Tax Tip: The More Obscure Medical Expenses

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

In an effort to retain graduates, provinces have recently begun to reimburse tuition paid to post-secondary graduates if they remain in the province. Saskatchewan will reimburse 100% of the tuition paid if the graduate remains in the province long enough, while Manitoba will reimburse up to 60%, and New Brunswick will reimburse 50%. This reimbursement is in addition to the credits allowed to students in the year that the tuition is paid (or in a later year if carried forward). For students who continue to live and work in the same province after graduation, the result is a reimbursement of more than the amount of tuition paid (in Manitoba and Saskatchewan). Assuming a four-year program with $5,000 per year tuition ($20,000 total tuition), 8 months of full-time attendance, and a student paying taxes in the lowest bracket while in school, the following table shows the recovery of tuition fees each year over time in each province: Prov Years 1 to 4 Years 5 / 6 Year 7 Year 8 Years 9 -10 Years 11 - 12 Total Recovered % recovered AB $2,310 $9,240 46% BC $1,642 $6,568 33% SK $2,210 $2,000 $2,000 $2,000 $4,000 $4,000 $28,840 144% MB $2,202 $2,000 $2,000 $2,000 $2,000 $20,808 104% ON $1,837 $7,348 37% NB $2,138 $4,000 $2,000 $18,552 93% NS $2,112 $8,448 42% PE $1,785 $7,140 36% NL $1,849 $7,396 37% YT $1,922 $7,688 38% NT $1,792 $7,168 36% NU $1,657 $6,628 33%   Many frenzied parents find the "back to school" rush a financial burden. Besides clothing, school supplies, transit passes and books, there is tuition for university students, a rising cost across the country. Now is the time to consider the monthly credits earned by post-secondary students, which will turn into cash at tax time for students or their supporting parents, grandparents or spouses. No receipts are necessary to benefit from this lucrative credit, but Form T2202A must be received from the university or designated educational institute. Advisors and clients should check the points below for a better understanding of qualifying criteria. EDUCATION AMOUNT Full Time Students. The credit for full-time students is $400 per month. A full-time education amount may be claimed for each whole or part month in the year that the student was enrolled in a qualifying educational program at a designated educational institution and the student: was enrolled full time, was enrolled part time and qualified for the disability amount, or was enrolled part time because of a mental or physical impairment. Qualifying educational programs (FULL-TIME): a program that lasts at least 3 consecutive weeks and requires a minimum of 10 hours of instruction or work in the program each week (not including study time). Instruction or work includes lectures, practical training, and laboratory work. It also includes research time spent on a post-graduate thesis. After 2003, a program taken by the student in connection with the student's employment duties, even if that student receives income from that employment, will qualify provided only that the employer does not reimburse the tuition cost. Prior to 2004, the opposite was the case: such programs did not qualify, whether the employer reimbursed the student or not. Non-qualifying educational programs: Students who receive, from a person with whom he or she deals at arm's length, a grant, reimbursement, benefit, or allowance for that program do not qualify. However, receipt of a scholarship, fellowship, bursary, or prize received, or any benefit received under the Canada Student Loans Act, Canada Student Financial Assistance Act, or the Act respecting financial assistance for education expenses of the Province of Quebec does not disqualify the education program. Part Time Students. The credit is $120 per month. These may be claimed for each whole or part month in the year that the student was enrolled in a specified educational program at a designated educational institution. A specified educational program is a program that lasts at least 3 consecutive weeks and requires at least 12 hours of instruction each month. NOTE: KNOWLEDGE BUREAU SELF STUDY COURSES QUALIFY!  See our website at www.knowledgebureau.com for more information on our programs. Only one education amount may be claimed for each month ó the full-time amount or the part-time amount.   Join us next time in Breaking Tax and Investment News for more tax savings tips related to education and tuition credits.   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.    

By now, most of us have heard of the Tax-Free Savings Account (TFSA) which was introduced in the February 26, 2008 Federal Budget. It is a registered account in which investment earnings, including capital gains, accumulate tax free. Beginning in January 2009, taxpayers over the age of 17 may contribute up to $5,000 each year to such an account. If a taxpayer's contribution room is not used in one year it may be carried forward to the next year allowing for a larger contribution in that year. In some ways the TSFA is similar to an RRSP and in a lot of ways it is not. Contribution room in TFSA does not depend on "earned income" but is a flat $5,000 per year. Unlike the RRSP, contributions to a TSFA do not result in an income tax deduction and withdrawals from a TFSA are not reported as income nor included in income for any income-tested benefits, such as the Canada Child Tax Benefit or Goods and Services Tax Credit. The CRA will establish contribution room for all taxpayers on the basis of income tax returns filed. Taxpayers who do not file for a number of years may establish their contribution room by filing those returns. Upon death of the TFSA holder, the funds within the account may be rolled over into their spouse's TFSA (before the end of the calendar year following the year of death) or they may be withdrawn tax-free. If the TFSA is not rolled over, any amounts earned within a TSFA after the death of the taxpayer are taxable to the estate or the recipient if paid out before the end of the first calendar year following the year of death. If the contents of a TFSA are donated to a registered charity in the taxpayer's will, the donation is deemed to have been made immediately before the taxpayer's death. One question that many people ask is who can receive the proceeds when the TFSA account holder dies? Although TFSAs are federally regulated accounts, provincial legislation determines if a beneficiary can be named in a TFSA contract. Under the Income Tax Act, the tax exempt status of the account only applies to the spouse or common law partner, so if the named beneficiary of the account upon death is someone other than a spouse or partner, the account is no longer considered to be a TFSA. Most provinces and territories have now enacted legislation allowing TFSA beneficiaries to be named that aren't spouses or partners, and therefore, upon the death of a TFSA holder, the beneficiary can have the TFSA assets passed on to them without going through the estate and subject to expensive probate fees. We have provided a summary below of the successor holder and beneficiary recognition by province:                                                         Province Designation of Successor Holder and Beneficiary Allowed? Effective Date Alberta Yes January 1, 2009 British Columbia Yes November 27, 2008 Manitoba Yes June 11, 2009 New Brunswick   Yes January 1, 2009 Newfoundland Yes May 28, 2009 Northwest Territories Yes February 2009 Nova Scotia Yes November 25, 2008 Nunavut Yes February 2009 Ontario Yes June 16, 2009 Prince Edward Island Yes December 3, 2008 Quebec No N/A Saskatchewan Yes May 14, 2009 Yukon   Yes May 14, 2009   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.

On July 13, 2009 The Honourable Jean-Pierre Blackburn, Minister of National Revenue and Minister of State (Agriculture and Agri-Food) announced the official launch of a new national advertising campaign for the popular new Home Renovation Tax Credit (HRTC) introduced in the 2009 Federal budget.   This credit is a one-time, time limited one, however, which means that if you've been planning on renovating your home and plan to use the credit on your 2009 tax return, eligible home renovation expenditures must be made between January 27, 2009 and before February 1, 2010. Families will be able to claim a 15% non-refundable tax credit for certain amounts paid to renovate their residence or cottages, up to a maximum credit of $1350, if they spend at least $1,000. However, the credit has already caused some significant controversy. That's because the eligibility for the credit is ìfamily basedî. For the purposes of the credit, a family will be considered to be an individual, the individual's spouse or common-law partner, and their children who were under the age of 18 throughout 2009. Yet, if two or more families have an eligible family dwelling in which they share ownership, each family can qualify for the tax credit on their tax returns. So it is possible that with three families sharing a home or cottage, up to $30,000 in renovations could be claimed, equalling a total of $4,050 tax credit, much higher than the benefits accruing to a single family! Some people are questioning the fairness of this tax credit, while others are saying that with the economy in the dumps, who can afford to spend any money on renovations, so the fact that families sharing a home are getting a better tax break is meaningless. Other detractors of the program insist that contractors are unavailable to complete the work, and other contractors are actually invoicing for work yet to be completed.   We would like to hear from you regarding the home renovation tax credit program and the rules regarding this "family based" tax credit program.   You can contact us by clicking on the link below.

It's half time, and that's a good time to review the income requirements of the owner-manager you may be working for. How should you begin this process? Here are some tips to consider: First, in determining the optimum income plan, each individual family member's total income and type will be critical. It is important to ensure that the family member has enough total income to utilize fully his or her personal credits, excluding those that can be transferred to other family members. These are discussed below. So, the total amount of income is important. The type of income is equally important. The payment of a reasonable salary, for example, will increase both net and taxable income. 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 must take these into account. Another key issue is the fact that a salary is earned income for purposes of creating RRSP contribution room. If it is desirable to allow family members to accumulate retirement income there may be a preference for paying a salary. Dividend income, on the other hand, increases both net income and taxable income as well, but also provides the dividend tax credit. 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, take The Knowledge Bureau's certificate course entitled Tax Planning for Corporate Owner-Managers.   Join us in our next edition of Breaking Tax and Investment News for some Back To School Tips for taxpayers.

.... but tax assistance is available It is an increasing expectation of the health care system across Canada today that the family will participate proactively in the care of their severely ill family members. This is a noble and honorable privilege, but it can also be exhausting and expensive, affecting workplace productivity as people leave to provide care, but also challenging the resources of the family, who may also be funding several children through university or preparing for their own retirement in a difficult environment. Fortunately the federal government has a host of tax preferences that can help. We will discuss some of them below: 1. THE HOME RENOVATION TAX CREDIT   This is a non-refundable tax credit provided to those who spend dollars for work performed or goods acquired in respect of an eligible dwelling, that is, a housing unit eligible to be an individual's principal residence at any time between January 27, 2009 and February 1, 2010, which is the time frame within which the qualifying expenditures must be made. This housing unit must be an individual's principal residence, ordinarily inhabited by the individual, the individual's spouse or common-law partner, or their children. According to the Finance Department website, this means that any dwelling that you own and use personally could qualify, including your home or your cottage. You may make renovations to both properties under the plan; however there is a maximum claim. The credit will applies to eligible expenditures of more than $1,000, but not more than $10,000, resulting in a maximum credit of $1,350 ($9,000 x 15%). To be eligible, expenditures incurred in relation to a renovation or alteration to an eligible dwelling (or the land that forms part of the eligible dwelling), must be of an enduring nature and integral to the dwelling, and includes the cost of labour and professional services, building materials, fixtures, rentals, and permits. If the eligible expenses under the Home Renovation Tax Credit also qualify for the Medical Expense Tax Credit, described below, they can in fact be claimed under both provisions. The following expenditures will not be eligible for the HRTC: the cost of routine repairs and maintenance normally performed on an annual or more frequent basis; expenditures that are not integral to the dwelling, and other indirect expenditures that retain a value independent of the renovation; expenditures for appliances and audio-visual electronics; and financing costs. 2. RENOVATIONS UNDER THE MEDICAL EXPENSE TAX CREDITS Incremental costs of building or modifying a new home for a patient who is physically impaired or lacks normal physical development where those costs are incurred to enable the patient to gain access to or be functional within the home may also qualify as medical expenses. Examples of home renovations that would be eligible are: the cost of installing entrance and exit ramps widening of doorways lowering shelves modifying kitchen cabinets moving electrical outlets. Examples of ineligible home renovations include the installation of hardwood floors or hot tubs. The types of structural changes that could be eligible are not restricted to the above examples. "Reasonable expenses" pertaining to a particular structural change may include payments to an architect or a contractor. 3. THE ATTENDANT CARE AMOUNT A deduction is available for attendant care expenses, and is available to individuals who are entitled to claim the disability tax credit.  The expenses must allow the disabled person to pursue employment or education. 4. CAREGIVER AMOUNT S. 118(1)(c.1) provides that a taxpayer who supports and lives with an infirm dependant in a home which the taxpayer maintains may claim a specified amount for that dependant as a non-refundable credit against taxes payable. To qualify, the dependant must meet these three criteria: be at least 18 years old, be either the child or grandchild of the taxpayer or the taxpayer's spouse or common-law partner, or the parent, grandparent, brother, sister, uncle, aunt, niece or nephew of the taxpayer or the taxpayer's spouse or common-law partner and resident in Canada at any time in the year, and be either the taxpayer's parent or grandparent and at least 65 years old or dependent on the taxpayer because of mental or physical infirmity. 5. DISABILITY AMOUNT S. 118.3 allows a taxpayer with "a severe and prolonged impairment in mental or physical functions" to claim a specified amount as a non-refundable credit against taxes payable. Basic Disability Amount is a non-refundable tax credit that acknowledges the expenses incurred corresponding to the treatment of a mental or physical impairment. This amount is available to all taxpayers who qualify. A supplementary disability credit is available for taxpayers who are under 18 years old. The amount of the supplement is decreased by any child care expenses claimed in respect of the child (in excess of the base child care amount) plus any portion of the disability supports deduction that relates to care or supervision of the child in excess of a base amount. CRA does not provide a separate form for the calculation of the Disability Amount, but provides a section on the Federal Worksheet to perform the calculation. The base child care amount is the legislated maximum (S. 118.3(1)(a.3)) amount of child care expenses that may be claimed in respect of a disabled minor without reducing the supplementary disability amount. 6. THE ecoENERGY RETROFIT - HOMES GRANT   This grant is administered by Natural Resources Canada and applies to improvements that reduce energy consumption and provide for a cleaner environment. Home and property owners could be eligible for federal grants of up to $5,000 to offset the cost of making energy efficiency improvements to their home or property. Most provinces and territories have complementary programs that offer additional financial assistance based on the results of the ecoENERGY Retrofit evaluation. For information on how you can qualify, please consult the ecoACTION Web site.   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.    

By Guest Columnist, Gordon Pape   Ontario's plan to harmonize its provincial sales tax with the GST could end up costing investors across Canada millions of dollars unless some kind of deal can be worked out. The problem arises from the fact that the 5% GST is applied to certain financial services, including mutual fund management fees, while provincial sales tax is not. As a result, investors currently pay an additional 0.1% on a 2% management charge. If the harmonized sales tax (HST) goes through as planned, the combined rate would be 13% which would increase the tax on a 2% management fee to 0.26%. The average management expense ratio (MER) on Canadian mutual funds is already one of the highest in the world. Such an increase would only add to the costs and would come directly out of investors' pockets in the form of reduced returns. To complicate matters further, residents of other provinces also risk being hit by the increase even though it theoretically applies only in Ontario. That's because the majority of mutual fund companies are based in that province. It would be impossible for them to apply different tax standards elsewhere, raising the possibility that a Calgary resident buying an Ontario-based fund would be hit with a 13% tax on the management fee even though Alberta has no provincial sales tax. This situation would also create a tax advantage for fund groups that are based outside Ontario, such as Investors Group which is headquartered in Winnipeg. Although three Atlantic provinces (New Brunswick, Nova Scotia, Newfoundland and Labrador) moved to an HST several years ago, this issue did not arise because no major fund companies are based there. But the announcement in the March Ontario budget that the province plans to implement a blended sales tax on July 1, 2010 has changed the whole picture. "The federal government should be concerned that people outside Ontario are not subject to a harmonized tax," says Barbara Amsden, director of research and strategy for the Investment Funds Institute of Canada (IFIC). She met with officials of the federal Finance Department in Ottawa on Monday to discuss the issue but said afterwards they "did not seem impressed" with the request for some kind of relief. Applying the HST to management fees would amount to a "tax on savings" she says, noting that Canada is the only value-added tax country in the world with sales taxes at two levels. The logical solution would simply be to exempt mutual fund management fees and similar financial charges from the GST/HST. But doing so would cost cash-strapped governments hundreds of millions of dollars. As of the end of May, member companies of IFIC had $537.8 billion worth of assets under management. If we assume an average management fee of 1.5%, that works out to slightly more than $8 billion that is currently subject to the 5% GST, generating about $400 million tax dollars for Ottawa. Amsden points out this is a huge windfall for the government as the fund industry has grown by almost 20 times since the GST was first introduced. Ontario, which is also under the gun financially, would dearly love to grab a piece of that pie so their Finance mandarins are equally unlikely to be receptive to pleas for an exemption. If neither level of government is prepared to give ground, be prepared to lose a chunk of your mutual fund returns to the tax man. And you thought stock markets were the only risk in town!   Reprinted with permission from Gordon Pape's Mutual Funds Update.   Gordon Pape is a Knowledge Bureau faculty member and well-known author who specializes in personal finance and investing. He is the author of numerous books on investing and personal finance and has been called ìCanadaís Mutual Fund Guruî by the media.