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. 

The individual provinces and territories provide health care insurance and many provide subsidies for the cost of prescription medications for their residents. The cost of the programs and the amount of subsidies are often linked to the taxpayer's income. While splitting pension income may reduce income taxes, preparers need also to be aware of the possible negative effects on health costs for their clients. Provincial Health Insurance Most provinces build the cost of provincial health coverage into their income tax rates but three provinces, BC, AB, and ON levy a clearly identifiable fee for health insurance. In BC and AB, the fee is billed and paid directly. In Ontario, the Health Premium is calculated and paid along with the normal Ontario Tax. BC and Alberta have premium assistance plans which are based on the couple's prior year net income (for BC) and the prior year's taxable income (for AB). Since transfer of pension income does not affect either the couple's combined net or taxable incomes, there are no effects in either province if pension income is split. The Ontario Health Premium, on the other hand is calculated based on the individual's taxable income. Thus pension income splitting will affect the amount of the Ontario Health Premium. For low-income seniors, the result will often be a reduction in the premium if income is split. For higher-income seniors, the health premiums may rise, but not nearly as much as the amount of tax that may be saved by splitting of pension income. PharmaCare Most provinces have a plan to help reduce the costs of prescription drugs for their residents and for seniors in particular. The majority of these plans have deductible or co-pay amounts that are based on a couple's combined net incomes. In those provinces, splitting of pension income will not affect the cost of prescription drugs. Some of the notable exceptions are: Saskatchewan: The new flat rate for seniors comes into effect on July 1, 2008. Seniors will quality if their individual net income (based on 2006) is below the $64,044 threshold. If splitting of pension income in 2007 brings one spouse's income below the threshold and does not bring the spouse's above the threshold, it would appear that seniors may lose their eligibility for the Senior's Drug Plan once the base year becomes 2007. Manitoba: Currently, the deducible for prescription drugs is based on the family total income. Since pension income splitting increases the transferee's total income but does not affect the transferor's total income, transferring pension income increases family total income. One would expect that the Manitoba government will adjust the criteria so that this anomaly will not affect the cost of prescription drugs for seniors before 2007 become the base year for determining the deductible amount.

On March 11, the government tabled a Notice of Ways and Means to amend the Income Tax Act. The majority of the content of the Notice is comprised of the detailed changes required to implement the measures announced in the February 26 budget. The changes implemented include: Establishing the Tax-Free Savings Account, effective for the 2009 tax year. Enhancing the flexibility of Registered Education Savings Plans by increasing by 10 years the time they may remain open and accept contributions, effective for the 2008 tax year. Increasing the residency component of the Northern Residents Deduction by 10 per cent, effective for the 2008 tax year. Extending eligibility for the Medical Expense Tax Credit to certain devices, effective for the 2008 tax year. Extending the Mineral Exploration Tax Credit by one year. Extending the capital gains tax exemption for certain donations of listed securities to certain exchangeable shares and partnership interests, for donations made on or after February 26, 2008. Adjusting the rate of gross-up of eligible dividends and the Dividend Tax Credit to reflect corporate income tax reductions, beginning in 2010. Increasing the benefits available to small and medium-sized businesses under the Scientific Research and Experimental Development Program, generally effective for taxation years that end on or after February 26, 2008. Amending the penalty for failure to remit source deductions when due and excusing early remittances from the financial institution remittance rules, effective for remittances on or after February 26, 2008. Reducing the paper burden associated with dispositions by non-residents of certain treaty-protected property, effective for dispositions that occur after 2008. Ensuring that the tax incentive for donations of medicines benefits recipients in developing countries to the greatest extent possible. Modifying the provincial component of the Specified Investment Flow-Through tax to better reflect actual provincial tax rates, generally effective for the 2009 tax year. Amending the Excise Act, the Excise Act 2001, and the Customs Tariff to improve tobacco tax enforcement and compliance, adjusting excise duties on tobacco sticks and tobacco for duty-free markets, and equalizing the excise treatment of imitation spirits and other spirits. Implementing Goods and Services Tax/Harmonized Sales Tax (GST/HST) as detailed in the budget. In a surprise move, the Notice also includes changes that effectively reverse the changes to Registered Education Savings Plans which were included in Bill C-253, as passed on March 6.  These reversing provisions will be enacted if Bill C-253 receives Royal assent and will become effective retroactive to the day Bill C-253 receives assent, ensuring that there is no time period when RESP contributions are deductible.  

On March 5, the CRA announced that it had revoked the registered charity status of the Francis Jude Wilson Foundation, effective February 23, 2008. According to the CRA press release, the Foundation had stuctured its affairs for the private benefit of a tax shelter and its promoters. The Foundation had issued $10,560,650 in charitable donation receipt during 2005 and 2006 but had only actual cash returns of $105,667 and paid professional fees of $234,855 to the tax shelter promoters. In addition, the CRA cited the foundation's failure to act in the best interests of the Charity by choosing prudent investments in favour of those selected and arranged by the tax shelter as evidence that a collateral, if not a primary purpose of the Foundation was to support and promote the tax shelter rather than its charitable activities. The Foundation may no longer issue charitable donation receipts and the CRA indicates that it may be liable for income tax equal to the full value of its remaining assets. In Taxpayer Alert issued last August, the CRA warned taxpayers "Participating in tax shelter gifting arrangements is likely to result in a tax bill!"  In that Alert, they indicated that they were auditing all gifting arrangements and offered the following startling facts: To date, the CRA has reassessed over 26,000 taxpayers who participated in these schemes, and denied about $1.4 billion in donations claimed. Audits of another 20,000 taxpayers involving $550 million in donation claims are just about complete. Audits on other arrangements involving over 50,000 taxpayers are about to begin.

On March 6, 2008, Bill C-253 (a private members bill) was passed in the House of Commons in spite of opposition from the minority Conservative government. If this bill is passed by the Senate, it will allow a deduction for the lesser of RESP contributions in the year, not in excess of the taxpayer's contribution room and $5,000. The Bill would also make all amounts received from an RESP taxable if that amount has been deducted by the taxpayer. This bill, originally introduced in 2006 would apply to taxation years after 2005, based on the wording of the bill.   On the other side of the coin, when RESP contributions are removed from the plan, they will be taxable, presumably to the recipient (student).   The government has indicated that, if the bill is passed, they would move to diminish its cost. On March 11, they followed through on that promise. See the Notice of Ways and Means Introduced below.

We'd like to thank all our readers who sent us feedback on our articles on pension income.  The following are some points brought up.   Is Pension Income Splitting Always a Good Idea? There are instances where splitting of pension income between spouses or common-law partners can have more negative effects than positive.  One area not discussed in our previous article is the claiming of medical expenses.  Since medical expense claims are reduced by 3% of the taxpayer's net income, the possibility exists that the transfer of pension income could reduce or eliminate a claim for medical expenses.    Since the credit for a medical expense claim is only 15% of the claim, adding $1,000 to a taxpayer's income will reduce the claim by $30 and the credit by $4.50.  This is more than offset by tax reductions for the transferor if he or she is a higher tax bracket, but if the two spouses are in the same tax bracket, the net effect may be negative.  The scenario, then, for this negative effect is both spouses are taxable both spouses in the same tax bracket one spouse is claiming medical expenses Where one of the spouses has no pension income, tranferring enough to claim the full pension income amount may still be beneficial although transferring more would be detrimental.   You should also look at the effects on provincial taxes as the brackets often do not coincide with the federal ones and the amount of the pension income credit will also vary for many provinces.   The effects of this election are not always straightforward so be sure to work out the optimum transfer for each client situation.   German Pensions In our article on pensions from the Republic of Germany we mistakenly indicated that private pensions received by Canadian residents were not taxable in Canada.  In fact, such pensions are subject to taxation in Canada and will likely have income tax withheld which is eligible for the foreign tax credit.  We apologize for this error.

What kind of service have you been receiving from the CRA? If you're not satisfied with it, there are now more options available to you to resolve any problems. The Taxpayer's Bill of Rights outlines the following right for individuals: to receive entitlements and to pay no more and no less than what is required by law to service in both languages to privacy and confidentiality to a formal review and a subsequent appeal to be treated professionally, courteously, and fairly to complete, accurate clear, and timely information not to pay income tax amounts in dispute before you have had an impartial review to have the law applied consistently to lodge a service complaint and to be provided with an explanation of CRA findings to have the costs of compliance taken into account when administering tax legislation to expect CRA to be accountable to relief from penalties and interest under tax legislation because of extraordinary circumstances to expect CRA to publish their service standards and report annually to expect CRA to warn you about questionable tax schemes in a timely manner to be represented by a person of your choice Plus CRA's commitments to small business: to administering the tax system in a way that minimizes the costs of compliance for small businesses to working with all governments to streamline service, minimize cost, and reduce the compliance burden to providing service offerings that meet the needs of small businesses to conducting outreach activities that help small businesses comply with the legislation we administer to explaining how we conduct our business with small businesses These rights and commitments are explained in the CRA's publication RC17 Taxpayer Bill Of Rights Guide: Understanding Your Rights As A Taxpayer. If you find that a CRA representative is not respecting any of these taxpayer's rights of commitments to small business, you should follow up on taxpayer right #9: ìto lodge a service complaint and to be provided with an explanation of our findings.î Probably the most common complaint we here is of the service received from the CRA. Some common service complaints noted in RC17 are: undue delays in meeting service standards errors, omissions, or oversights on CRA's part poor or misleading information received in your dealings with CRA, and unprofessional behaviour from CRA staff. The CRA even has a form (RC193 Service-Related Complaint) for you to file such complaints. If you're feeling that you're getting nowhere with the CRA, the government has recently appointed Mr. Paul Dubé to act as a Taxpayer's Ombudsman to help resolve issues with CRA. According to the Taxpayer's Ombudsman website Mr Dubé's mandate is to: ensure that CRA respects taxpayer's service rights conduct impartial and independent reviews of service-related complaints about the Canada Revenue Agency (CRA); facilitate taxpayer access to assistance within the CRA; identify and review systemic and emerging service-related issues within the CRA that have a negative impact on taxpayers; and provide advice to the Minister of National Revenue about service‑related matters in the CRA. To file a complaint to the Taxpayer's Ombudsman, you must file the Tax Ombudsman's Complaint Form which is available online. The complaint form can be mailed or faxed to the Ombudsman's office (along with any supporting documentation).   The ombudsman cannot review complaints dealing with tax policy or legislation, or decisions that can be dealt with by the courts.