Tax Tip: The More Obscure Medical Expenses

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

By Evelyn Jacks What's happening with the value of the Canadian dollar? Should investments be pulled out of US currencies? Concerned investors may have these and other questions on their minds as they attempt to make decisions on buying property and investments south of the border and hedging on currency values. The Governor of the Bank of Canada, Mark Carney, has attempted to address some of these issues in a presentation October 28th to the Standing Senate Committee on Banking, Trade and Commerce. He brought a cautious acknowledgement of improvement including the view that a global recovery from the financial crisis is beginning. However, Mr. Carney noted also that ìsignificant frailties remain.î One of these significant frailties is the strength of the Canadian dollar, which is working against economic recovery in Canada, causing a drop in net exports. The bank now projects that the Canadian economy will contract by 2.4 per cent this year and then grow by 3.0 per cent in 2010 and 3.3 per cent in 2011. Another is predictions around inflation. The Bank expects both core and total inflation to return to the 2 per cent target in the third quarter of 2011, in the meantime rising from a negative position to 1 per cent this quarter. These issues point to volatility in currency valuations. Specifically, the Governor stated: The main upside risks to inflation relate to the possibility of a stronger-than-anticipated recovery in the global economy and more robust Canadian domestic demand. On the downside, the global recovery could be even more protracted than projected. (Editor's Note: . . .particularly in light of the H1N1 pandemic?) In addition, a stronger-than-assumed Canadian dollar, driven by global portfolio movements out of U.S.-dollar assets, could act as a significant further drag on growth and put additional downward pressure on inflation. ìWhat ultimately matters,î says Mr. Carney, ìis the exchange rate's impact in conjunction with all other domestic and foreign factors on aggregate demand and inflation in Canada. To put it simply, the Bank looks at everything through the prism of achieving our inflation target.î And that target is the reason why the Bank reaffirmed its conditional commitment to maintain its target for the overnight rate at 1/4 per cent until the end of June 2010 with a view to achieving a 2% inflation target. ìThe exchange rate should be seen in this context,î says Mr. Carney. ìIt is an important relative price, which the Bank monitors closely.î Evelyn Jacks is Founder and President of The Knowledge Bureau and Program Director for the Distinguished Advisor Conference, which will be covering these global issues of concern with Robert Ironside, Richard Croft and other leading advisors in tax and financial services from Canada and the U.S. in Tucson, AZ November 8-11.

By Alan Rowell, DFA, Tax Services Specialist   As you may be aware, legislation was introduced on September 18, 2009 to put the Home Renovation Tax Credit into effect. As of this writing, it has passed first reading with two more to go, plus the Senate. On October 19, 2009, CRA held an information session in Hamilton, Ontario with representatives regarding the HRTC. At issue is when a qualifying expense is actually incurred and if it is deductible if the expense has been incurred but the work has not been completed before February 1, 2010. The Issue CRA has not, as of yet, issued a clarification on their interpretation of the proposed legislation but does admit that it is "greyî. There are three interpretations of the proposed legislation at issue: A qualifying expenditure will be eligible when a contract is signed, regardless of the installation date, or A qualifying expenditure will be eligible when a contract is signed and paid for, regardless of the installation date, or A qualifying expenditure will be eligible when paid for and all installation and work is completed before February 1, 2010. CRA's representative, an auditor from the "underground economyî section, has one suggestion ñ contact your MP so that clarification can be implemented directly into the legislation and avoid the differences of opinion that will ultimately become an issue. The Mechanics Putting aside the legalese of the situation, the mechanics of filing and claiming the HRTC is also going to be a challenge, especially for professional tax services who will be under the April 30th time constraints. A new schedule will be introduced for claiming the home renovation expenses. The draft version of the schedule, a copy of which was provided by the CRA representative, looks much the same as a medical expense schedule, with one notable difference. The GST/HST number of each receipt needs to be input into the return. Any expense claimed that does not have the GST/HST number on the new schedule  may trigger a pre/post assessment review. This review could require taxpayers to send in their receipts. In the meantime, this hugely popular program initiated in the January 2009 Federal budget is now running into trouble for legitimate contractors. The popularity of the program has created sales, helping to stimulate our economy. With these sales also comes the need to complete the work and have installations completed. Some contractors are already booked through January 2010.  Do they need to finish on time for the claims to be deductible? This needs to be clarified as soon as possible. Canadians need to know - no one wants to spend a couple of years working through objections and appeals waiting for the Courts to interpret the legislation. This needs to be clarified now ñ have the legislation state the intent so that everyone knows where he or she stands and can plan accordingly.   Alan Rowell, DFA, Tax Services Specialist is President of The Accounting Place.

EXPERT OPINION: KNOWLEDGE BUREAU FACULTY Knowledge Bureau asked three of its Distinguished Faculty members about their views on these latest developments and specifically, resulting currency issues. Here is what they say: Richard Croft I believe that the Canadian dollar will reach par and then likely move above par in time. I think the question for the Bank of Canada (BoC) is not whether it will move higher, but the speed at which it moves higher. Of note is Prime Minister Harper's answer to a question about the Canadian dollar poised by a reporter. Mr. Harper - who is an economist by trade - said (and I am paraphrasing) that he felt a rapidly rising Canadian dollar would dampen the pace of the recovery and then went on to say that he had full confidence that Mr. Carney at the BoC was handling the Canadian dollar in an appropriate fashion. The key point is the rapidly rising comment. There is very little any government can do to manage their currency against the momentum of currency traders. You can talk down the dollar temporarily as the BoC did recently. But over time, it will move back to its base case driven by momentum, and that points to a stronger Canadian dollar - much stronger. The fundamental principle underpinning this has to do with a simple proposition as put forward by Dennis Gartman, editor of the Gartman Letter. Canada has things (commodities, oil, precious metals) that the world wants and Canada is willing to sell those things at very high prices - all of which translates into a stronger dollar.   Gordon Pape I think it should be obvious to everyone at this point that trying to predict currency movements is like trying to catch the wind. If the global recovery gathers momentum in 2010, then we should see upward pressure on the Canadian dollar. The extent to which the Bank of Canada is willing to back up its words with actions will determine how fast and how far it will rise. But if we slip back into recession and commodity prices weaken, especially oil, then the loonie will fall back to perhaps as low as 80-85 cents. The bottom line is that the fate of the loonie is closely tied to the health of the international economy. ROBERT IRONSIDE, ABD, Ph.D. (Finance) My take on this is that the US dollar is now the currency of choice for the carry trade, whereby you borrow in the low cost market and invest in higher returning assets abroad. As long as this continues, there will be downward pressure on the US dollar. A counter argument could be made if there were a significant movement back to risk aversion, as this would drive the US dollar higher, much as it did a year ago. Once the Federal government starts to tighten monetary policy, I expect a sharp upward movement in the US dollar, as the carry trades are unwound and the dollar loans are repaid. Of course, if this occurs after other Central Banks have started their monetary tightening cycles, this effect would be significantly weakened. A rapidly rising US dollar could also have a large dampening effect on asset prices, much as the unwinding of the yen carry trade a year ago caused major disruptions in both currency and asset markets. It now appears that we have a rapidly inflating global asset price bubble starting to form, while deflation remains the predominate force in both goods and labor markets. Asset price inflation is being driven by extremely loose monetary policies in all major economies, while goods and labor market prices are being driven lower by high and rising unemployment in most Western economies. Moving to the Canadian dollar, it still appears to be closely tied to the price of oil. At the time of writing this article, oil had weakened somewhat over the past few days, as had the Canadian dollar. It will be very interesting to see what happens to oil prices when US interest rates start to move higher, as there will be two competing forces at play. On the one hand, that should signal that US economic growth is returning, tending to push prices higher. This will be offset by a strengthening US dollar, which will tend to push the price of oil down. I have no data to suggest which force will predominate. Does anybody else care to either agree or disagree with me? I would appreciate hearing your views. Good question, Robert. Please send your thoughts by clicking on the Add Your Thoughts button below: Evelyn Jacks is Founder and President of The Knowledge Bureau and Program Director for the Distinguished Advisor Conference, which will be covering these global issues of concern November 8-11 with top advisors from Canada and the US in Tucson, AZ.

Canadians taxpayers may find that their overall income from investments or even employment and business activities may have taken a hit over the year.  There may be a bit of good news to offset the bad, at least from a tax point of view, if you are a quarterly instalment payer. Many people don't realize that instalments remitted to CRA (often by post-dated cheques) can be adjusted to actual income earned in the year. Others don't know that the CRA "billing method" of collecting quarterly instalments is only one of three methods of payment. The other two are optional: Current-Year Option. Under this option, the taxpayer's income tax liability for the current taxation year is estimated then one-quarter of the estimated amount over $3,000 is due on each of the four due dates: March 15, June 15, September 15 and December 15. (Farmers and fishers must only make one instalment payment, on December 31 on 2/3 of the estimated taxes owing.) Prior-Year Option. Under this option, the first two instalments are estimated at one-quarter of the taxes due in the second prior year (since the prior year's return is not available when these instalments are due) and the last two instalments are calculated at one-half of the excess of taxes due in the prior year over taxes due in the second prior year. If you know your income will drop this tax year over last, write a letter to CRA to recalculate your instalment payment base and return the last post-dated cheques. Note that, for 2008 and subsequent years, the instalment threshold for individuals is $3,000 ($1,800 for Quebec filers). You will not be required to make an instalment payment at all if the actual tax owing will not exceed $3,000 in 2008 ($1,800 in Quebec). Subscribe to EverGreen Explanatory Notes for more information. Or attend The Knowledge Bureau's November Year End Tax Planning Workshop coming to a city near you November 24 to 30.

In the past few years, governments have been moving towards family income splitting in very limited circumstances. For example, in 2007 it became possible for those who receive certain pension benefits to transfer up to 50% of that income to a spouse if that is to their tax advantage. This will usually provide for tax savings as pensioners take advantage of the progressivity of tax brackets and rates. It is also possible for business owners to split the revenues they earn by hiring their spouse or children in the business, if they otherwise would have hired a stranger to perform the role. The family member must be qualified to perform the role and actually do so, for reasonable compensation similar to what would be paid to a stranger. In this case, the amounts paid are deductible to the business owner and taxable in the hands of the family member. This is great tax planning, as it opens up tax advantaged investment opportunities for the family members by creating "roomî for contributions to Registered Retirement Savings Plans (RRSP) and in the case of adults, contributions to the Canada Pension Plan (CPP), and Tax-Free Savings Account (TFSA). Certain employed commission sales agents may also split income by hiring a family member as an assistant, however the fact that this ­assistance is required and paid for by the agent must be a condition of their contract of employment. When it comes to splitting investment income the rules are more ­complicated, as described below. Passive income from investments is reported each calendar year and, with the exception of rental income, will not create RRSP contribution room. The primary categories of investment income are: ï Interest: this income is reported in full in the year received, or in the case of compounding investments, in the year accrued. ï Dividends from Canadian Corporations: Paid out after-tax profits of a corporation, the actual amounts received are "grossed upî on the tax return, thereby increasing a taxpayer's net income. You'll see this on your T-slip as the "taxableî amount. This gross-up can have an effect on the size of refundable or non-refundable tax credits. However, the dividend is offset by a dividend tax credit which reduces federal taxes and, in the end, gives most investors better tax results than interest earnings. Dividends from Canadian Controlled Private Corporations are subject to different gross-up and dividend tax credit rates from those of public corporations, because of the way the corporations are taxed. This system ­integrates the personal and corporate tax systems in an attempt to avoid double taxation. ï Rents: This income is reported on a "net profit basisî and is ­generally nil, as many taxpayers like to reduce their rental income by claiming a deduction called Capital Cost Allowance based on the value of their building. This may however cause a tax problem in the future, if buildings appreciate over time. ï Royalties: This income is reported in full, but certain resource properties may be subject to more advantageous tax treatment. It is important to understand how you might earn these types of income from your investments. If you are still unclear about these terms speak to your advisors so that you can match investment products to income sources. Notice that capital gains earned on the sale of income producing assets, such as publicly traded shares or a rental property, are not included in this list of investment income sources. A capital gain occurs when an income producing asset is sold for more than its "adjusted cost baseî. That's your original acquisition value or price plus certain additions or deductions. Only one half of any capital gains are taxable, after you reduce them by any capital losses incurred during the year. This source is in a category by itself.   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: <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com🏢office" /> 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

  The Distinguished Advisor Conference November 8 - 11, 2009 Leadership and Opportunity in Turbulent Times The Distinguished Advisor Conference (DAC) is the annual educational, motivational and fun networking conference for Canada's leading financial advisors. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com🏢office" />   The spectacular stars all come out at the DAC Opening Reception November 8. Be there!   Agenda    Application     Speakers   To Register: 1-866-953-4769     For more information and to view complete Conference Program, please visit http://www.knowledgebureau.com/dac.