Tax Tip: The More Obscure Medical Expenses

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

The savings government has booked for itself in this budget include the removal of a significant tax savings measure for executives as well as a change in the computation of interest on overpaid taxes owed by government to corporations. Vain Canadians are targeted too, as botox, hair replacement therapies, liposuction and teeth whitening are removed from the list of allowable medical expenses. In addition there is important news for investors in RRSPs, RESPs and RDSPs, students and those receiving US Social Security Benefits. Here's an overview of the changes:A. FOR FAMILIES There are four significant tax changes: Joint Access to Child Tax Benefits, Universal Child Care Benefits and Child GST Benefits in Joint Custody situations UCCB for Single Parents: The parent may elect to exclude the UCCB from their income and instead include it in income of the child who was claimed under the amount for an eligible dependant (formerly known as the equivalent-to-spouse amount), resulting in the elimination of tax on the benefit in most cases. Medical Expenses: For expenses incurred after March 4, 2010, expenses for procedures done for purely cosmetic purposes are not claimable, unless the services are necessary for medical or reconstructive purposes. US Social Security Survivor Benefits: For US Social Security Benefits received after January , 2010, including Tier 1 Railroad Retirement Benefits, recipients of benefits dating to service prior to January 1, 1996 will use a 50% income inclusion rate, rather than the post 1995 inclusion rate of 85%. Online Notices. Taxpayers will be allowed to authorize CRA to provide them with certain Notices, including Notices of Assessment and Reassessment, online. B. FOR STUDENTS: Scholarship Exemption: Where a scholarship, fellowship, or bursary is received in connection with a part-time program, beginning in 2010, the scholarship exemption will be limited to the amount of the tuition paid for the program plus the cost of program-related materials. This limitation does not apply to students who are entitled to the Disability Tax Credit. Programs that are research-based and qualifying for the education amount, and leading to a degree or diploma will qualify for the exemption. Post doctoral fellowships will however, be taxable. Education Amount: The budget clarifies that a post-secondary program that consists principally of research will be eligible for the Education Amount (and scholarship exemption) only if it leads to a college or CEGEP diploma, or a bachelor, masters or doctoral degree (or an equivalent degree). Post-doctoral fellowships will not be eligible. C. FOR INVESTORS RRSP Rollovers to RDSPs (Registered Disability Savings Plans): As of March 5, 2010, the rollover rules for RRSPs at death are extended to allow tax-free rollovers from the deceased taxpayer's RRSP to the RDSP of a surviving child or grandchild. Such rollovers are limited to the recipient's RDSP contribution room and will generate a Canada Disability Savings Grant. Such rollover contributions will not be allowed until July 2011 to give the government and financial institutions time to adjust their systems to deal with such rollovers. Where the taxpayer died after 2007 and before March 5, 2010, transition rules will be available to allow similar rollovers. Catch-Up of RDSP Grants and Bonds: Starting in 2011, When an RDSP is opened, CESG and CDSB entitlements will be calculated for the 10 years prior to the opening date (but after 2008) based on the beneficiary's income in those years. Provincial Support of RESP and RDSP Plans: The budget proposes to clarify that all payments made by provincial or territorial governments will not affect the amount for federal grants or bonds. D. FOR EXECUTIVES Employee Stock Options: There are three important changes: Cash Outs: For options exercised after March 4, 2010, the stock option deduction will only be available when the employee actually acquires the shares. Employees who cash out their options with their employer will not be eligible for the deduction. This closes a loop-hole where the employer could deduct the amount paid to the employee while the employee effectively paid tax on the cash at one-half the normal rate. Election to Defer Taxable Benefit: The budget proposes to eliminate the deferral of the stock option taxable benefit currently available using form T1212 on all stock options exercised after March 4, 2010. As of 2011, employers will be required to withhold tax on the taxable benefit like all other taxable benefits. This change will accelerate the payment of tax on such stock options and discourage employees from exercising options and retaining the shares. For many employees, the cash to pay the tax on the taxable benefit will only be available if the stocks are sold immediately. Special Tax Relief for Taxpayers who Deferred the Taxable Benefit: The budget proposes that, in a year in which a taxpayer is required to include in income a deferred stock option benefit, the taxpayer may elect to pay a tax equal to the taxpayer's proceeds of disposition of the optioned shares. In Quebec the tax is 2/3 of the proceeds. This election is not available for shares disposed of after 2014. The election will only make sense where the proceeds from the sale of the stock are less than the tax on the taxable benefit. E. FOR BUSINESSES Interest Paid to Corporations on Overpaid Taxes: Effective July 1, 2010, the interest rate payable by the CRA to corporations on overpaid taxes, GST/HST, EI premiums, CPP, excise tax and duty will be set at the average yield of three-month Government of Canada Treasury Bills sold in the first month of the preceding quarter, rounded up to the nearest percentage point. Reportable Anti-Avoidance Transactions: To help identify aggressive tax planning, leading to abusive tax avoidance transactions, the government is proposing that a new regime be introduced under which a tax "avoidance transaction" that features at least two of three "hallmarks" would be a "reportable transaction" that must be reported to the Canada Revenue Agency. Consultations on the matter will be held. CCA Changes: There are four changes of note for the depreciation of Television Set-top Boxes as well as clean energy generation, heat recovery equipment and distribution equipment in Class 43.1 and 43.2 Mineral Exploration Tax Extension: Budget 2010 proposes to extend eligibility for the mineral exploration tax credit for one year, to flow-through share agreements entered into on or before March 31, 2011. F. INTERNATIONAL TAXATION Taxable Canadian Property: After March 4, 2010, Section 116 compliance obligations forthese properties will be eliminated. Tax Refund Availability: Section 164 of the Income Tax Act will be amended to permit, for returns filed after March 4, 2010, the refund of an overpayment of tax if in respect of a required withholding under section 105 of the Income Tax Regulations or section 116 of the Income Tax Act where the taxpayer files a return no more than two years after the date of theassessment. FIEs and Non Resident Trusts: New measures regarding foreign investment entities, proposed to apply for taxation years that end after March 4, 2010 and others on the attribution of trust income from non-resident trusts to resident contributors are proposed to apply to taxation years that end after March 4, 2010, after a public consultation process. For details of the above provisions see EverGreen Explanatory Notes. To subscribe click here.

Debt Management Strategy At the Forefront of Cautious Optimism The federal government is moving forward with a three part "Plan Aî in this budget. That is, there are no new taxes, no significant spending cuts and targeted financial stimulus to better support Canada's unemployed, develop innovation and stimulate spending by businesses on energy projects and clean energy generation. This is all based indications that Canada has returned to economic growth after a brief but deep recession. However, there are many unknowns for Canada due to the fragile state of global economic recovery, and therefore the budget proposes an ambitious plan to bring its $56 Billion budget deficit back to balance in five years, in advance of any other G7 Nation, with a Debt Management Strategy. Specifically, the deficit is projected to decline to $27.6 billion in 2011ñ12, $17.5 billion in 2012ñ13 and $1.8 billion in 2014-15. Deficit reduction will be accomplished largely through projected increases in budget revenues as the economy grows, largely coming from a 30% increase ($34.6 Billion) in personal income taxes, as well as $17.6 Billion in spending cuts, an increased revenues from Employment Insurance. In addition several tax loopholes being closed: the removal of the deferral of taxation on stock option benefits, the removal of cosmetic procedures from the medical expense credit and a change to the payment of interest by the government to corporations on overpaid taxes will provide significant savings for government. For more information see Tax Changes, below. PRIVATE SECTOR FORECASTS Of particular interest to investors and their advisors are the private sector forecasts, which show significant economic indicators now until 2014: Real GDP growth averaging 2% over the period, but rising to 3.2% in 2011 A GDP and CPI inflation rate averaging 1.7% now to 2014, but rising to 2.1% by 2014 a 3 month treasury bill rate rising to 4.4% by 2014 a 10 year bond rate rising to 4.5% by 2014 Canadian dollar close to par with the US dollar starting in 2011. An unemployment rate of 7.9% in 2011, dropping to 6.6% by 2014. For detailed analysis see EverGreen Explanatory Notes. To subscribe click here.

By Evelyn Jacks It is a time when Canadian savings rates are low and personal bankruptcies are increasing. Governments are also concerned about the ability of over-leveraged home owners to pay off mortgages when interest rates rise in the future. Here is what we think was missing from this budget to help with these issues: For Savers: Increase the TFSA contribution limit ó perhaps up to $1000 a month For Pre-retirees: remove the 18% RRSP contribution level for lower income earners. Anything you can save for your RRSP is a good thing, up to the normal maximum dollar limits. For Pensioners: anyone receiving periodic pension income from either RPP or RRSP/RRIFs should be able to income split at any age and spend/reinvest their savings. Also, the government should consider permanently removing the requirement to minimum amounts out the RRIF ó last yearís temporary measure was a good one in turbulent times.  For Students: increase the amount of tuition fees that can be transferred to parents or supporting individuals from $5000 to anything the student can't use. For Caregivers: Allow a deduction for all costs of giving home care to the terminally ill. There is an expectation that families will help fill gaps the medical system can't fund. There is a huge economic cost to this and the tax system should recognize this. For the Sick and Disabled: Remove the 3% of net income limitation on the claimability of medical expenses and make this a deduction rather than a tax credit for anyone with a Disability Tax Credit claim. Evelyn Jacks is President of The Knowledge Bureau and author of Essential Tax Facts 2010, Master Your Taxes, and Make Sure It's Deductible; all available from the Knowledge Bureau bookstore at bulk purchase pricing for advisors and their clients.

The Minister of Finance, The Honourable Jim Flaherty releases the Federal Budget on March 4, 2010 at 4 p.m. Eastern time.    The Knowledge Bureau will issue a full report of the budget changes that are introduced within EverGreen Explanatory Notes, as well as a highlights version in a Special Edition of the Knowledge Bureau Report on March 5th, 2010.   Stay tuned to Knowledge Bureau Report for highlights from the Federal Budget 2010 and see EverGreen Explanatory Notes for a complete summary of the budget.  Sign up today!

According to a new report released by the Parliamentary Budget office, the current financial structure of the government is not sustainable, and the national debt is expected to increase substantially if the government continues to operate in the manner they are currently. The report, authored by Parliamentary Budget Officer Kevin Page, suggests that for long term financial sustainability, some type of permanent fiscal action such as increased taxes, reductions in program spending or a combination of the two needs to be put in place. The document titled The Fiscal Sustainability Report, is an independent report released for the first time and advises that Canada's aging population will be the government's top priority over the next few decades. The report predicts that the shift of baby boomers moving from working age to retirement is currently right around the corner and the government better be prepared to take action in the very near future to ensure that the Canada's economy is sustainable. The impact of the demographic shift will be in two areas: health care funding and elder benefits and the smaller tax base the government will have to collect from. The sustainability report advises that "although it is important to acknowledge that many elements of a long-term projections are uncertain, the demographic transition underway in Canada is notî. The report also goes on to say that as of 2008 there were five prime age working Canadians (aged 15-64) for every one person aged 65 and over. This ratio is expected to drop to one in four by the year 2019 and to 2.5 to 1 by 2033. This considerable decline is part of trend that has existed for the past several decades, for example, in 1971 there were just under eight workers for every retiree. Gross domestic product (GDP) growth is also projected to decline over the next few years, which goes against the current trend of GDP growing annually by approximately 2.1 percent. This amount is expected to decline to an average growth rate of .9%. The report warns "The fiscal action required to achieve sustainability does not need to be taken immediatelyÖ however, a significant delay in implementing fiscal actions substantially increases the required amount of corrective measures,î On March 4th Canadians will see first hand what the Federal government has planned for the future when they present their annual budget. Educational Resources:  To deepen your knowledge consider enrolling in a Knowledge Bureau course today by visiting our website or calling 1-866-953-4769 for a personal consultation.

Will your clients overpay their March 15th instalment payment?  It is important that they don't, particularly if their income has taken a hit over the past year.  Canadians taxpayers may find that due to employment layoffs or possibly due to their portfolio tanking,  overall income may have taken dropped off.  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 during the year ($1,800 in Quebec). Suggested Educational Resources: Learn more about tax planning in these Knowledge Bureau courses:  Introduction to Personal Tax Preparation, Tax Preparation for Proprietorships or subscribe to EverGreen Explanatory Notes for more information.