Tax Tip: The More Obscure Medical Expenses

Are you claiming all the medical expenses you or your clients might be entitled to? 

The deadline for the Canada Employment Insurance Financing Board to officially announce the EI premium rate for 2011 is November 14, 2010. Speculation of late has been that the rate would be increased by the maximum allowed (0.15%). However, on September 30, the finance minister announced that the maximum increase for 2011 will be limited to .05% and for subsequent years, the increase will be limited to 0.1%. The EI premium rate for 2010 was capped at the 2009 rate (1.73%; 1.36% in Quebec).  The new rate for 2011 will therefore be no more than 1.78% of insurable earnings.  With Statistics Canada reporting an increase in the average weekly earnings of about 3.9%, one can expect that the maximum insurable earnings will increase from $43,200 to roughly $44,800.  This would mean an increase of about $50.00 in maximum EI premiums ($44,800 x 1.78% ñ $43,200 x 1.73%) to $797.44  (from $747.36).  The official announcement of the 2011 rate and maximum insurable earnings has not yet been made. Educational Resources:   Learn more about payroll taxes by taking the Knowledge Bureau's certificate course Basic Bookkeeping for Business or increase your knowledge by taking Advanced Payroll for Professional Bookkeepers.

Important changes are in the works for Canadian residents who own Roth IRAs.  Unless taxpayers want to start paying tax on accumulated earnings within their Roth IRAs, an election must be filed by April 20, 2011. On August 27, 2010, the Department of Finance released draft legislation that amends the rules in the Income Tax Act governing the taxation of non-resident trusts and the related foreign reporting rules. These new rules will apply to a Roth IRA trust, subject to the application of the Canada-US Tax Convention. The new rules will apply to taxation years that end after March 4, 2010. Note that for Canadian income tax purposes an IRA (but not a Roth IRA) is a "foreign retirement arrangement" and is treated like a pension plan. Under recent changes to the Canada-US Tax Convention (known as the "Fifth Protocol"), a Roth IRA will be a "pension" for purposes of the Convention as long as no contribution is made to the Roth IRA after December 31, 2008, by or on behalf of the individual, while the individual is resident in Canada. Thus, if no contributions were made after 2008 while the taxpayer was resident in Canada, income accruing in the plan will continue to be deferred. Rollovers from one Roth IRA to another are not considered to be Canadian contributions, however, rollovers from plans other than another Roth IRA are considered to be Canadian contributions (if the taxpayer is resident in Canada at the time) and after such rollovers, the Roth IRA is no longer considered to be a "pension" and subsequent earnings on those contributions within the plan will be taxable to Canada. Election to Defer Canadian Taxes on Accrued Income in Roth IRAs Taxpayers who established Canadian residence prior to January 1, 2010 and had a Roth IRA, must file an election before April 30, 2011 if they wish to defer Canadian taxes on income earned within the Roth IRA. Taxpayers who establish residence after December 31, 2009 have until the filing due date for the return for that year to file the election. The election is irrevocable and applies to all tax years in which the taxpayer is a Canadian resident. According to CRA's Income Tax Technical News No. 43, dated September 24, 2010, the election should be made in the form of a letter containing the following information for each Roth IRA plan or account: The taxpayer's name and address; The taxpayer's social insurance number and social security number; The name and address of Roth IRA trustee or plan administrator; The Roth IRA account number; The date that the plan was established; The date that the taxpayer became resident in Canada; The balance of the Roth IRA as of December 31, 2008 or as of the date on which the taxpayer became resident in Canada, whichever is later; The amount and date of the first Canadian Contribution made to the Roth IRA, if any; and A statement signed by the taxpayer indicating that they elect to defer Canadian taxation under paragraph 7 of Article XVIII of the Canada-U.S. Tax Convention with respect to any income accrued in the Roth IRA for all taxation years ending before or after the date of the Election, until such time as a Canadian Contribution is made. The letter should be mailed to: Income Tax Rulings Directorate 16th Floor, Tower A, Place de Ville 320 Queen Street Ottawa ON K1A 0L5 If the taxpayer makes and election and had previously reported accrued income from the IRA, they may request and adjustment to the return for the year(s) in which the income was reported to remove the amount from income. The usual 10-year limitation on adjustments applies. The election is valid only until a Canadian contribution is made. Once a Canadian contribution is made, the Roth IRA is no longer a "pension" according to the Convention and therefore any subsequent earnings within the Roth IRA will be taxable in Canada. This information was extracted in EverGreen Explanatory Notes from The Knowledge Bureau.

Sooner or later theyíre gonna get you if you donít file your tax return! At least that was the expensive lesson learned by a BC man who failed to file tax returns for six years. On September 1, 2010, a hefty court-imposed fine of $6,000 on top of unpaid taxes and interest was handed down. CRA penalties have not been indicated to date. He must also file all outstanding tax returns and has been handed a years probation. A good tax preparer can complete previous years' returns using information provided by the taxpayer and missing information obtained directly from employers and CRA. Prosecution and penalties can be avoided through the Voluntary Disclosures Program (VDP) if outstanding tax returns are filed before CRA initiates action. Taxes owing and interest must still be paid. For more information see www.cra.gc.ca/voluntarydisclosures Educational Resources:   Learn more about filing prior years' returns, deadlines, fines and penalties by taking the Knowledge Bureau's certificate course Introduction to Personal Tax Preparation Services.

The Distinguished Advisor Conference takes Canadian advisors to Orlando Nov 14-17 to focus on family wealth management issues and early registrations for the event end September 30. Power strategic practice concepts will be discussed by leaders from the financial services. "We are looking forward to ground-breaking discussion on the issues Canadian families and their advisors face in developing sustainable wealth in a difficult economic climate,' noted Knowledge Bureau president Evelyn Jacks, conference host and founder. For more information follow these links:   Agenda  Venue  Register

On September 27, the federal government released its sixth report on the progress made in its Economic Action to combat the 2008 global financial crisis and the numbers look really good. Unfortunately, it doesn't seem to feel that way to the majority in the fray: in a month long poll of tax and financial advisors across the country, Knowledge Bureau found that 74% answered "no" when asked if they felt that the economy had stabilized since the start of 2010. According to the document: Canadian incomes have risen faster than any other G7 country in terms of gross disposable income Total credit growth in Canada continued to outpace that of the United States through the first half of 2010 and improved financial market conditions resulted in a rebound in net corporate bond and equity issuances. In addition, the difference between corporate and government bond rates narrowed considerably. All the tax relief scheduled in the Action Plan has now been implemented for both personal and business taxes. An excellent analysis of tax reductions introduced since 2006ótwo years before the financial crisis--on both federal and provincial fronts accompanies the paper Meanwhile the average of private sector forecasts for the economy, released in June anticipate GDP growth at 3.5% this year, hovering just under 3% over the next several years, an unemployment rate that will drop from its high of 8% this year back to around 6.5 by 2015 and inflation numbers (CPI, Core and GDP) all coming in around 2%. We can expect, based on the same projections that three month treasury bill rates will rise from this year's low of 0.7% to close to 4% in 2013, and we can expect to see rates on 10 year bonds back up around the 5% mark around the end of 2013. The exchange rate on the Canadian dollar will continue to rise to near par in 2011 and stay above 95 cents now until 2015. That's good news for retirees who wish to spend time south of the border in the next little while. And those private sector forecasters anticipate a significant rise in the price of a barrel of oil over the next several years. How does that all translate into Canadian communities? Be sure to voice your opinion in the Knowledge Bureau Poll now, then tune in next week for a summary of all the results.

Siegfried Merten, MFA from St. Catharines, Ontario reports that the German Government is requiring the filing of German tax returns by some recipients of German pensions for the period 2005-2009. Non-compliance will result in an estimated tax and late filing penalties. He tells us more in this interview with KBR Staff: Q. What is the issue with the German Tax Department, Siegfried? A. Canadian taxpayers receiving German pensions may receive a letter from the German equivalent to CRA, Finanzamt Neubrandenburg (RiA), requesting the German Tax Returns for the years 2005-2009 to be filed within 12 weeks. It's very important that clients of tax and financial advisors be contact immediately to be urged to open the mail and not to ignore it! Q. What should be done? A. If you do not comply the Tax Office has the authority to estimate your income and tax it accordingly. They may also levy penalty charges. Even after they have estimated everything you are still compelled by law to file the 5 tax returns and may be subjected to a fine. Q. But isn't that double taxation if you have filed your income properly on the Canadian tax returns? A. If you have been declaring your German Pension on your Canadian Tax Return there should be no taxes owing to Germany since you have paid tax on them to Canada -- but you still have to file the returns. Q. Where can people find help? A. All information including tax forms are available on the internet at www.steuerportal-mv.de. If you have any further questions or need to have the 5 Tax Returns filed please feel free to call me any time at: 905-708-5889.