Tax Tip: The More Obscure Medical Expenses

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

The Minister of Finance, The Honourable Jim Flaherty has announced new regulations that have come into effect on September 1, 2010 that will help provide protection to Canadians and their use of credit cards.  One of the regulations that came into force provides a minimum 21 day interest-free grace period for credit card purchases when balances are paid in full.  The application of the new regulations will relate specifically to those credit cards issued by banking institutions that are federally regulated. Regulations that came into effect earlier this year provided information to credit card customers related to interest rates and applicable fees, consent requirement for increases to credit limits and changes to debt collection practices. In addition to the interest free grace period, the new regulations will provide additional information to consumers through the following changes: A breakdown of the time it would take to fully pay off outstanding debt if only the minimum monthly payment is made Disclosure of all interest rate increases in advance to the credit card customer Payment allocation would be changed to benefit the cardholder Minister Flaherty advised that the change in regulations would "make financial products more transparent for consumersî and "will protect Canadians and their families from unexpected costs.î To review the full new release, link here.   To keep current with all financial and economic news try the EverGreen Explanatory Notes DEMO TODAY! Or call us to subscribe: 1-866-953-4769.  

Robert Ironside, Ph.D., Knowledge Bureau faculty member, course author and financial professor discussed his views on the state of the economy in a recent interview with Knowledge Bureau President Evelyn Jacks. Q. How can we think about investing into the best of the bad outcomes our current global economy is experiencing? Do you have any concerns that existing investments in "safe, guaranteed investmentsî are at risk? A. 'I think the likely outcome will be recession followed by significant inflation as the only way the developed economies (probably led by Japan) can stave off an outright default (although this might still be several years in the future). Remember, inflation is just another form of taxation. Any form of tax is a transfer of purchasing power from Party A to Party B. The inflation tax is a transfer of purchasing power from creditors to debtors. It works by reducing the purchasing power of the nominal dollars loaned out. Thus I buy a $1,000 bond today that matures ten years from now. If we have significant inflation between today and ten years from today, the bundle of goods and services that my $1,000 will purchase will shrink. This shrinkage is an effective confiscation of my wealth that is every bit as real as an income tax, but because it is so insidious, it can be imposed by the weakest of governments. Therefore, in answer to your question, the major concern I have is about the erosion of wealth in fixed income securities. Many, many investors have moved significant portions of their portfolios into fixed income. In order to get yields above zero, many investors have started to lengthen out their maturies. If the securities have maturies beyond about five years, I think they are highly exposed to purchasing power risk (the loss of value due to inflation). As to tax, that is a huge issue, because tax is levied on the nominal return, not the real return. Although investors should only be concerned with the real, after-tax return, most of them focus only on the nominal return. As inflation (and nominal returns) rise, the real, after-tax return falls in a linear fashion. It does not take much to produce a negative, real, after-tax return. The higher the nominal return, the more negative the real, after-tax return.î   Robert Ironside, ABD, PH. D is the author of several Knowledge Bureau certificate courses, including Financial Literacy: The Relationship Between Risk and Return.  Mr. Ironside will headline the Distinguished Advisor Conference being held November 14-17th in Orlando, Florida, where the theme is "Focus on The Family".   View the entire agenda by clicking here.

With Canada's high personal tax rates, there is a great desire among taxpayers to find ways to save on taxes within the family unit, particularly where one spouse has a significantly higher income than the other. Income splitting is the process of redirecting income within a family group to take advantage of the lower tax brackets, deductions and credits available to each family member. Income is split by transferring income-earning assets from high-income to lower-income family members. Savings can be achieved in a number of ways: from strategies as simple as making interest free loans to making more complex arrangements involving corporations and trusts. There are three important characteristics of the Canadian tax system that make income splitting attractive to taxpayers: Because of the progressive nature of our income tax system in Canada, marginal tax rates applied to taxable income rise as the individual's income increases. The Canadian tax system taxes individuals rather than households. In addition, each individual has a basic personal tax credit, and pays no tax on income earned up to the amount that generates the credit. For 2010, the basic personal amount is $10,382. Certain income sources are taxed more advantageously than others (capital gains and dividends are taxed at lower marginal rates than interest income). Therefore, better tax results for the family unit as a whole can often be obtained when each individual in the family earns taxable income, as opposed to one person earning all of the income. The Canadian Government is well aware of these potential tax savings and over time has enacted several rules to prevent it. The Attribution rules found in S. 74 and 75 of the Income Tax Act potentially apply whenever property is transferred or a loan is made at little or no interest to a family member. Income Splitting Rules Some important rules related to income splitting are as follows: Transfers and loans to spouse or common-law partner If an individual transfers or loans property either directly or indirectly, by means of a trust or any other means to the spouse or common-law partner for that person's benefit, any resulting income or loss from that property is taxable to the transferor. An exception to this rule is made if a bona-fide loan is made and interest paid at the prescribed rate or more (S. 74.1(1)). Example: Inter-spousal Interest-free Loan Issue: Bob makes an interest-free loan to his wife, Sue, of $50,000. Sue then invests the $50,000 in bonds so she can earn interest income. She will pay less tax than if Bob had invested the money, as she is in a lower tax bracket. Will this strategy work? Answer: No. Loans to a spouse/common-law partner are subject to attribution where any income or loss from property is realized from the loan proceeds. Had the loan been made to earn income from a business that Sue runs, however, the business income would not be attributed. Assignment of CPP Benefits A specific exception to this rule surrounds the assignment of Canada Pension Plan (CPP) benefits to a spouse, which is allowed and results in the reporting of those benefits by the spouse to whom they have been transferred. Example: Splitting CPP Benefits Issue: Ethel's CPP benefits are larger than Elwin's. They wish to equalize the amount that is reported on their tax returns by splitting CPP benefits equally. Is it possible to do so? Answer: Yes. By making application with HRDC, Ethel and Elwin can split the CPP benefits to the extent that the benefits were earned while the couple was together. Further, attribution rules will not apply on income from property earned on CPP benefits that have been assigned to a spouse. Therefore, Elwin can invest the assigned CPP benefits and report resulting earnings in his own hands. Election to Split Pension Income Beginning with the 2007 tax year, taxpayers who receive pension income that is eligible for the pension income amount may elect to have their spouse report up to 50% of that pension income. This election affects how much pension income is reported by each spouse but does not involve the actual transfer of those funds and therefore does not result in any attribution. Transfers and loans to minors Where property is transferred or loaned either directly or indirectly to a person who is under 18 and who does not deal with the transferor at arm's length or who is the niece or nephew of the transferor, the income or loss resulting from such property is reported by the transferor until the transferee attains 18 years of age. An exception to this rule is made if a bona-fide loan is made and interest paid at the prescribed rate or more (S. 74.1(2)). Example: Loan to a Non-Arm's Length Minor Issue: Maggie lends $5,000 (interest-free) to her son, Tom (16), who invests in the bond market. This year, Tom earns $625 in interest income from those bonds. How much income will Tom report on his tax return? Answer: Nil. Attribution rules require the $625 earned by Tom to be reported by Maggie because the interest was earned by a minor, in a non-arm's-length transaction. Gain or Loss Deemed That of Transferor When property that is transferred to the individual's spouse or common-law partner earns taxable capital gains (or losses), such gains or losses will be reported by the transferor (S. 74.2(1))   Educational resources:For more information on tax planning provisions and compliance requirements, subscribe to The Knowledge Bureau's online tax reference for taxpayers, financial advisors and their clients: EverGreen Explanatory Notes. Call: 1-800-953-4769 to order today.

The Minister of Finance, The Honourable Jim Flaherty, has once again released the Fiscal Monitor, this time for the three months ending June 2010, announcing a deficit of $2.8 billion for the first quarter of the 2010-11 fiscal year, compared to a deficit of $5.0 billion for the same period ending June 2009. Although at first glance this looks like good news, we need to remember that for the same period in 2008 there was a budgetary surplus of $2.9 billion. During the period personal and corporate income tax revenues were decreased by 3.4% and 5.1% respectively. Other revenues consisting of net profits and revenues from Crown corporations and returns on investments were down as much as 15%. EI premiums revenues were up $11 million, just under a 1% increase. What does this mean to the average Canadian? As discussed previously in the Knowledge Bureau Report, today's deficits are always of concern for several reasons:  will they become the taxes of tomorrow?  This is of particular significance to the ten million or so baby boomers who make up approximately one-third of our population and just under 50% of the tax filers, who may be concerned about the future purchasing power of whatís left of their retirement savings. By the year 2011, the first boomers will reach age 65. Those aged 65 and over, according to Infrastructure Canada, are the most intensive users of the health care system, a financing burden yet to come for Canadian governments. What effects will this continued deficit spending by both federal and provincial governments have on public pensions and the health care system? How should elder Canadians prepare for higher costs of medical treatments, hospital care or the requirement for private home assistance resulting from an overburdened health care system? A review of retirement income plans, critical health care plans, family succession and estate plans would be timely in an attempt to better understand financial needs for a future with less government capacity to assist and the possibility of increasing taxes on income or capital.  What can be done today to plan for these uncertainties when returns on investments are minimal and inconsistent? We would like to know your thoughts on the deficit, and what plans Canadians can make to prepare for the future. <?xml:namespace prefix = o />Educational Resources:  Now is a good time to review tax planning considerations and strategies for your clients. Consider the following Educational Resources available from The Knowledge Bureau: Portfolio Risk Manager Tax Efficient Retirement Income Planning  

The Distinguished Advisor Conference November 14-17 Winnipeg, Manitoba. Influential thought leaders, executives and multi-disciplinary advisory teams from across the ranks in the Canadian financial services industry will gather November 14 to 17 at the Distinguished Advisor Conference to discuss family wealth management at a pivotal time in history, when a global economy is facing a series of difficult scenarios. "The times are new, they are tough, and for some, they are scary,î says Evelyn Jacks, President, The Knowledge Bureau, founder and host of this event. "The best advisors and their associated firms need to know how to navigate families towards their best possible financial outcomes, as the developed world continues to experience the effects of significant change including deleveraging, recession, unemployment, lower tax revenues, and persistent challenges to a family's required investment returns.î Twenty influential speakers will take the stage to help advisors plan strategically to take on the challenge of these and other key issues facing advisors today including: Robert Ironside, who will discuss how the end of the "Debt SuperCycleî will impact the wealth of families and their current investment strategies Richard Croft on how flat investment returns, and erosion of purchasing power will require new product solutions while Evelyn Jacks explains how tax and economic change impacts Real Wealth Management. Gordon Pape, on whether this is the right time to buy propertyóin Canada, Florida or other retirement havens Ron Thiessen, Debbie Hartzman and Enzo Calamo on how to broach the emotional impact of financial change on family structures Terri Williams, Louise Guthrie, Doug Nelson, Roland Chalupka, Alan Rowell and Lea Koiv on how planning can increase cash flow in lifecycle transition periods, particularly in retirement, health and estate planning Don Stewart, on how financial illiteracy affects the financial health of Canadians and what can be done by advisors to help Greg Pollock, Lisa Langley and Anthony Morris on how global economic change defines the new financial advisor and their family practices, with vital discussion on how to survive and thrive in hard times Paul Bates, Al Emid, Kish Kapoor and Mick Kelly on fostering successful relationships with families in good times and in bad. . . .Cont'd. Early registration for the DAC is now possible, with a discount offered until September 30. The event takes place at the Hard Rock Hotel in Orlando; detailed information is available by phone at 1-866-953-4769 at www.knowledgebureau.com/dac. Contact: Evelyn Jacks, President, evelyn@knowledgebureau.com

In the next couple of weeks, as the children head back to school, we should give some thought to how to claim all those tuition fees that are being paid out to various educational institutions. Here is a review of the basic definitions for non-refundable credits and what qualifies for the tuition credit and education amounts: TUITION FEES Students may claim the fees paid for courses taken in the tax year. To qualify, each tuition fee must be more than $100. Eligible tuition fees include: Fees paid for courses at a post-secondary school level paid to a university, college, or other educational institution in Canada, Fees paid to an educational institution in Canada certified by the Minister of Human Resources Development for courses (if the student was 16 or older in the year) to develop or improve skills in an occupation, Fees paid for courses at a post-secondary school level paid to a university, college, or other educational institution in the United States if the student lived in Canada near the border throughout the year and commuted to the school, and Fees paid if the student was in full-time attendance at a university outside Canada, for courses that were at least 13 consecutive weeks long, and that will lead to a degree. Other eligible fees include: admission fees, charges for the use of library or laboratory facilities, examination fees, application fees (but only if the student later enrolls in the institution), charges for a certificate, diploma, or degree, mandatory computer service fees, academic fees, the cost of any books that are included in the total fees for a correspondence course, and fees, such as athletic and health services fees, paid to a university, college, or other educational institution in addition to tuition for post-secondary courses, when such fees are required to be paid by all students. If not all students are required to pay them, then amounts eligible are limited to $250. Non-qualifying tuition fees include: Costs for secondary education at a private school or for private music, dance or other such lessons, do not qualify. students' association fees, medical care, transportation and parking, meals and lodging, goods of lasting value that you will keep, such as a computer, microscope, uniform, or an academic gown, and initiation or entrance fees to a professional organization Also, fees cannot be claimed if: they are paid or reimbursed by an employer, where the amount is not included in the employee's income, paid by a federal, provincial, or territorial job training program where the amount is not included in income, or the fees were paid (or are eligible to be paid) under a federal program to help athletes, where the payment or reimbursement has not been included in income. NOTE: KNOWLEDGE BUREAU SELF STUDY COURSES QUALIFY!   Educational Resources:   Taking the Knowledge Bureau's certificate course Introduction to Personal Tax Preparation Services is a great way get your start earning a second income as a tax services specialist. See www.knowledgebureau.com for more information on our courses and how to enroll.