Tax Tip: The More Obscure Medical Expenses

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

Throughout 2009 CRA announced the revocation of the charitable status of various charitable organizations. When a charity has its charitable status revoked, it can no longer issue donation receipts and is no longer considered a qualified donee under the Income Tax Act.  In addition, the charitable organization is no longer exempt from income tax and it may be subject to tax on the full value of its remaining assets (unless it is a non-profit organization). In the recent past, several donation investment offerings have been created, many of which include the "flipping" of art or other items in return for charitable donation receipts which provide a tax benefit on the investment. The offerings usually worked like this: A promoter gives a person the opportunity to purchase one or more works of art or another item of speculative value at a relatively low price. The proposal is that the promoter will work with the person to make arrangements for donating the works of art or other items to a Canadian registered charity or other specified institution. The person donates the art or other item and receives a tax receipt from the charity or other specified institution that is based on an appraisal arranged by the promoter. The appraised value of the art is substantially higher than the cost paid by the person. When the person claims the receipt on his or her next tax return, it generates a tax saving that is higher than the amount paid for the art in the first place. CRA takes a dim view of these offerings. To date over 100,000 taxpayers have learned first hand that the Canada Revenue Agency considers the donation schemes a sham, and they want their money back. It is CRA's view that the appraisal generated by the individual associated with these schemes may not represent the fair market value of the acquired property. If it did, then the property would not be sold at the lower price. On December 5, 2003 new legislation was introduced (changes to S. 248) to limit the eligible amount of a gift made after December 5, 2003 to the cost of the property to the taxpayer if the property was acquired within three years of donating it and the property was acquired for the purposes of the donation (i.e. it was acquired under a gifting arrangement as defined in S. 237.1). CRA advises that anyone considering entering into a tax shelter arrangement should obtain independent professional advice before signing any form of documents related to the donation and: know who they are dealing with, and request the prospectus or offering memorandum and any other documents available in respect of the investment and carefully read them; pay particular attention to any statements or professional opinions in the documents that explain the income tax consequences of the investment. Often, these opinions will tell the investor about the problems that can be expected and suggest that the investor obtain independent legal advice; not rely on verbal assurances from the promoter or others--get them in writing; and ask the promoter for a copy of any advance income tax ruling provided by the CRA in respect of the investment. Read the ruling given and any exceptions in it. Individual taxpayers should be aware that their tax return can be reassessed up to three years after the date of assessment. Even if the benefits of the tax shelter were accepted upon initial assessment this should not be interpreted as acceptance of the claim, it may still be subject to audit by the CRA. For free information about Breaking Tax and Investment News, self study courses on tax and personal finances, or books on personal finance. Call: 1-800-953-4769.

According to the Summary Report on Retirement Income Adequacy Research, recently released by the Department of Finance and authored by John M. Mintz, Research Director and Palmer Chair in Public Policy, The University of Calgary, financial intermediaries have some work to do in helping investors reduce risk. Here are highlights from the report, released December 18, 2009: The role of financial intermediaries is to help investors reduce risk and information costs as well as provide liquidity to investors when they need it. The objective is not to eliminate risk but to use it wisely and better distribute it in a sensible way. Some individuals may simply need government support and CPP/QPP benefits in retirement and the house they purchased during their working lives. Given the complexities involved in investment and estate-planning decisions, Canadians often pay for asset management and advice, with the most expensive fees associated with retail mutual funds (about 200 basis points). This comes at a cost to the income they earn on their investments. These costs are acceptable to the extent that they improve returns on their saving. The research suggests that active management does not provide returns on a persistent basis any better than passive management for both pension plans and mutual funds. Once taking into account active management costs, passive managed assets would provide superior returns. Individual investors do not seem to be advised sufficiently to invest in indexed and exchange-traded funds to improve fund performance. Nor is it clear as to why pension fund managers invest in active managed funds for the same reason. The research that has been undertaken to date does not explain why pension and retirement accounts are not invested more heavily in passively managed funds. What do you think? Please send your thoughts by clicking on the Add Your Thoughts button below: Educational Resources: Now is a good time to look at retirement income plans, family succession and estate plans in an attempt to better understand financial needs for a future which could certainly include tax increases on both income and capital. To learn more consider the following Educational Resources available from The Knowledge Bureau: ► Tax Efficient Retirement Income Planning ► Master Your Retirement ► Master Your Taxes ► Tax Efficient Investment Income Planning ► Master Your Real Wealth ► Master Your Investment in the Family Business Additional Educational Resource: EverGreen Explanatory Notes: Your online gateway to the latest changes at the Department of Finance and CRA.

An Overview Of The Summary Report On Retirement Income Adequacy Research Jack M. Mintz, Research Director and Palmer Chair in Public Policy, School of Public Policy, The University of Calgary released a summary of research undertaken for the Research Working Group on Retirement Income Adequacy on December 18, 2009, which confirms that overall, the Canadian retirement income system is performing well, providing Canadians with an adequate standard of living upon retirement. Amongst the findings in the report, it appears that Canada has one of the lowest poverty rates among elders in the OECD coutries, and that our public pension system, that is, OAS/GIS, CPP/QPP and provincial top-up programs are ensuring that low-income Canadians are able to achieve high income replacement rates, even exceeding 100 percent. Tax-assisted saving accounts as well as transfers and pension programs have otherwise provided an adequate retirement income at all income levels for the majority of Canadians. However, the report suggests that retirement income adequacy depends not only on saving but also on the investment performance of retirement funds, and that in fact Canadians may not be well served in the retirement marketplace by their financial advisors. (See Role of Financial Intermediaries, below). Based on recent studies, Baker and Milligan (2009) provide evidence suggesting as a rough rule of thumb that 60 percent replacement levels of pre-tax incomes are adequate to maintain expenditures. Yet: Low-income Canadians need a higher level of replacement income to avoid poverty. Some middle- and high-income Canadians may need even less than 60 percent of their pre-retirement income to sustain an adequate standard of living (for example, the OECD suggests 50 percent for individuals with incomes over $90,000 in Canada, twice the median). Much depends upon individual circumstances that affect personal consumption levels, including the need to support dependants, health requirements and the cost of housing and other basic necessities. Join us next week for a discussion on the Role of Financial Intermediaries. Educational Resources: Now is a good time to look at retirement income plans, family succession and estate plans in an attempt to better understand financial needs for a future which could certainly include tax increases on both income and capital. To learn more consider the following Educational Resources available from The Knowledge Bureau: ► Tax Efficient Retirement Income Planning ► Master Your Retirement ► Master Your Taxes ► Tax Efficient Investment Income Planning ► Master Your Real Wealth ► Master Your Investment in the Family Business   Additional Educational Resource: EverGreen Explanatory Notes: Your online gateway to the latest changes at the Department of Finance and CRA.

      By Evelyn Jacks   After the financial crisis of 2008 and 2009 that resulted in an unprecedented financial stimulus into the global marketplace, Canada is poised for a significant economic recovery in 2010, amidst some very good news in terms of the financial health of Canadian households, but also some significant red flags for the future. While personal net worth has rebounded above its ten year average and Canadian savings rates are at an eight year high, considerable fiscal expansion and monetary stimulus are supporting domestic demand, which may well spell higher taxation levels in future federal and provincial budgets. Taken together with the strength of the Canadian dollar and the impact of inflation, the tax preparation and wealth planning process takes on new importance this quarter with tax season beginning again for over 24 Million Canadian taxfilers. The following economic review follows developments at the Bank of Canada, specifically recent speeches by its Governor, Mark Carney on Current Issues in Household Finances on December 16, and in a report to the Standing Committee on Banking, Trade and Commerce, as well as recent news releases and compliance documentation from the Department of Finance, and the Canada Revenue Agency (CRA), will help advisors and their clients better anticipate what 2010 holds in store for purchasing power, savings rates, consumer spending and debt as well as taxation trends. PART 1: CANADA IN A GLOBAL ECONOMY Canadian economy has suffered a deep, albeit brief, recession. More than 400,000 jobs were lost and Canada suffered a $30 billion fall in output. However, it is expected that the Canadian economy will likely grow faster than the other G-7 countries in 2010. In most major economies, the inventory cycle has turned and housing sectors are stabilizing. But according to the Bank of Canada, stronger growth in domestic consumption will be necessary to offset weak external demand for Canadian exports, given our strong dollar and the global recession. The situation is worse for us because of the problems in the US, where the rebound in consumer consumption there is projected to be more moderate than in previous cycles. This is largely because, over the last three decades, U.S. consumer spending grew substantially faster than national income, driving the ratio of consumption to GDP from 62 per cent to a record 70 per cent. In the same period, the personal savings rate fell from 11 per cent of disposable income to 1 per cent, while household debt doubled from 84 per cent of disposable income to 165 per cent. This is quite unlike the trendlines in Canada: Canadians' Net Worth is Strong. Rebounding housing and financial markets increased Canadian household net worth to 589 per cent of disposable income by the end of the third quarter, above its 10-year average. Personal Savings Rate: The personal savings rate in Canada rose to an eight-year high of 5.5 per cent in the second quarter of 2009, reflecting a sharp increase in household savings and in general a responsible and precautionary reaction to the uncertainties stemming from the economic outlook and financial conditions of the past year. Consumer Borrowing: Consumers did and are expected to continue to take further advantage of unusually low borrowing rates, which the government's stimulative monetary policy is structured to encourage. Household Finance: At the same time, the Bank of Canada has warned that it is the responsibility of households to be able to service debt when fiscal stimulus measures are unwound and the marketplace produces its own results, which could include inflation and higher interest rates and taxation in the future. Bankruptcy Increases: While government stimulus packages hope to encourage consumer consumption to balance the economy and meet inflation targets, personal bankruptcies in Canada rose 41 per cent in the third quarter from the same period a year ago, leaving the number of bankruptcies as a proportion of the population at its highest level since 1991. Loan Delinquencies: Delinquency rates on loans have risen as well, with the proportion of mortgages with payments in arrears three months or more having increased by half over the past year. Mortgage Arrears. The current rate of mortgage arrears, remains more than one-third below its peak in the early 1990s. Financial institutions: Institutions have been alerted by the Bank of Canada not take false comfort from mortgage insurance and past performance of household credit, as the overall credit profile of Canadian households could well shift in a negative trend if debt continues to grow at current rates. Debt Service Ability: The Bank of Canada undertakes regular stress tests, to understand the vulnerability of Canadian households and their financial stability. Recent results illustrated that a hypothetical increase in unemployment could produce loan losses for financial institutions representing about 10 per cent of their Tier 1 capital. Should these simulations be accurate, by the middle of 2012, almost one in ten (9.6 per cent) Canadian households would have a debt-service ratio greater than 40 per cent, the threshold above which households are considered financially vulnerable. Don't miss the Annual Line-by-Line T1 Tax Update, a Distinguished Advisor Workshop presented by The Knowledge Bureau in five Canadian cities in January. It's an excellent way to update your skills in personal tax preparation with all the latest changes in tax laws. For dates, locations and registration, click here.

As we discussed in our last issue of Breaking Tax and Investment News, with the end of the year now past us, it is worthwhile to review changes that have occurred during 2009 that may impact you or your clients at tax filing time.   Following are recent tax changes specific to those who are employed. It is important to review various tax provisions available to employees in this year of change, as the economic downturn has led to numerous job losses, especially in the automotive, media and manufacturing sectors. Apprenticeship completion and incentive grants. Employees who received these amounts must report them as income on Line 130 of the tax return. RPP Contribution Maximums. It is a time when companies are struggling to fund their employees' pension plans. However, if you are entitled to one, and you are assured your company will be able to fund your retirement, your role in planning is to consider all the ways to maximize recent contribution maximums, and "backfillingî any available contribution room based on past services provided. For money purchase plans, the annual contribution limit will be $22,000 in 2010; thereafter the amounts will be indexed. For defined benefit plans, the maximum pension benefit per year of service will be $2,333 in 2009 and $2,444 for 2010. After this, the maximum benefit will be calculated as 1/9 the money purchase limit. Don't forget, you may be able to make past service contributions as well. And if you are about to receive a pink slip and a severance package, consider maximizing your RRSP contribution. In some cases, legal fees for challenging the amount of severance offered will be deductible too. RRSP Contribution Maximums. You may contribute to your RRSP throughout the year and within the first 60 days of the new year in order to make a deduction to offset 2009 taxes. Maximum contributions are calculated as 18% of earned income to a maximum dollar contribution limit. This was set at $21,000 for tax year 2009, based on an earned income of $116,667 in 2008. The contribution deadline is March 1st, 2010.   Educational Resources:  Now is a good time to look at retirement income plans, family succession and estate plans in an attempt to better understand financial needs for a future which could certainly include tax increases on both income and capital.  To learn more consider the following Educational Resources available from The Knowledge Bureau: Tax Efficient Retirement Income Planning    Master Your Retirement       Master Your Taxes <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com🏢office" />Tax Efficient Investment Income Planning                      Master Your Real Wealth      Master Your Investment in the Family Business  

<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com🏢office" /> January: Jan. 2: Reduce your tax withholdings at source: file your TD1 form to claim tax credits and a T1213 form. Make your TFSA deposit. Jan. 16: Defer stock option benefits. Jan. 30: interest payment on inter-spousal loans. April: April 15: US tax filing date April 30: T1 individual tax filind deadline February: T4, T5 slips due Federal Budget review (dates vary) May: Will and estate planning review March: Federal Budget review for 2010 RRSP filing deadline Pension Adjustment Reversal deadlines March 15: instalment due T3 slips due June: T1 proprietorship filing deadline June 15: instalment Closer Connection Exception Statement for Aliens (IRS Form 8840) Discuss these milestones with your clients when doing your year end planning in order that these important deadlines are not missed.     Join us next week for more milestones to mark in your calendar for discussion purposes.   To learn more about preparing T1 tax returns, register for Introduction to Personal Tax Preparation Services or call 1.866.953.4769 today to make an appointment for your free professional development consultation.