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. 

Leveraging Tax Preferences: Consider funding this new "bucket of savings" with your RRSP tax savingsóa great way to leverage two available tax provisions. But also look at your new investment options from the tax-exempt income within the TFSA. For example, it may make some sense to look at the tax-free income in the TFSA as a source for funding assets that will multiply on a tax exempt basis: for example life insurance, critical illness insurance or a tax exempt principal residence. TFSA or HBP? Consider whether it makes more sense to withdraw funds on a tax-free basis from within an RRSP to fund a new home purchase under the Home Buyers' Plan or whether the taxpayer should save and withdraw funds under the TFSA instead. As there are no tax penalties for failure to pay back the funds to the TFSA, and withdrawals automatically create new TFSA contribution room, it may make sense to accumulate money in the TFSA instead. TFSA or LLP? Education savings strategies should now be revisited as well. Saving within the TFSA allows you to accumulate funds on a tax-deferred basis and then withdraw them without penalty or a requirement to repay the funds. This is not so under the Lifelong Learning Plan, which allows for a tax-free withdrawal from the RRSP but requires an annual repayment schedule. The avoidance of income inclusion penalties therefore makes the TFSA a more attractive withdrawal vehicle for these purposes than the Lifelong Learning Plan. Better to leave the funds in the RRSP for tax deferred retirement savings. TFSA or RESP? This new account would also appear to be a better savings vehicle for education purposes than the RESP, which eventually could provide a tax penalty on withdrawal if intended recipients do not end up going to school. However, in making this choice the investor misses out on the Canada Education Savings Grant sweetener. Offsetting Pension Contribution Limitations. Contributors to employer pension plans are often precluded from making RRSP contributions because of their pension adjustment amount. Likewise those who have contributed the maximum to an RRSP ó 18% of earned income to $20,000 in 2008 and want to do more to supplement their savings on a tax-assisted basis, now have the opportunity to tap into another tax deferred savings opportunity. In particular the TFSA a good place to park interest-bearing investments. Supplementing Executive Pension Funding: Executives who earn more than $111,111 in 2008 will be unable to save for retirement on a tax assisted basis for income above this amount. The TFSA provides a small window of opportunity to shore that tax assistance up. This option should be employed in conjunction with planning for funding of top hat plans like Individual Pension Plans or Retirement Compensation Arrangements. New Tax Sheltering Opportunities for more Pre-Retirees: The TFSA is a great savings option for people who do not have the required earned income for RRSP contribution purposes and therefore have few opportunities for tax sheltered retirement savings. This includes those in receipt of passive income sources like pension income, investment income or employment insurance benefits. New Tax Sheltering Opportunities for RRSP Age-Ineligible Taxpayers: The tax shelter can continue for those who reach age 71 and don't need the money in their RRSP. While withdrawals must be generated under the usual rules, reinvestment into a TFSA will allow those tax-paid funds to grow again ñ faster in a tax sheltered account, as opposed to a non-registered account. Benefits for Single Seniors: RRSP Melt Down Strategy Enhancements: It has always made some sense to melt down RRSPs to "top income up to bracket" in circumstances where taxes will be higher at death than during life. We generally use that strategy for singles or widow(er)s as the RRSP funds cannot be rolled over to as spouse or common-law partner's RRSP. Now surplus funds can be deposited into the TFSA so that retirees can continue to build wealth on a tax deferred basis and keep legacies intact. TFSA Borrowing and Excess Contribution Penalties: Because income from the TFSA is not taxable, borrowing funds to contribute to a TFSA will not be tax deductible. Using borrowed money to invest in non-registered accounts makes more sense as interest is then tax deductible. Estate Planning Considerations. Also note that the TFSA loses its tax-exempt status after the death of the plan holder, meaning that the investment income will become taxable. However a rollover opportunity is possible when the spouse or common-law partner becomes the successor account holder. This will not be affected by the spouse's contribution room and will not reduce existing room either. When an adult child dies without a spouse, the plan should be collapsed or transferred to another appropriate savings vehicle. Marriage Breakdown: Investors in the TFSA will be able to transfer from one party to the split to the other on a no-penalty basis, however, the transfer in this case will not re-instate contribution room for the transferor. Nor will it affect the contribution room of the transferee. File a Tax Return: yet another reason to endear oneself to the tax system: a return is required to build TFSA contribution room and so it is folly to file late or miss filing a return. Remember there is a statute of limitations of ten years in filing late or adjusted returns. Don't cut into your tax exempt wealth accumulation potential by being tardy on this front. Investment Ordering Decisions. The New TFSA requires a second look at the order in which investors maximize accumulation activities. Taxable investors should consider family priorities and then contribute funds in this order: To an RPP To an RRSP (including spousal RRSP) To a the TFSA To RESPs (Registered Education Savings accounts to maximize Canada Education Savings Grants and Bonds) To RDSPs (Registered Disability Savings Plans to maximize Canada Disability Savings Grants and Bonds) To non-registered accounts Next week: More Tax Planning Ideas To Share With Your Clients!

On November 20, the minister of finance sent a letter to financial institutions regarding Registered Retirement Income Funds. The letter states: Dear ______: I am writing to seek your cooperation on an important issue for Canadian seniors, withdrawals from Registered Retirement Income Funds. Many seniors are understandably concerned about the impact of the recent deterioration in market conditions on their financial security and I believe it is important to ensure that they do not face undue obstacles in managing their assets in these challenging times. A common misconception is that seniors must sell assets to satisfy RRIF withdrawal requirements, something many may not want to do at this time given the recent decline in value of many assets. The income tax rules permit "in-kind" asset transfers to meet the minimum withdrawal requirements ñ they do not require the sale of assets. It has been brought to my attention that, in certain circumstances, there may be obstacles to in-kind asset transfers within financial institutions. It has also been suggested that some financial institutions may not be advising clients of this option where it does exist. To address this issue, I am expecting all financial institutions to accommodate in-kind transfers ñ at no cost to clients ñ or offer another solution that achieves the same result. I would ask that you ensure that all clients with RRIFs be made aware that this option exists. I would like to hear from you by Friday, November 28 to confirm that steps have been taken to ensure that in-kind asset transfers between RRIFs and other accounts are possible at no cost to the client and that RRIF clients will be made aware of this option. Thank you for your cooperation. Sincerely, James M. Flaherty As the letter indicates, in-kind payments from RRIFs are allowed but not common. Most taxpayers and financial institutions assume that the minimum RRIF withdrawals must be made in cash. To accomplish that, retirees with their RRIF investments in bonds or stocks would have to sell those investment instruments in order to have cash available to make those minimum RRIF withdrawals. The minister is asking financial institutions to facilitate in-kind RRIF withdrawals and to inform their RRIF holders that such withdrawals are possible. Although the RRIF annuitant could request that the stock certificates be delivered to them, a more likely scenario is that the financial institution holding the RRIF assets would transfer those assets to a non-registered trading account for the annuitant. For RRIF annuitants who require that RRIF income to live on, such withdrawals would be of little benefit, but they might allow RRIF annuitants who have other funds available to recover from large decreases they may have experienced this year in their RRIF investments, though not without some income tax consequences. See the example below. Example: In-kind RRIF Withdrawals Henry is 85 years old. His RRIF balance at the beginning of 2008 was $200,000, invested in blue chip stocks. His minimum RRIF withdrawals for 2008 are 10% of the beginning balance (rates rounded for clarity). With the melt-down in the markets in the latter half of 2008, his RRIF holdings now have a fair market value of $100,000. Scenario 1: Henry sells sufficient stocks to generate the required $20,000 cash for withdrawals. After Henry sells $20,000 worth of stock, his RRIF balance will be $80,000 with no tax relief for the loss in value of his stocks and no means of recovering that lost value, even if the value of the stocks increases in future years. He will pay tax on the $20,000 RRIF withdrawal in 2008. In 2009, his minimum RRIF withdrawal will be reduced to approximately $8,000 (about 10% of the remaining balance). If Henry needs the $20,000 to live on, he can expect that, even if the value of the remaining portfolio increases, more than the minimum withdrawals will likely be required for some time - and likely his RRIF balance will not last for long. Scenario 2: Henry makes an in-kind withdrawal of stock from his RRIF. After Henry removes $20,000 worth of stock from his RRIF, the remaining balance will be $80,000. There is no tax relief in 2008 for the loss in value of his stocks, but he now holds $20,000 in stocks outside of his RRIF. Should the stocks regain their value, he can recover those losses. Henry will have to pay tax on the $20,000 RRIF withdrawal in 2008. If the stock that was withdrawn does recover, he will have to pay capital gains tax on the increase in value. In 2009, his minimum RRIF withdrawal will be reduced to approximately $8,000 (about 10% of the remaining balance).   Taxpayers who may have already converted a portion of their RRIF stock portfolio into cash (and thereby locking in the losses) in order to withdraw those funds can still place themselves in the same position as those who have made in-kind withdrawals by repurchasing the liquidated investments in their non-registered portfolios. This, of course, is only possible if the taxpayer does not need the RRIF income for living expenses. Planning Opportunity? RRIF annuitants who hold their RRIF funds in stocks that have decreased in value but who fully expect that the value of the stocks will recover may find that in-kind withdrawal of RRIF assets may present a planning opportunity. By converting the stocks from RRIF assets (which will be fully taxable when the amounts are withdrawn) to non-registered assets, the increase in value will only be 50% taxable rather than fully taxable. Retirees who have funds available might consider converting the RRIF assets to cash at a low point in their value and then re-purchasing the same investments outside their RRIF allowing the recovered values to be taxed at the capital gains tax rate. To learn more about retirement planning strategies, see the Retirement Income Specialist program.

Last week the CRA issued the draft version of T4217 - Payroll Deductions Formulas for Computer Programs - 88th Edition - Effective January 1, 2009. This obscure document provides the details of the tax brackets and rates applicable to 2009. The indexation factor that applies to federal amounts is 2.5% for 2008. For the various provinces, the indexation factor varies from 0% for provinces who do not apply indexing to their rates and amounts to a maximum of 3.8% in Alberta. Federal Tax Brackets for 2008 and 2009 2008 Taxable Income Range   Tax Rate 2009 Taxable Income Range Up to $37,885   15% Up to $38,832 $37,886 to $75,769   22%   $38,833 to $77,664 $75,770 to $123,184   26% $77,665 to $126,264 Over $123,184   29% Over $126,264 Tax rates remain at the same levels, but the brackets have been indexed by 2.5% Federal Personal Amounts for 2008 and 2009 Personal Amounts 2008 2009 Basic Personal Maximum Claim $9,600 $10,100 Age Maximum Claim $5,276 $5,408 Base Amount $31,524 $32,312 Spouse or Common-Law Partner Maximum Claim $9,600 $10,100 Reduced by net income over $0 $0 Eligible Dependants Maximum Claim $9,600 $10,100 Reduced by net income over $0 $0 Children under 18 Maximum Claim (per child) $2,038 $2,089 Infirm Dependants Maximum Claim $4,095 $4,198 Reduced by net income over $5,811 $5,956 Canada Employment Maximum $1,019 $1,044 Public Transit Passes Maximum None None Children's Fitness Maximum $500 $500 Adoption Expenses Maximum Claim $10,643 $10,909 Pension Income Maximum Claim $2,000 $2,000 Caregiver Maximum Claim $4,095 #4,198 Reduced by net income over $13,986 $14,336 Disability Basic Amount $7,021 $7,196 Supplementary Amount $4,095 $4,198 Base Child Care Amount $2,399 $2,459 Tuition, Education, and Textbook Minimum Tuition $100 $100 Full-time Education Amount+ Textbook Amount (per month) $400+$65 $400+$65 Part-time Education Amount+ Textbook amount (per month) $120+$20 $120+$20 Medical Expenses 3% limitation $1,962 $2,011 Refundable Medical Expense Supplement Maximum $1,041 $1,067 Base Family Income $23,057 $23,633   Canada Pension Plan Contributions for 2008 and 2009 The maximum pensionable earnings under the CPP (Canada Pension Plan) for 2009 will increase from $44,900 to $46,300. This translates to a maximum employer and employee contribution in 2009 of $2,118.60, increased from a maximum of $2,049.30 in 2008. The basic exemption of $3,500 will remain the same in 2009 as will the contribution rate of 4.95%. The self-employed rate of 9.9% will also remain unchanged for the year. Employment Insurance Premiums for 2008 and 2009 The maximum insurable earnings for Employment Insurance purposes increase to $42,300 but the premium rate remains at 1.73% for a maximum annual premium of $731.79 for all provinces (up from $711.03) except Quebec where it is reduced to 1.38% for a maximum premium of $583.74. For 2009, the maximum earnings for the Quebec Parental Insurance Plan (QPIP) are $62,000 with a rate of 0.484% for a maximum annual premium of $300.08.

Has your income changed since filing last year's return? If so, your eligibility for certain refundable tax credits may increase or decrease this year. Always monitor new benefit levels and "clawback zones"; that is, the income thresholds used to phase out your eligibility for the Working Income Tax Benefit (WITB), the Canada Child Tax Benefit (CTB), and GST Credit. Income distributed through these credits begins again in July 2009, if you file family tax returns on time and report net income (line 236 on the tax return of both spouses) within various clawback zones. Again, an RRSP contribution might help you maximize these credits, which can really help with cash flow throughout the year. The Working Income Tax Benefit (WITB) is a refundable tax credit that can provide some tax relief for individuals and families that are employed in low income jobs. It also helps to encourage those not currently in the workforce to enter it by accessing the tax credit incentive. Taxpayers could be eligible for the WITB if: They are 19 years of age or older at the end of 2008 and; They were a resident of Canada for income tax purposes throughout the year Note that if the taxpayer was under 19 years old during the year and had a spouse, common-law partner or eligible dependant in 2008, they could also be eligible for the benefits. Taxpayers are not eligible for the benefits if they don't have an eligible dependant and were enrolled as a full time student for more than 13 weeks in 2008 at a designated educational institution. Entitlement is also lost if they were confined to a prison or are not required to pay tax as an officer or servant of another country or are a family member of such a person. All benefit levels and thresholds are indexed each year. Qualifying taxpayers must apply for the credit by filing a tax return and completing Schedule 6. Individuals can apply to have 50% their current year's estimated WITB prepaid. Prepayments will be made on the same payment cycle as GST credits are paid but the entire prepayment will be paid over the number of remaining GST payment dates left in the year. So, for example, an application made in April 2009 will earn 1/3rd of 50% of the estimated WITB in July, October and January. Prepayments will be reconciled to the actual entitlement when a return is filed by adding the prepayment amount to taxes owing.

But it's not all bad news: if you have cash you may be your bank's new best friend An editorial by Evelyn Jacks Last week, Desjardins Securities issued a news release stating the obvious when it comes to pension funding in Canada: corporate pension plan funding levels have hit an all-time low thanks to plunging stock markets, leaving company plans with assets worth just 72 per cent of their obligations under current conditions. Stats Canada agrees. In a report issued in July 2008, it was noted that since the beginning of 2000, under-funding of defined benefit pension plans have required employers to do a number of things including adding defined contribution components to their existing defined benefit plans, and injecting money into defined benefit plans to ensure adequate funding. In fact, in 2006 employer contributions accounted for 72% of total contributions to RPPs, up from 70% in 2005, and those increases came mainly from special payments for unfunded liabilities and solvency deficiencies, which increased by 44% at that time. Now, because more than 60% of large corporations' pension assets are invested in equities, according to Standard & Poor's analysis, the problem is even worse. Their senior analysts predict that even if equity markets remain flat for the remainder of 2008, defined benefit plans may end up with a combined under-funding well in excess of the record $219 Billion experienced in 2002. Companies are facing massive expenses as a result of equity valuation declines of 20% and more. Executives at Boeing for example, estimate that the company's pension expenses could rise to about $1,000 in 2009, even though its pension was overfunded at the end of the third quarter this year. Underfunding poses a significant threat to current and future pension receivers according to Mario Jametti at York University, who recently studied the problem, particularly for defined benefit plans. It is interesting to note this is of particular concern to Canadian women, who have been the sole reason for the increases in memberships in employer registered pension plans' growth since 2006. Membership was around the 6 million level in 2006, when 83% of women had a defined benefit plan, compared with 77% for men. The public sector accounts for only 10% of all registered pension plans, but the growth in membership appears to come largely from women working in the public sector. The problem therefore is well documented, primarily due to the fact that boomers were to begin retiring en masse in 2010 or so, a decision that certainly is being rethought by many due to the current economic climate. In fact according to Stats Canada, two-thirds of pension plans in Canada were in the red back in mid-2003. Both longevity as well as the decline in long-term interest rates have had a significant effect on the value of pension liabilities relative to the assets of the plan. Therefore, the problem is complex relating to the design, administration, and regulation of pension plans, according to Jack Selody, of the Legal Services Department at the Bank of Canada who authored a paper entitled Vulnerabilities of Defined Benefit Pension Plans back in May of 2007. There are several consequences: Companies must fund pensions according to the rules within a regulated time period. To do so, revenues must increase or expenses must be cut. If they can't do it, individuals will face layoffs and this is already happening. Bankruptcy is the most severe consequence; everyone loses under this option. Governments can relax the rules for funding and/or guarantee pension benefits. This requires quick co-operation and plans of action, which are unlikely. Ontario is the only province in Canada which has created a Pension Benefits Guarantee Fund, but it only guarantees the first $1000 per month of pension benefits. The Manitoba Pension Benefits Act and Pension Benefits Regulation, on the other hand, require an actuarial valuation of a pension plan to be performed at least every three years on both a going concern and solvency basis. Where the solvency ratio of the plan is less than .9 an annual valuation is required. Under the legislation the employer is required to fund unfunded liabilities revealed in a going concern valuation over 15 years and solvency deficiency revealed in a solvency valuation over 5 years. The legislation does not provide any general solvency relief due to the economic environment. Individuals must take responsibility for their own futures and shore up their retirement funding options with proper planningóthe sooner the better. So, it's back to Personal Finance 101 for investors. Time to see your tax and financial advisors to discuss projections for retirement incomeóand the younger you are the more effective this will be. Remember also that 90% of Canadians underfund their RRSP contribution room. It's time to rethink that. In a world where people think nothing of spending $4 a day on coffee, remember this: invested inside a tax deferred plan that $1,460 you spend each year on coffee (yes, $4 x 365 is $1,460!!) will grow to about $8,300 in only 5 years . . . and that's without the initial double digit tax savings the RRSP contribution will produce! Seems like a no-brainer to cut down on the coffee (better for you too!) Doug Nelson, financial advisor and lifecycle coach with the Knowledge Bureau, adds "perhaps we are all beginning to realize that the investment returns seen between 1982 and 2000 were well above the long term averages and that now we need to plan for more conservative long term returns and perhaps even a more modest lifestyle. This may be the beginning of redefining the 'normal retirement date' for most pensioners and the beginning of the end of full or partial indexing, two components that are a significant expense to most pension plans". Nelson also emphasizes that most people inappropriately focus on their gross annual, before-tax income or their gross pre-tax investment returns when evaluating the strengths or weaknesses of their current financial situation. "Clients must begin to focus on after-tax income and after-tax investment returns. By doing so they will find that with some small changes they can receive significantly more after-tax income and have greater financial security with considerably less portfolio risk. In today's uncertain environment, it doesn't matter what you have, it only matters what you keep." At the 2008 Distinguished Advisor Conference Nelson presented what has been referred to as "The Premier Retirement Planning Process in Canada". Doug is the co-author of the certificate course Tax Efficient Retirement Income Planning, which teaches the process to advisors. The last word goes to Robert Ironside, Knowledge Bureau faculty member and course author, who adds some important wisdom to the pension funding issue: "As the Canadian banks are reducing their level of funding in the money market, due to the current turmoil in the financial sector, they are very actively searching for personal deposits. If you have money to invest, you have just become your bank's new best friend. All of the Canadian banks want your term deposit and they are willing to pay you well for it. It is not often that you can obtain a return on a savings account that is higher than Prime, but today you can." "Investors looking for a safe and secure haven for cash they might need over the next few years would be well advised to shop aggressively among the banks to see who will offer the best rate. Investors requiring periodic cash inflows could set up a laddered series of GIC investments to both match the need for periodic cash and capture the benefit of longer deposit periods." In short, while we are seeing that our most trusted institutions and savings plans are under threat, there is also significant opportunity. To win in this environment, individuals and their advisors must step up and secure their own futures with proper planning, good health and high doses of productivity as the ultimate antidotes to the financial disease around us today. Evelyn Jacks is President of The Knowledge Bureau, a leading educational institute teaching professional development and personal finance to investors and their advisors. Your comments are welcome. For more information visit www.knowledgebureau.com.

The global financial crisis, which is of significant concern to investors and retirees in planning the right outcomes before the end of 2008, must also be considered by executors dealing with the financial consequences at death for Canada's aging demographic. The opportunity to add value as an informed executor of the estate of grandparents, parents, and siblings is both an honour and a large responsibility that can be extremely costly when the correct tax consequences are missed. Evelyn Jacks and a detailed workshop on planning with trusts with John Poyser. Tax and financial advisors who want to be up to speed on the latest information to maximize tax savings on personal transitions, will want to participate November 14 to 21 in Winnipeg, Toronto, Calgary, Vancouver and Edmonton. "Practical education on year end planning for families and individual investors in this critical time will be discussed in detail," says Evelyn Jacks, President and Founder of The Knowledge Bureau. "However, we also are very pleased to review the astute preparation of the final return of those who pass away this year, in conjunction with various trust structures available. We believe this is of particular relevance in light of the significant financial turbulence we are experiencing today." John Poyser, LL.B. from the firm Inkster, Christie, Hughes and Knowledge Bureau Faculty Member, will host a detailed discussion on that subject. Did you know, for example, that when a person passes away and their estate passes, in whole or in part, to a spouse or spouse trust, it is possible to "harvest capital losses?" John will show that is achieved by opting out of the rollover available under subsection 70(6) on an asset by asset basis. To the extent that assets might have a pent up capital gain and certain other assets might have pent up capital losses, the executors can trigger gains and losses on a targeted basis to cross-cancel them in the deceased's income tax return rather than carrying them forward into the estate where they might not be effectively used. Advisors and the executors they work with, must also be aware of rules relating to qualified farm property and qualifying small business corporations, where a capital gains exemption is available. Depending on the terms of the trust, the designation does not have to be made evenly or equally among a collection of beneficiaries, but can be made in a way where the gains are allocated to the beneficiaries who have the most opportunity to take advantage of it, and other forms of income are allocated to other beneficiaries. Early registration for The November Year End Tax Planning Workshops ends October 31. To register call 1-866-953-4769 or enrol online. Dates, cities and venues appear below:   Date City Venue November 14 Winnipeg The Manitoba Club Register Now November 17 Toronto East Crowne Plaza Don Valley Register Now November 18 Toronto West Crowne Plaza Hotel Toronto Airport Register Now November 19 Calgary Carriage House Inn Register Now November 20 Vancouver Terminal City Club Register Now November 21 Edmonton Four Points by Sheraton Edmonton South Register Now Click here for more details.