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. 

For the first time in history seniors who receive eligible pension income can elect to have their spouse or common-law partner report up to half of that income. Should all taxpayers transfer as much as they can? Is pension splitting good for everyone? The answer to the last question is easy ñ no, not everyone will benefit from splitting pension income. For example, where both spouses have eligible pension income and both are in the highest tax bracket. Likewise when income is low enough that neither spouse is taxable, transferring pension will be of no benefit. The answer to the first question is not so simple. Reducing income for a high-income senior can have several benefits. Along with the obvious reduction in taxes payable at the taxpayerís marginal tax rate, reducing income may also reduce the clawback of Old Age Security and may increase the taxpayerís age amount. However transferring income to a spouse may have the exact opposite effect. So, no simple rule will work for all taxpayers. However, here are some guidelines that will help you to optimize the transfers for most taxpayers. Higher Income Spouse with PensionWhere the spouse who has the pension income is the higher-income spouse, transfer just enough to equalize their taxable incomes. If there is not enough income eligible for transfer, transfer all that is available. This is true even if the other spouse has eligible pension income By equalizing taxable income, the couple will generally pay the minimum amount of tax. td.boxed {border:1px solid black;} Example 1 John Mary Age 66 65 Eligible Pension Income $40,000 Nil Taxable Income $80,000 $46,000 Taxes before splitting* $22,018 $8,564 Proposed pension split -$17,000 $17,000 Taxes after splitting $14,138 $14,138 Tax savings $2,307 ñ in this case, the savings are due mostly to the elimination of the OAS clawback although the age amount is now clawed by for both spouses. * all tax calculations based on 2007 Ontario residents. In fact there is a lot of leeway in the amount selected for transfer with little or no tax effect, so long as both taxpayers are in the same tax bracket (both federally and provincially) and the transfer takes the higher income spouse out of a clawback zone. One Spouse Under 65In cases where the spouse is under 65, it may be beneficial to increase the lower spouseís income even more where the transfer will decrease the older spouseís clawbacks. Example 2 Bill Jessie Age 66 60 Eligible Pension Income $40,000 Nil Taxable Income $80,000 $46,000 Taxes before splitting $22,018 $9,119 Proposed pension split -$20,000 $20,000 Taxes after splitting $13,136 $15,177 Tax savings $2,824 ñ in this case, the savings are due to the elimination of both the OAS and age amount clawbacks. Lower Income Spouse with Pension IncomeWhere the pension income amount claimed by the couple is less than $4,000 it will generally be beneficial to transfer pension income to maximize the pension income amount claimed by the couple, even if you are transferring the income to a spouse who has a higher taxable income. Example 3 Edward Ellen Age 66 60 Eligible Pension Income $10,000 Nil Taxable Income $24,000 $76,000 Taxes before splitting $1,934 $19,294 Proposed pension split -$2,000 $2.000 Taxes after splitting $1,393 $19,750 Tax savings $85 ñ in this case, the savings are due to the increasing the family pension income amount (mitigated by the fact that Ellen pays tax on the income at a higher rate). If your income tax software does not optimize pension income splitting, be sure to look carefully at each return where pension income and spouses are involved. Apply these general rules and answer these questions: Can transfer of pension income equalize the spouseís income tax brackets? Can transfer of pension income reduce the clawback of the age amount or OAS on one return without increasing them on the other? Can transfer of pension income increase the total pension income amount available to the couple?

In our last issue of Breaking Tax and Investment News we covered tax treatment of various foreign pensions. The taxation of German pensions are featured today, as the rules have changed recently and it may be helpful to discuss this with your clients from a retirement income planning point of view. Retirement Pensions [Corrected]Under Canada's tax treaty with the Federal Republic of Germany, retirement pensions form Germany that are received by a Canadian resident are taxable in Canada, and taxable in Germany. The full amount of such pensions, in Canadian dollars, should be included in income. A foreign tax credit is available for any tax withheld at source. War PensionsLikewise, periodic or non-periodic payments received by a resident of Canada from Germany as compensation for an injury or damage as a result of hostilities are taxable only in Germany. Social SecurityAs a result of recent pension reform in Germany, for social security pensions which began in 2005 or earlier, 50% of the pension is non-taxable in Canada 2005 and 2006. After 2006, the dollar amount which was non-taxable in 2006 remains non-taxable in each subsequent year until the year the taxpayer dies. For pensions which begin after 2005, the percentage that is non-taxable in Canada is set in the year the pension starts, see the chart below. The 50% rate for 2005 increases by 2% each year for the period 2006 to 2020 and then increases by 1% each year until the taxable percentage reaches 100% for pensions which begin in 2040 or later. The non-taxable amount determined in the second year remains constant for all subsequent years. Year Pension Starts Taxable Portion Year Pension Starts Taxable Portion Year Pension Starts Taxable Portion 2005 or before 50% 2017 74% 2029 89% 2006 52% 2018 76% 2030 90% 2007 54% 2019 78% 2031 91% 2008 56% 2020 80% 2032 92% 2009 58% 2021 81% 2033 93% 2010 60% 2022 82% 2034 94% 2011 62% 2023 83% 2035 95% 2012 64% 2024 84% 2036 96% 2013 66% 2025 85% 2037 97% 2014 68% 2026 86% 2038 98% 2015 70% 2027 87% 2039 99% 2016 72% 2028 88% 2040 or later 100%  Example: Pensions which begin after 2005 John is a Canadian resident who began receiving monthly payments under the social security legislation of Germany in the amount of $1,000 on July 1, 2006. This pension is taxed as follows: 2006: Total pension received during the year (line 115) = $6,000   Taxable portion = 0.52 x $6,000 = $3,120   Non-taxable amount (line 256) = $6,000 - $3,120 = $2,880 2007: Total pension received during the year (line 115) = $12,000   Taxable portion = 0.52 x $12,000 = $6,240   Non-taxable amount (line 256) = $12,000 - $6,240= $5,760 2008 and later: Non-taxable amount (line 256) remains at $5,760 each year regardless of the amount of pension received (except in the year of death). Proration: Death of Pensioner. In the year the taxpayer dies, the non-taxable portion is prorated for the number of days the person was alive in the year. Audit-proofing. These German pensions and their exempt portions are often audited. The taxpayer must provide the notice issued by the German social security administration, which states when the pension was started. Look for the sentence that reads: "Die Rente beginnt am [xxx date]." (The pension starts on [xxx date].) Survivor s Pensions. If a survivor pension is paid to a surviving spouse, the pension is considered to have started when the original pension started. In the first year of the pension, the applicable percentage is applied to determine the taxable portion. In the second year (the first year that the pension is received for the full year), that percentage is once again applied and the non-taxable portion determined is the non-taxable portion for all subsequent years, until the year of death of the survivor.This topic and over 800 others are discussed in The Knowledge Bureau s EverGreen Explanatory Notes, now available at introductory prices for professionals in the Tax and Financial Services Industry. For more information, click here.

Tax and financial advisors will be interested in CRA s new handbook on securities transactions. The handbook discusses who has to file a T5008 information return to report securities transactions, including some interesting situations like: What are the reporting rules for a hot topic in today s marketótraders in precious metals? (did you know, pawnbrokers who buy gold rings don t have to file a T5008 slip) What are the tax reporting rules for investment counsellors? (they usually use the services of a broker or agent in serving clients but must file form T5008 if they act as agents for their clients in buying and selling securities) The guide goes on to explain the T5008 is not required to report the exchange of old shares for new shares occurring in the course of a reorganization of the capital structure of a corporation as long as the exchange meets the requirements of section 86 of the Income Tax Act, and no consideration other than new shares is receivable. Among other topics, reporting rules for the dissolution and continuation rules for partnerships are also discussed. For more information click here.

It appears CRA is auditing taxpayers who have excess contributions in their RRSPs these days, this can be a nightmare for those who find form T1-OVP daunting. Updated by the agency on February 9, it is worth taking a look at the new simplified version, which hopefully will make life a bit easier for tax practitioners and financial advisors alike. Check out the following links: T1-OVP Individual Tax Return for RRSP Excess Contributions T1-OVP-S Simplified Individual Tax Return for RRSP Excess Contributions In addition, a new guide was posted providing instructions for the reporting of Retirement Compensation Arrangements. The guide covers employer responsibilities relating to application for an RCA Account Number (Form T733), how to withhold and remit the refundable tax, how to report contributions made (Form T737-RCA), how to complete the T737-RCA slip and summary, and how to report the deductible RCA contributions to the employee. In addition the responsibilities of the custodian are outlined and penalties and interest costs described for those who fail to comply with withholding, remitting or filing requirements. For more information see T4041 Retirement Compensation Arrangements Guide 2007 The Knowledge Bureau is pleased to offer a new designation program for those consulting with clients in retirement income planning. The Retirement Income Specialist Program under the MFA Designation is now available. Please click here for more information.

On February 11, the government announced that Jim Flaherty, Minister of Finance, will table the 2008 Federal budget in the House of Commons on February 26 at 4PM. The Knowledge Bureau will be pleased to bring highlights of the budget to your inbox in a special release of Breaking Tax and Investment News on the evening of the 26th. Subscribers to EverGreen Explanatory Notes will enjoy a more complete analysis within the week following the budget. If you've not subscribed yet, we invite you to take a look at EverGreen now. Click here to view the on-line demo now. National firms this is an authoritative, inexpensive and simple way for you to get budget analysis out to your associates and sales channels in the heart of RRSP and Tax Season. Call us to subscribe before February 15 for best pricing. Click here to subscribe or call us toll free now: 1-866-953-4769.

The Knowledge Bureau suggests a quick fix for fairness and equity this time around. Winnipeg, MB. January 29, 2008. The Knowledge Bureau, Canada's leading educator in the tax and financial services, has submitted its pre-budget suggestions to The Federal Finance Department recommending changes to improve fairness and equity in the tax system for Canadians. Tax savings from new pension income splitting rules introduced for tax year 2007 are lucrative, in some cases can add up to six figures in savings to the wealth of Canadians earning qualified pension income over an average 20 year retirement period, says Evelyn Jacks, President of The Knowledge Bureau and best-selling author of Essential Tax Facts. However because eligibility for income splitting is tied into the criteria for claiming the $2,000 pension income amount, the existing rules favor those who retire with employer-sponsored plans, (they can split income at any age), over those who have self-funded private pension savings from RRSPs, (who must be age 65 to benefit from pension income splitting). The flaw is in the age criteria for the pension income amount, says Mrs. Jacks. which results in a considerable disadvantage to the self employed and others who are not members of Registered Pension Plans. This needs fixing. Second, The Knowledge Bureau suggests improvements to two features of the Canada Pension Plan: Couples who have each maximum funded their CPP throughout their working lifetimes will find that on the death of one spouse, there will be no CPP survivor benefit. Surviving spouses should be able to benefit from the deceased's lifetime contributions. CPP lump sum death benefits, currently set at a single payment of $2500 are not indexed. They should be, especially in light of the survivor pension issue. Third, the cost of education has been rising in Canada, yet the amount of tuition, education and textbook credits that can be transferred to supporting parents, spouses or grandparents has remained at $5000. This threshold should be increased substantially to reflect the real costs of supporting a student financially. Finally, charitable giving rules should recognize both time and money. If we can figure out a way to give a community-based Fitness Credit for children, says Mrs. Jacks, why not give credits to those who volunteer at the community centre or other worthwhile community endeavors by creating tax recognition for volunteer time? Evelyn Jacks is one of Canada's most prolific international authors, speaker, educational publisher and an award-winning entrepreneur, having written 40 books, including the Essential Tax Facts series (annual editions in 2005 to 2008), Make Sure It's Deductible (3rd Edition, McGraw Hill) Evelyn is also co-author of a cutting edge team leadership title: Get Your People to Work Like They Mean It (McGraw Hill). The Knowledge Bureau, is a national post-secondary educational institute specializing in training inter-advisory teams in the tax and financial services to practice Real Wealth Management: the after tax, after cost accumulation, growth, preservation and transition of wealth. This includes planning strategically and tactically for financial stewardship, business succession, retirement income and tax efficiency with their clients. Her latest course is entitled Tax Efficient Retirement Income Planning, one of six courses in the Retirement Income Specialist Program, leading to the MFA Designation, offered exclusively by The Knowledge Bureau.