent ó 20% of amount not withheld or remitted. Criminal Penalties Taxpayers who participate in tax evasion can also be liable to a second level of punishment by being charged with an offense. Here's what you need to know: Anyone who is found to be guilty of an offence as a result of failure to file a tax return can face a fine of not less than $1,000 and not more than $25,000 or both the fine and imprisonment for up to 12 months. Anyone convicted of tax evasion will face a fine of not less than 50% and not more than 200% of the tax that was sought to be evaded or a prison term not exceeding two years, or both. An additional fine of not less than 100% and not more than 200% of the tax sought to be evaded or credits sought to be gained. This additional penalty would be sought by election of the Attorney General and could also be accompanied by a prison term of not more than 5 years. To learn more about preparing T1 tax returns, register for Introduction to Computer-Based Personal Tax Preparation or call 1.866.953.4769 today to make an appointment for your free professional development consultation.

The Honourable Jim Flaherty will be tabling the Government's fourth budget on January 27, 2009.   Watch for Breaking Tax and Investments News coverage of the complete 2009 Budget.

For 2008 and subsequent years, the quarterly instalment threshold, used to determine whether instalments are payable by individuals was increased from taxes owing of $2,000 ($1,200 for Quebec filers) to taxes owing in excess of $3,000 ($1,800 for Quebec filers). Farmers and fishers, who are currently required to make one instalment payment by December 31, will not be required to make an instalment payment at all if the actual tax owing for either of the two preceding years does not exceed $3,000 ($1,800 in Quebec). Given the events in the marketplace in late 2008, the requirement of the December 15 instalment payment should be reviewed immediately. With the devastation wreaked upon the marketplace in October, Canadians may find that their overall income from investments or even employment and business activities may have taken a hit in the last quarter. Commission-based financial advisors in particular may find themselves in this boat this year. But there may be a bit of good news to offset the bad, at least from a tax point of view, if you are a quarterly instalment payer. Many people don't realize that instalments remitted to CRA (often by post-dated cheques) can be adjusted to actual income earned in the year. Others don't know that the CRA "billing method" of collecting quarterly instalments is only one of three methods of payment. The other two are optional: Current-Year Option. Under this option, the taxpayer's income tax liability for the current taxation year is estimated then one-quarter of the estimated amount over $3000 is due on each of the four due dates: March 15, June 15, September 15 and December 15. (Farmers and fishers must only make one instalment payment, on December 31 on 2/3 of the estimated taxes owing) Prior-Year Option. Under this option, the first two instalments are estimated at one-quarter of the taxes due in the second prior year (since the prior year's return is not available when these instalments are due) and the last two instalments are calculated at one-half of the excess of taxes due in the prior year over taxes due in the second prior year. If you know your client's income will drop this tax year over last, write a letter to CRA to recalculate the instalment payment base and return the last post-dated cheques. Subscribe to EverGreen Explanatory Notes for more information. Or attend The Knowledge Bureau's January Line by Line Tax Update Workshop coming to a city near you January 9 to 16.