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. 

By Robert Ironside, Ph.D. Within every crisis lies opportunity and that is a subject I will address later. First, we need to understand why a problem on Wall Street is going to infect every Canadian bank and thus indirectly, every Canadian, whether they be an investor, a small business owner, employee or retiree. To understand the problem, we first need to look at a very simplified Balance Sheet of a typical bank. Balance Sheet As of October 31, 2008 Assets Liabilities Securities Retail Deposits Loans & Mortgages Money Market Borrowing Owner's Equity As you know, a Balance Sheet lists assets on the left hand side and liabilities on the right hand side. The major asset of a bank is the loans that it has made. For every dollar of loans that have been made, the bank has to obtain funding on the right hand side of the balance sheet. For large Canadian banks, the major source of funding is retail deposits. But if the bank makes more loans than it has retail deposits, it has to fund the difference from some other source. That other source is primarily money market borrowings. The money market is the market for high quality, short term debt instruments. Banks issue a variety of instruments into the money market, including negotiable certificates of deposit. These are purchased primarily by large institutional investors seeking a safe haven for short term cash surpluses. Banks participate in the money market as both borrowers and lenders. When a bank has excess funds at the end of the day, it will typically lend these out on an overnight basis through the interbank market. A bank that is short of funds overnight will borrow the money. In the US, the rate for this overnight borrowing and lending of surplus funds is referred to as the fed funds rate. On Tuesday, September 30, the posted fed funds rate was 2%, as set by the US Federal Reserve. However the actual market rate was 7%. Because the money market is an institutional market rather than a retail market and because the dollar amounts are large, money market borrowings are not covered under any form of deposit insurance. This leads to a high degree of risk aversion among money market participants. At the slightest hint of risk, money market participants quickly move their cash surpluses to a more secure investment. We now have the background to understand the current situation. Fear and uncertainty is everywhere. Banks are not comfortable lending to other banks, because they have no certainty they will be repaid. Institutional investors are scared to lend to banks because they too fear that they will not be repaid when the instruments mature, similar to the problem faced by thousands of ABCP (asset backed commercial paper) holders in Canada, who collectively hold over 30 Billion of former money market securities. Now we have to look at some data, specifically the loans to deposit ratio for the large Canadian banks. The loans to deposit ratio has been rising over the last several years. A rising ratio indicates that more of the loans made by the banks are funded in the money market, rather than from retail deposits, which tend to be "stickyî. But given the current climate of fear, banks are finding it increasingly difficult to access funds in the money market. So what does this all mean to me, the average Canadian? There are several probable outcomes. These include: 1. Funding costs are rising quickly for the Canadian banks. This will most definitely be passed along to those wanting to borrow money. Watch for interest rates to rise quickly on bank loans, especially for longer term, fixed rate money. 2. Loans will become harder to obtain. When money is cheap and easily obtained, banks will lend. When money is tight and hard to obtain, banks do not want to lend. Those with weaker credit will find it increasingly difficult to obtain credit and the cost of credit, if it can be obtained, will rise sharply. 3. The interest rate on credit cards will likely rise. For many years, banks have aggressively pushed a wide array of credit cards to an increasingly diverse group of consumers, many of whom have used the credit thus obtained to fund a lifestyle which they really can't afford. As the economy slows, credit card defaults will rise. The response from the banks will be to monitor card holders more closely and reduce available credit to those most at risk. 4. Yields on deposits will rise. If you are an investor with large cash balances, you have just become your bank's new best friend. Now is the time to aggressively negotiate better terms on your deposit funds, as the bank badly wants your money, as they know very well that retain deposits are much more "stickyî than money obtained through the money market. 5. Volatility in equity markets will remain. This problem is not going away any time soon, irrespective of the $700 Billion bailout package passed by the US Senate and Congress last week. The primary underlying cause of the problem in the US banking sector is falling US residential real estate prices. The banking sector will not really stabilize until residential real estate prices stop falling. This will likely not happen any time soon, as the real estate market is caught in a vicious downward spiral. As market prices fall, more homes become worth less than the debt against them, leading more borrowers to default, which in turn leads to more foreclosures and forced sales, pushing prices yet lower. 6. Real estate prices will fall. In the end there is something else to consider: called "Reversion to the meanî óall markets go back to their long run averages. Our P/E (price/earnings) ratios have been ranging in average of 28, and now coming down, likely to around 10. The long term average p/e ratio is about 16. If P/E ratios are falling, stock prices will not do well. We have this issue now. Historically, however, over longer holding periods, markets have provided investors with a 6.8% real rate of return (Jeremy Seagull 1802). We know that markets will always give us this real return even though we can have extended periods of much lower rates. So, if you are 20 or so, hold on and wait. If you are in debt, try to reduce discretionary spending and pay off your credit cards. Cash is king. Get safe and be prepared to weather a storm of 6 to 8 months in case you need to. There is danger is for those who are 45 plus. We don't know when things will recover. It's difficult to predict retirement income. Returns may not be good over the next few years. So the bottom line is this: Brace yourself: for tighter lending and the inevitable fallout for business, which will affect profits and returns on investment. Robert Ironside, ABD, PH. D is the author of several Knowledge Bureau certificate courses, including Financial Literacy: The Relationship Between Risk and Return. 

Gordon Pape, Publisher and Editor of The Internet Wealth Builder has this perspective (Reprinted with Permission): Prior to last week, the TSX had never experienced a one-day drop of 800+ points. Now we have had several! Those are truly staggering. Is this the end of the stock market? No, it is not the end of the stock market, unless you think that capitalism is dead. The market has gone through rough times before and has always emerged stronger than ever. Could things stay like this for a decade? Possibly - it happened in Japan, as another member points out elsewhere in this issue. But is it likely? No. Events are moving at such an accelerated pace that it is difficult to imagine the kind of stagnation envisaged by the question. That said, it would be unrealistic to expect a prolonged rebound in the markets any time soon. In the fall edition of the quarterly publication Strategy, the analysts of RBC Capital Markets write: "The experience surrounding the early 1990s U.S. real estate bust argues for a prolonged period of sub-par GDP growth rather than a quick turnaround. Countries responsible for more than 50% of global GDP, which include Canada, are in trouble and leading indicators warn that the world economy will continue to soften into the first half of 2009." During an interview on CBC Radio last week, the host asked me if there was any light at the end of the tunnel. My response: "There's light at the end of every tunnel. The real question is, how long is the tunnel?" No one knows the answer to that one. People keep asking me what they should be doing in the current circumstances. There is no simple answer. In the end, it comes down to your personal situation and your risk tolerance level. As I see it, there are four possible courses of action. Go shopping. There are lots of bargains out there. The problem is they may be even better bargains next week. Sit tight. This is the best option if you have a reasonably diversified portfolio, are holding good-quality securities, and don't expect to need access to your invested cash for a year or more. The biggest mistake that investors make is to sell great companies when they're down. That's how folks like Warren Buffett get rich - by buying the stocks you've dumped at bargain basement prices. Pare down. Another big mistake people make in tough times is to ignore their statements because they are afraid to see how badly they are performing. All that is likely to achieve is to make matters worse if the portfolio is poorly constructed. Call up your portfolio on-line this weekend if you have access to it that way. Review it very carefully. Identify the weakest holdings. Calculate your asset mix. If you decide at the end of the process that you have more stock market exposure than you want, begin selling off the weak sisters. But be strategic in your selling. Wait for days when the markets are moving up. This is especially important in the case of equity funds. Most mutual funds are valued at the end of each trading day and your advisor will have a cut-off time for accepting an order, usually 3 p.m. If you enter a sell order on a day the market is plunging, your price is likely to be lower (perhaps a lot lower) than the closing NAV the day before. The converse is true on days the market rises. So plan your selling carefully. Bail out. We are experiencing a stock market sell-off of historic proportions with no let-up in sight. The bail-out package that the U.S. Congress finally cobbled together last week appears to have impressed absolutely no one. After weekend news from Europe about widespread bank bailouts there, investors lost all sense of proportion on Monday are were selling everything in sight. High-yielding stocks and trusts have held up better than the general market but even the best of them were being hit in mid-afternoon Monday trading. Among our recommendations, Bank of Nova Scotia and Sun Life were down more than $3 at that point, Canadian Utilities was off over $2, and Enbridge and TransCanada were in the red by about $1.80. Among the trusts, Vermilion had slipped almost $4, Canadian Oil Sands was off $2, AltaGas was down $1.45, and Davis + Henderson had lost almost $1. We suggest it would be a mistake to sell these or any other quality securities in these market conditions. While it is possible that the selling frenzy could drive prices even lower, we believe that 12 months down the road anyone who sells now will regret it. - G.P. Gordon Pape is a best-selling Canadian author and speaker affiliated with The Knowledge Bureau and publisher of the Internet Wealth Builder.

An Interview With Richard Croft "We have thought for some time that the end game in the credit crunch would ultimately result in the government buying back the debt. What I find interesting about this is that the marketplace in the US is forcing the financial system to look like a system like we have in Canada. The US has always had thousands of independent banks; we have always had 6 major banks which are impenetrable. We are now seeing the emergence of "superbanks" in the US, which from a regulation viewpoint, look a lot more like the Canadian banking system, so maybe we had it right all along." Commenting about the bailout itself, Richard says this: "The underlying assets in question acquired by the US government currently have no buyers, but may still have a value. The big difference is that the government has time, banks don't, so it can take those assets and sell them off at some price in the marketplace over time. So that's the key benefit of the bailout package; it will filter the assets back into the system eventually. In the end it may not cost the taxpayer much; but we have managed to avoid a long recession, which cuts into government revenues and costs lots of money in term of unemployment insurance or deposit insurance required to be paid in the case of bank failures. So at the end of the day, the bailout will end up as a wash, and together with the tax breaks introduced with it, put more money in the hands of taxpayers." "Another interesting point, is that many large US banks can't go bankrupt nowóexamplesóJP Morgan, CitiBank, Bank of America, Goldman Sachs, Morgan Stanley, Wells Fargo, óthey are now too big to fail." "What we are left with is an interesting balancing act between the effect of regulation on financial services and free market activity. One of the reasons why the Great Depression went on as long as it did was tightening regulation in the period. Liquidity, we have learned, is important." So the bailout was a good thing? "The bailout may bring liquidity back, which will shorten the recession, but I expect that markets won't do anything much more than find stability around the bottom. There won't be a great turn around soon. But the credit issues are also being addressed with the bailout and this is key to recovery. The longer term moral hazard is that the government is seen as the pot of gold at end of rainbow." Is this a good thing or a bad thing? "You want regulation to prevent the proliferation of the structured products that have emerged to meet investor demandóbut the flip side is less regulation allows more growthóin Canada we have always operated on regulatory regime, but we never got the same level of growth, nor the boom and bust scenario the Americans have scene. If you want a scorecard, look at currency. The fact that the Canadian dollar rolled down to 64 cents, measures and gauges merits of a capitalist economy. We are now seeing a downside of a lower regulation environment but more regulation may not allow needed growth. " There is so much yin and yangónobody really knows what the immediate future will hold, so what's an investor to do?. "That's true, so the best defence is a diversified portfolio. Decisions made at this moment should be made on whether you can tolerate the risk level of the portfolio you are in." "If investors are comfortable with risk in the portfolio, some may raise it. There are great buys to be had. Warren Buffet boughtósome investors might also wish to step up to the plate and take a look at great companies undervalued now. " So the bottom line? "The bottom line is that investors holding portfolios came through this kind of cycle did better than those who did not have one. Many had only a 3-4% downsideówhich is not so painful at all. A well balanced portfolio is what you need to work with to weather these kinds of storms." Richard Croft is an investment counselor / portfolio manager, and principle of R. N. Croft Financial Group Inc. Richard will also be speaking at the Distinguished Advisor Conference in Monterey, California next month on the subject of portfolio construction with new tax efficient investing tools.

IN AN EXCLUSIVE INTERVIEW WITH Breaking Tax and Investment News, DR. JACK MINTZ, Palmer Chair in Public Policy at the University of Calgary, told Knowledge Bureau President Evelyn Jacks that while markets will follow history and eventually recover, what we have seen over the past two dramatic weeks south of the border is a significant event. Advisors and their clients need to be very careful and not overreact, as there is both good and bad news. "Canada is in a better position than the US because we have done a lot of good things lately," said Dr. Mintz. "We've had good fiscal policy. Corporations on the whole are in a strong position, debt is down, and in general we are not over levered. Strength of the balance sheet is key today. In addition, Canadian consumers are not as heavily in debt as their US counterparts, and that for the moment is good news in a volatile environment." But there is plenty of cause for caution as well, something to be discussed in earnest between advisors and their clients. "The biggest concern is for those who need credit or immediate cash flow. Many people moved into cash a while ago, but the uncertainty in the marketplace today makes it difficult to play the markets, because we really don't know how long it will take to come out of this bear market," says Dr. Mintz, recommending that it is best to avoid unnecessary indebtedness, and to understand that credit will get tighter, especially in the US." In terms of strategy, Dr. Mintz cautions that "anyone who was retired should have thought about safety in assets when designing their portfolios. Over the long haul, 10-15 years from now, markets will be up again, but it's going to take time." For those about to retire, it may be best to think about Dr. Mintz's words above and think about a longer term horizon in planning. "Stay diversified, he says, "and don't overreact." Dr. Jack Mintz is the Palmer Chair in Public Policy at the University of Calgary and lead speaker at The Distinguished Advisor Conference in Monterey California, November 2 to 5th.

Record-breaking and severe global stock market swings followed the announcement of new tax breaks and deposit insurance protection resulting from the historic bailout of the US financial market, approved on October 3 by the US House of Representatives. The package was designed to kick start the flow of credit by US banks who backed impaired assets, like mortgages on homes which values have plummeted. What is the impact of these developments for Canadians? In this special report, we interpret Finance Minister Jim Flaherty's October 6 news release outlining Canada's relative fundamental strength as a means to comfort Canadians rattled by the volatility in the financial markets. Read in conjunction with the Bank of Canada Governor Mark Carney's message to the Canadian Club of Montreal on September 25, it appears that this correction should eventually be "cathartic" and "stabilizing" in restoring order to global financial markets. October 6 News Release: Finance Minister Jim Flaherty Financial Minister Jim Flaherty issued a news release today to comment on the severe shocks gripping the global credit system, in particular the US and now Europe, and to provide comfort to Canadians about their own financial institutions, which he described as "sound and well-capitalized, and less leveraged than their international peers." Mr. Flaherty explained: "The structure of our financial institutions continues to benefit Canadiansólarge Canadian investment dealers have been bank-owned since the late 1980s, and as a result are regulated on a consolidated basis by the Office of the Superintendent of Financial Institutions." "Canadian capital requirements for financial institutions are well above minimum international standards and higher than in other jurisdictions. Canadian institutions have met, and continue to meet, their capital requirements. The IMF has concluded that Canada's financial system is mature, sophisticated and well-managed, and able to withstand sizeable shocks." When it comes to real estate, our mortgage scene is also in better shape: smaller mortgages relative to home values, a small subprime component and sound economic factors, such as low interest rates, rising incomes and a growing population all make our housing finance model supportable. That's the good news. The bad news is that Canada's financial system will see the effects of the credit squeeze too, with the result that longer term credit extended to Canadian businesses and households will likely be affected. In response, the Bank of Canada has increased the availability of "term liquidity" to the tune of $20 Billion. As well the range of credit to be accepted for this liquidity has been widened, in an effort to keep credit affordable for Canadians. This announcement should provide comfort to Canadians panicking during the current ìtsunamiî of financial concerns. However, both Governor Carney and Finance Minister Flaherty cautioned that global markets are now at a critical juncture as many foreign financial institutions need to raise capital for lending purposes, but their ability to do so has been reduced. This affects all those who rely on credit for their future, particularly businesses and consumers. Without credit, business operations cannot be financed in advance, mortgages and auto loans cannot be provided to consumers. Survival depends for many on cutting costs in an attempt to shore up balance sheets. Knowledge Bureau faculty members spoke with President Evelyn Jacks to comment on these recent developments and their potential impact on Canadian, in this Special Report After the Bailout: The Impact on Canadians News Releases October 6 News Release: Finance Minister Jim Flaherty Bank of Canada Governor Mark Carney's message to the Canadian Club of Montreal on September 25 Commentary The Good News and The Bad News with Dr. Jack Mintz Canada and the New Super Banks with Richard Croft Brace Yourself: Why a Crisis on Wall Street in Coming to a Bank Near You with Robert Ironside Rebounds: Not Soon with Gordon Pape Are You Ready for a Bear Market? with David Christianson   Solutions   Financial Markets Meltdown - Severe Credit Crunch

David Christianson, BA, CFP, R.F.P., TEP I always like to ask that question when the markets are high, as that is the ideal time to assess your preparedness for a bad market. I ask the same question in sideways markets and bad markets. That's why I asked the question in 1994, 1998, 2000, 2005 and again last year. Why this theme? Because investors must always be ready for a bear market. Bears follow bulls as surely as winter follows summer. (Good news is that, unlike Winnipeg winters, bear markets are shorter than their opposite season.) In our professional practice, we are always looking at our client portfolios and asking, "Is this financial plan ready to withstand a bear market? If stock prices collapsed tomorrow, do we have enough cash, short-term and guaranteed investments set aside to provide all the client's spending requirements until the markets recover?" It takes a lot of discipline to consistently ask this question when the markets are at record highs and clients are resisting investments into boring old bonds that will only pay them 4%. However, it's those preparations that carry us through tough times like 2008. It's a lot tougher to ask the question after the markets have declined 20%, but you still have to ask it and make the necessary adjustments and provisions. Bear market facts. The accepted definition of a bear market is a stock index declining 20% from its previous peak. We are now officially in a bear market. Since 1970, there have been six bear markets on the Toronto Stock Exchange. The declines ranged from 20% to a high of 43%, for the longest bear, from 2000 to 2002. (Remember that much of that decline was due to the decline of Nortel, which made up over 20% of the total market at its peak.) In all cases except 2002, the stock market started its recovery before the economy emerged from recession. The 2002 stock market recovery was delayed by historic events like 9-11, and the crush to confidence from accounting fraud in companies like Enron, WorldCom and others. What about recoveries? The average return has been 25% for the 12-month period after the end of the last four bear markets. The lowest 12-month return was 15.2%, and that was produced even while the 1991 recession was still working its way through the economy. A bear market is different than a quick correction, in that it can last quite a while. A rapid correction is easier in many ways, because the pain is over quickly. In a real bear market, the market can decline for months or even years, with short rallies in between to keep our hopes up. The possibility (or the reality) of a bear market is not a reason to pull out of the markets or to stop investing. Like a bull market, a bear market can stop at any time and turn around. It usually happens when things look very bad for the economy. The important thing is to make sure you are ready, in case this bear market is not over. Are you ready financially? Will you be able to leave your investment portfolio for the two or three years that could be required? Better yet, will you able to add more money and buy stocks at real bargain levels? If you will need cash from your portfolio in the next year or two, make sure that you've put that money aside in money market funds or other guaranteed vehicles. Are you ready psychologically? Do you have what it takes to ignore all the pundits coming out of the woodwork, saying they told us so? Market gurus tend to want to make headlines by over-dramatizing a situation. The media tend to exaggerate these dramatic comments because they make great headlines. When these stories start to suggest that all of our assumptions about a rising market in the future were wrong and the market will never rise again, are you prepared to ignore the noise and continue to invest according to your personal investment policy? Hopefully, you examined the balance in your portfolio when the market was peaking, and made sure that you had adequate amounts in bonds and money market. If not, you might want to make sure you do that now. This is not to abandon the market, but rather to make sure that you have the staying power to remain invested throughout the bad market and volatility. And don't forget, if your advisor had seemed too conservative for you in 2006 and 2007, send him or her a thank you card. They may have been protecting you from your own enthusiasm. Things are different this time. Closed credit markets are threatening to bring the US economy (and all others by extension) to a grinding halt. But remember, nothing lasts forever and better times will return eventually. The important thing is to look at your time horizon for your investments. If you have the staying power, then stay the course and remain invested according to your own personal optimal asset mix. If you don't have the time, then make sure you have enough money off the table to tide you through. David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc. and author of a certificate course for The Knowledge Bureau entitled The Structure of Client-Centred Practices.