Tax Tip: The More Obscure Medical Expenses

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

 Are the services you provide to your clients GST-taxable? If you are not sure, you might be interested in a revised notice CRA issued in June regarding the application of GST on the delivery of financial services. Notice 250 - Proposed Changes to the Definition of Financial Services defines when GST is required to be charged on financial services and contains several lengthy examples outlining the obligations of investment managers, full service brokers and financial intermediaries like mutual fund sales people. The rules have left much to interpretation of facts, and this has advisors worried, rightly so. In general, financial services, as defined in subsection 123(1) of the Excise Tax Act (the Act) are exempt. This includes the sale of insurance policies and trailer fees. However, the proposals specify that the following services are not financial services and therefore taxable: asset management services; credit management services; and certain services that are preparatory to or provided in conjunction with a financial service. Although paragraph (q) of the definition of financial service is not directly amended, its scope will be clarified by the proposed addition of new definitions of the terms "asset management service" and "management or administrative service" to subsection 123(1) of the Act. What is important, according to the Notice, is that " asset management services, provided to an investment plan, or any corporation, partnership or trust whose principal activity is the investing of funds, are considered to be management or administrative services and therefore excluded from the definition of "financial service".î That means, they are taxable. An investment plan includes a trust governed by: a registered pension plan; a registered retirement savings plan; a registered education savings plan; and a mutual fund trust Example 4 in the notice discussed mutual fund sales: "The buying and selling of mutual fund units are supplies of financial services. In the course of providing services to clients and to the dealer, the mutual fund salesperson agrees to assist investors in purchasing, redeeming and exchanging units held in accounts. While the salesperson provides some services that are preparatory to a supply of a financial service, such as customer assistance, information and advice, the nature of the business and the degree of reliance by the dealer and the investor on the salesperson in effecting a supply of a financial service indicate that the services provided by the salesperson go beyond those that are merely preparatory. The services provided by the salesperson in these circumstances would be included in paragraph (l) as arranging for a financial service and not excluded by any of paragraphs (n) to (t) or proposed paragraphs (q.1) and (r.3) to (r.5).   In other words, the activity would be defined as a financial service under subsection 123(1) of the Excise Tax Act and therefore, exempt from tax. The notice goes on to explain that "it would be a question of fact as to whether the services provided in any particular case are considered to be a single supply that is made only in consideration of the commission on the purchase of the units or a combination of the commission on the purchase and the trailing commission. The facts and circumstances of each transaction would have to be considered on their own merits.î Advisors should consult a qualified tax practitioner well versed in the new rules if they have any concerns about tax compliance.   We have created a table summarizing the taxable versus non-taxable services under the Excise Tax Act and the application of GST/HST in respect of "financial service".  Contact us at reception@knowledgebureau.com if you are interested in a copy of the summary.   We would like to hear from you on this subject ñ what do these changes mean to advisors and their clients?      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.  

Short of cash after a long summer off? Take a second look at your tax withholdings and quarterly tax instalment requirements (the next one coming up September 15). Many employees have deductions or credits available to them that are not reflected on the TD1 form; a review could create new cash. Retired? Remember that often pensioners, business owners and investors overpay instalments needlessly, too. If this is just the right time to invest after-tax dollars and the wrong time to be pulling capital out of the marketplace to make unnecessary tax prepayments, you'll want to review the amount you're paying in tax on income. Employees: Where an employee has additional deductions or credits available this year, be sure to have the employer take these into account when calculating the tax to be withheld by redoing the TD1 Tax Credit Return. Reducing tax withheld at source enhances the employee's cash flow ñ amounts that would otherwise be received as a lump-sum refund when the tax return. Why wait for spring when the money could be working for you now? Convert overpaid taxes into an increase in the take-home paycheque received every pay period. If you find it unacceptable that the average tax refund was $1,400 per taxpayer in 2009, when that money could be working for you or your clients instead, act now. Non-Statutory Deductions Some deductions can be taken into account by the employer without having to obtain the consent of CRA. Others require a pre-authorization from CRA before the employer can take them into account and reduce withholdings. Deductions that do not require Approval the employee's contributions to a registered pension plan, the deduction available to an employee who resides in a prescribed Northern zone, union dues, contributions to a Retirement Compensation Arrangement or certain other pension arrangements, and certain contributions to a Registered Retirement Savings Plan. Deductions that Require Approval An employee may have deductions or credits available other than those described above which will reduce the amount of tax he or she ultimately has to pay when the tax return is filed. The employee has the right to request that the employer take these into account in calculating the amount of income tax to withhold from net pay. However, the employee must first obtain the written permission of the Canada Revenue Agency. Permission is requested by filling a Form T1213 with the CRA on which the employee identifies the employer and the dollar amounts of deductions or credits that will be available to reduce the amount of tax. If the CRA is in agreement, an authorization will be issued to the employer. Excerpted from Advanced Payroll for Professionals, one of the courses that comprise the Bookkeeping Services Specialist program.   Next time: September 15 Instalment Payment Need Adjusting?

End of summer is a great time to review the income requirements of your family business clients. This is a prerequisite to any year end planning activities and required investment services to reduce and maximize after-tax income. Here are some tips to consider: First, in determining the optimum tax efficient income plan, each individual family member's total income sources and their "tax timingî should be analyzed. The Knowledge Bureau's Tax Efficient Retirement Income Planning Course features an Income Analysis and Projection software tool that makes this process both fast and easy. It is important to ensure that every family member has enough total after-tax income or available cash flow to meet needs and wants. Family income splitting, which allows family members to fully utilize personal credits, and social benefit payments are most important planning factors. Planning now for type of income to be earned coming into year end is critical, too. The payment of a reasonable salary, for example, will increase both net and taxable income. At lower income levels, it will also normally attract CPP and (often) EI contributions, both of which give rise to additional personal credits and may increase the family member's Canada Employment Credit. A decision to pay additional salary will increase net income for the purposes of calculating deductions like child care and credits like spousal and child amounts, medical and charitable donations. Keeping an eye on relevant net income thresholds is important and RRSP planning can help get desired tax minimization results. Therefore tax and investment advisors need to work together. Remember that a salary is earned income for purposes of creating RRSP contribution room. If it is desirable to allow family members to accumulate more tax sheltered retirement income there may be a preference for paying a salary over a dividend, for example. Dividend income, remember, increases both net income and taxable income as well, on an inflated basis, because it includes a gross up provision. That is later offset by the dividend tax credit, as part of the integration process between the corporate and personal tax systems. Therefore, issues that need to be taken into account in evaluating the payment of a dividend as compensation include:the taxable amount of the dividend is greater than the cash amount, so dividends have a greater effect on clawbacks than do salary, dollar for dollar: dividend income is not earned income and does not create RRSP contribution room; dividend income is investment income for purposes of computing the Cumulative Net Investment Loss account, and the receipt of a dividend may increase access to the capital gains deduction; dividends paid from a private corporation to a minor will normally attract the kiddie tax, meaning that they are taxed at the highest possible rate; because of the dividend tax credit, the tax treatment of the dividend must be modeled closely where the taxpayer has relatively low income and may be in danger of not utilizing all of his or her personal credits. For more information on owner-manager tax planning, join us at our November Tax Planning Workshop: Year End Planning Strategies for Individuals and Business Owners - Focus On The Family Business.  Link here for more details. 

With back to school just around the corner and other money spending opportunities on the horizon, we thought it would be worthwhile to review the Tax-Free Savings Account (TFSA) rules to determine if it is worthwhile raiding the account for those upcoming cash requirements. Here are the top 6 questions we receive regarding TFSA's: 1. What is a TFSA and Who Can Contribute To It? Available since January 1, 2009, the new Tax-Free Savings Account (TFSA) is a registered account in which investment earnings, including interest, dividends and capital gains accumulate within the account on a tax free basis. Contributions up to an annual maximum of $5000 can be made by/for those who have reached 18 years of age and are residents of Canada. There is no maximum contribution age (you can be 92, for example!), however a tax return must be filed to build "TFSA Contribution Roomî. This $5000 annual maximum amount will be indexed after 2009, with rounding to the nearest $500. The annual maximum remains at $5,000 for 2010 contributions. 2. How is TFSA Contribution Room Calculated? The TFSA contribution room is made up of: ∑ annual TFSA dollar limit ($5,000peryear plus indexation, if applicable); ∑ any unused TFSA contribution room in the previous year; and ∑ any withdrawals made from the TFSA in the previous year, excluding qualifying transfers. 3. Can unused contribution room be carried forward to future years? Unused contribution room can be carried forward on an indefinite carry forward basis. This means two things: first if you have unused TFSA contribution room of $10,000, you can in fact carry that unused contribution room forward indefinitely to fund when you have the money. Secondly once you build contribution room, you can't lose it. That is, you can take the principal and earnings out of your TFSAóon a tax free basis--and spend it on whatever you want; then put it back ñ as long as you wait until you have the contribution room. 4. How can I keep track of my TFSA Contribution Room? Based on information provided by the issuers, the Canada Revenue Agency (CRA) will determine the TFSA contribution room for each eligible individual and report this on the Notice of Assessment. Withdrawals, excluding qualifying transfers, made from a TFSA in the year will be added back to TFSA contribution room at the beginning of the following year. 5. What happens when I make an overcontribution? Taxpayers cannot contribute more than their available TFSA contribution room in a given year, even if they make withdrawals from the account during the year. If they do, a penalty tax of 1% of the highest excess amount in the plan during the month, is charged, for each month you are in an overcontribution position. Discrepancies in contribution room limit or excess contributions, must be reported to the TFSA issuer. In addition, after October 16, 2009, any income earned resulting from an overcontribution, or a contribution to a prohibited or non-qualifying investment will be taxed at 100%. For example, let's take Paul who contributed $5,000 to his TFSA in 2009, and another $5,000 in 2010. In mid 2010 he decided to take out $4,000 from his TFSA to put a deposit on a sports car he saw for sale on e-Bay. When Paul found out he couldn't import the sports car into Canada, he backed out of the sale and received his deposit back. Unfortunately, as Paul has already put his full TFSA maximum into the account, he no longer has contribution room. He will have to wait until 2011 to re-contribute all or part of the $4,000 withdrawal. If he does re-contribute during 2010 he would be subject to the penalty tax of 1% a month for each month the excess contribution is in the account. 6. What income sources should be earned from the TFSA account? That largely depends on age and sources of other income. Those sources of income subject to the highest marginal tax rates (such as interest) or dividends, (which artificially inflate net income, thereby decreasing social benefits payments), should perhaps be earned within a TFSA. Capital gains and losses should perhaps be incurred outside the TFSA for better tax results, particularly if planned in combination with a charitable giving strategy. But if you are looking for the power of real tax free growth, the TFSA should contain a diversified set of investments, including equities. Note that losses from investments earned within a TFSA are not deductible from capital gains held outside the account. In addition, transfers of assets held outside of a TFSA, which result in a capital loss at time of transfer are considered to be "superficial lossesî which are not usable as a deduction against capital gains of the year.   Compliance Alert:    Many people are not aware of the form and schedules used to calculate the taxes and penalties imposed on excess contributions or prohibited or non-qualified investments to TFSA's. RC243 Tax-Free Savings Account (TFSA) Return 2009 RC243-SCH-A Schedule A - Excess TFSA Amounts RC243-SCH-B Schedule B - Non-Resident Contributions to a Tax Free Savings Account (TFSA) 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.

Most of us are aware that principal residences are eligible for special tax status.  Throughout the last 40 years there have been a number of changes to the rules surrounding principal residences, particularly those that are long-held (think family cottages), the historical changes are outlined below.   As an overview, a property qualifies as your principal residence if it meets the following conditions: Is a house, cottage, condominium, apartment, trailer, mobile home, or houseboat. Is owned by you alone or jointly with another person. You, your spouse, your former spouse, or any of your children lived in it at some time during the year. You designate your property as your principal residence. Form T2091, Designation of a Propery as a Principal Residence by an Individual is used to calculate the capital gain portion.   The basic computation to calculate the exempt gain is as follows:   Total Gain X        1+ the number of years the home was designated as a principal residence                                               Total number of years you owned teh home after 1971 <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com🏢office" />  Historical changes Special consideration must be given to the tax status of long-held residences in determining tax consequences of the various plans clients have: ï Pre 1972: No tax is payable on accrued gains on any capital assets ï 1972 to 1981: Prior to 1982 one principal residence designation was allowed for each year for each spouse. Therefore for these years a husband and wife can designate different principal residences (e.g. a house and a cottage) to help minimize capital gains (and taxes) on a sale. 1982 to date: Since 1982 you have been able to designate only one home as your family's principal residence for each year. If you are married or are 18 years or older your family includes you, your spouse, and your minor children. If you are not married or are under age 18, your family includes your mother and father and your brothers and sisters (unmarried and under age 18). ï 1993 to date: One principal residence designation allowed for each year to each conjugal relationship (married or common-law) ï 1994: Prior to February 23, 1994, everyone had a $100,000 personal capital gains exemption. This meant that every Canadian could generate up to $100,000 of capital gains during their lifetime (up to this date) and not pay tax on those gains. In order to get the final benefit from this exemption, many people elected, on form T664, to use up their exemption and trigger a capital gain. The election increased the adjusted cost base of particular assets owned at that time so that when the property was actually sold, the taxable capital gain was that much less. If you filed a T664, you are considered to have sold your capital property at the end of February 22, 1994, and to have immediately reacquired it on February 23, 1994. ï 1998 to 2001: Same-sex couples could elect conjugal status, thereby limiting their tax-exempt residences to one per unit ï 2001 to date: Same-sex couples are required to limit themselves one principal residence designation per year per conjugal relationship   Excerpted from Tax Efficient Retirement Income Planning, one of the courses that is part of the MFA, Retirement Income Services Specialist program. Register now and save.

Employers - in the very near future you will have many summer students leaving their jobs to head back to school, it's time to brush up on the rules related to "interruption of earnings" or what is more commonly referred to as a "termination of employment".   A termination checklist is useful in helping the payroll department to determine that all payments and all deductions are captured for the final pay. It can also be used to ensure that all internal policies relating to a termination have been complied with.   A record of employment (ROE) form is required by the government once an employee has a break in employment. The government uses the information on the ROE to determine whether a person qualifies for EI benefits, the benefit rate and the duration of his or her claim. An ROE must be issued by an employer even if the employee has no intention of filing a claim for EI benefits. An interruption in earnings could be due to the employee's quitting or the employer terminating the employment, but only arises if it involves or is expected to involve 7 consecutive calendar days without work or insurable earnings from the employer. An interruption of earnings also occurs where a salary falls below 60% of normal earnings due to illness, injury, quarantine, pregnancy, the need for a parent to care for either newly born or adopted children, or the need to provide care or support to a family member who is gravely ill with a significant risk of death. Special rules apply to casual workers. When a part-time or casual worker has not worked for 30 days, is no longer on the employer's active employment list or the employee or the government requests an ROE form, a form must be completed by the payroll department. When an employee is terminated a termination letter is usually prepared by the payroll or human resource department which outlines the reason for the termination, monies owing to the employee and continuation of any benefits or other coverage. The letter should also describe any non-competition agreement terms and any other actions required by both the employer and the employee. An employee may or may not work their notice of termination period ñ the period from the announcement that employment is terminated until the last day of work. As noted above, if an employee chooses not to work their notice period, the employer generally does not have to pay the employee for the notice period. On the other hand, if an employer chooses not to have the employee work out their notice period then the employer must pay the employee for this period. As mentioned earlier in the course, this payment is referred to as "pay in lieu of notice". Notice period rules vary by province and can be found in provincial labour standards. Educational Resources: Excerpted from Advanced Payroll for Professional Bookkeepers,  one of the courses that comprise the Bookkeeping Services Specialist program.