Tax Tip: The More Obscure Medical Expenses

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

Under our system of personal taxation, Canadians are taxed as individuals, not households. Taxpayers are, in general, prohibited from splitting income with family members. That is, if a taxpayer gifts or transfers money or other property to his or her spouse or common-law partner or minor children, resulting income is usually attributed back to the taxpayer and added to his or her income.   With the low prescribed rates set by CRA that are currently available for inter-spousal loans, it is timely to review the attribution rules so that tax planning opportunities are used to their best advantage. The Income Tax Act covers these rules as follows:   Transfers and loans to spouse or common-law partner If an individual transfers or loans property either directly or indirectly, by means of a trust or any other means to a spouse or common-law partner for that person's benefit, any resulting income or loss from that property is taxable to the transferor (S. 74.1(1)). Transfers and loans to minors Where property is transferred or loaned either directly or indirectly to a person who is under 18 and who does not deal with the transferor at arm's length or who is the niece or nephew of the transferor, the income or loss resulting from such property is reported by the transferor until the transferee attains 18 years of age (S. 74.1(2)). Gain or Loss Deemed That of Transferor When property that is transferred to the individual's spouse or common-law partner generates a taxable capital gain (or loss), such gain or loss will be reported by the transferor (S. 74.2(1)). Deemed Gain or Loss When property that is transferred to a minor generates a taxable capital gain or loss, the capital gain or loss is deemed to be the income of the minor (S. 74.2(2)). These rules are in place largely due to the result of Canada's progressive tax system and graduated tax rates. That is, individuals with higher income levels are subject to higher marginal tax rates. In addition, different income sources are subject to varying tax treatment. Finally, each individual in Canada qualifies at least for the Basic Personal Amount (a "tax-free zone"). When taken together, these factors provide a financial advantage when several family members earn some income, as opposed to one family member earning all of it. If such rules were absent, the higher income family members could transfer some of their income to the lower income family members to take advantage of the lower tax brackets enjoyed by those persons. This would result in less total tax payable, and more after-tax funds for the family. For this reason, it is always best to look at tax filing from a "family" rather than an individual perspective, and to seek the best tax result for the household, as opposed to the individual. This can be attained despite the restrictions placed upon taxpayers as a result of the Attribution Rules. The Attribution Rules target two distinct categories - transfers or loans to a spouse and minor child. There are significant differences in the restrictions applicable to each. Transfers - Spouse Assets transferred to a spouse will result in the associated income and capital gains that are earned being taxed in the transferor's hands Where a spouse guarantees the repayment of a loan, for investment purposes, made to the other spouse, attribution will apply to any income earned from the funds whose repayment was guaranteed. Example: Guarantee of a Debt Issue: Joan is a medical doctor in the highest tax bracket, and her husband Billy is a student working on his Masters degree (lowest tax bracket). To attempt to reduce their total taxes, Billy takes a $150,000 loan from their bank and invests in interest bearing securities. Because Billy has no other earnings, the bank asks for Joan's guarantee. In the current year, Billy's investment earns $9,750 in interest. How will this income be treated under the Attribution Rules? Answer: The $9,750 of income must be reported as interest income in Joan's hands. This is because she provided a guarantee for Billy's investment loan. S. 74.5(7) treats the guarantee as if it were a loan from Joan to Billy. Transfers - Child Dividend and interest income resulting from assets transferred to a minor child will be attributed back to a non-arm's length transferor, but not capital gains or losses. Example: Loan to a Minor Issue: Bobby (16 years old) received $15,000 from his parents. He invested in shares of a publicly traded computer company. He sold the shares 2 months later for $45,000. What capital gain will need to be reported by his parents? Answer: Nil. Capital gains earned by minor children are not subject to the attribution rules.     See next week's edition of Breaking Tax and Investment News for details on Exemptions from the Attribution Rules.   Educational Resources: For more information on topics pertaining to compensation planning for owner managers and tax planning information, register for Tax Planning for Corporate Owner-Managers, a certificate course by self study from The Knowledge Bureau.

The Honourable Jim Flaherty, Minister of Finance, released The Fiscal Monitor for March 2009 late last week. One of the highlights, and that is what they called it in the news release, was a budgetary deficit of $3.6 billion in March 2009 compared to a $1.2 billion deficit at the same time in 2008. The Fiscal Monitor report also points out that in the same period from April 2007 to March 2008 there was a surplus of $11.4 billion. The revenues in the period from April 2008 to March 2009 went down by $9.2 billion (or 3.8%) largely due to a decrease in revenues provided through corporate income tax and goods and services tax. Higher transfer payments caused program expenses to increase through this same period by $6.8 million. What does this mean? As discussed in a Breaking Tax and Investment News editorial issued after the 2009 Federal Budget release, today's deficits will surely become the taxes of tomorrow. The trend of large deficits are of particular significance to the ten million or so baby boomers who make up approximately one-third of our population and just under 50% of the tax filers. By the year 2011, the first boomers will reach age 65. According to Infrastructure Canada, those age 65 and over are the most intensive users of the health care system, a financing burden yet to come for Canadian governments. At best, the deficits brought about by the Federal government will require taxpayers to ask hard questions, not only about the financial state of the nation, but about their own ability to fund retirement income and health care costs, if governments are stretched by new financing costs. What effects will deficit spending today have on public pensions and the health care system? How will deficits affect taxation on after-tax retirement income or wealth transition in the future? How will incomes of boomer offspring fare on an after-tax basis? Now is a good time to revisit 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 income or capital. We would like to know your thoughts on the deficit, and what the future holds for us with these kinds of deficits predicted for the next couple of years.

There are corporate tax implications when a business is terminated and a corporation ceases to exist. Generally, a corporation ceases to exist on: a winding up of the corporation pursuant to provisions outlined in subsections 88(1) or 88(2) of the Act; amalgamation with another corporation under subsection 87(1) of the Act; and Dissolution of its charter by filing Articles of Dissolution in the jurisdiction in which the corporation was incorporated. There are differing tax consequences which will result to the corporation and its shareholders, depending on the manner in which the corporation is terminated. For instance, there are generally tax deferral provisions available to a wholly owned subsidiary that is wound-up into its parent, pursuant to subsection 88(1) of the Act. Similarly tax deferrals are accorded for a statutory amalgamation under Subsection 87(1). However, a winding-up under subsection 88(2) and distribution of the corporation's assets to its shareholders will generally result in the realization of the corporation's assets at fair market value (S. 88(2)(a)(iv)) and the taxation of such distribution to its shareholders as a dividend at fair market value. Filing Implications - Business Cessation On the Federal T2 return, if any of lines 072 (wind-up of subsidiary), 076 (amalgamation) and 078 (dissolution) apply, it is the corporation's final taxation year. Example: Tax Planning Consider and quantify the corporate tax impact of effecting a dissolution or termination of the corporation. Will there be corporate tax payable on resulting capital gains and recaptured capital cost allowance or the realization of reserves and deferred amounts? Consider the utilization of losses to the successor corporation and the fact that an additional taxation year will occur on an amalgamation with another corporation. Record Retention- The records of the dissolved corporation must also be kept for two years after the day the corporation is dissolved [Reg. 5800(1)(b)]. Clearance Certificates The responsible representative of the corporation must obtain a clearance certificate from CRA pursuant to S. 159(2) before distributing any of the corporate property to avoid possible liability for the corporation's tax obligations. See Information Circular 82-6, Clearance Certificate, for more details. Inactive Corporations If the articles of the corporation are still legally in force, despite the corporation being inactive, the corporation must file a tax return. Shareholder Implications   Evaluate that tax implications to the shareholders. If the shareholders are individuals they may be subject to tax on deemed dividend treatment on the wind-up of a corporation. If the shareholders are corporations consider the potential implications of Section 55 of the Act. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com🏢office" />  Provincial Laws While each province has legislation for its own corporate tax laws, the federal government administers returns and collects taxes for most provinces and territories. However, Quebec, and Alberta administer their own corporate tax returns. To learn how this topic pertains to corporate taxation at the provincial level, refer to the applicable provincial legislation, guides and information circulars. In Alberta, if it is the last return for the corporation, the reason for the final return must be listed (i.e. amalgamation, discontinuance of permanent establishment, bankruptcy, wind-up into parent, and dissolution of corporation). Quebec asks if the corporation has ceased activities at line 29 of Form CO17 and corporations in Ontario must obtain a Letter of Consent from the MCBS to voluntarily dissolve.     Educational Resources: For more information on topics pertaining to corporate tax preparation and tax planning information, register for Introduction to Corporate Tax Preparation, a certificate course by self study from The Knowledge Bureau.    

CRA has provided us with the lowest prescribed rates in the last 25 years - 1% once again this quarter- for the application to outstanding sums for shareholder loans, employee benefits and interspousal loans. This is a great opportunity to use low-taxed corporate dollars to fund family income splitting, the purchase of new vehicles, new investments or to fund employer-required moves. Advisors and their clients should be discussing these strategies in the post June 15 period, after filing 2008 proprietorship returns. The Canada Revenue Agency announced the prescribed annual interest rates that will apply to any amounts owed to the CRA and to any amounts the CRA owes to individuals and corporations. These rates are calculated quarterly in accordance with applicable legislation and will be in effect from July 1, 2009, to September 30, 2009. Income tax The interest rate charged on overdue taxes, Canada Pension Plan contributions, and Employment Insurance Premiums will be 5%. The interest rate paid on overpayments will be 3%. The interest rate used to calculate taxable benefits for employees and shareholders from interest-free and low-interest loans will be 1%. Other taxes The interest rate on overdue and overpaid remittances for the following taxes will be: Tax and Duty Overdue remittances Overpaid remittances GST 5% 3% HST 5% 3% Air Travellers Security Charge 5% 3% Excise Tax (non GST) 5% 3% Excise Duty (except Brewer Licensees) 5% 3% Excise Duty (Brewer Licensees) 3% N/A Softwood Lumber Products Export Charge 5% 3%   <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com🏢office" />  Educational Resource: 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.  

At a time when individuals are concerned, and justifiably so, about planning for their retirement and the income sources they can rely on, a major revamp of the Canadian Pension Plan is being considered.  Based on two recent news releases, the question being asked by many is: Are Canadians able to rely on the public pension plan provided by the government, or should they be saving for their golden years through their own retirement savings plans?<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com🏢office" />   A June 1st article in the Globe & Mail regarding Canadian retirement savings plans states that private-sector pension coverage was available for only 23.7% of employees in 2006, down from 30.5% in 1991.  This almost 7% drop in private pension plan availability means that individuals will be looking to the government to provide some form of retirement pension income to top up their own RRSP's.   An information paper was released by the Department of Finance at the end of May containing some recommendations for changes to the current Canada Pension Plan. As joint stewards, and as part of a regular three year review process, Federal, Provincial and Territorial Ministers announced that the current Canada Pension Plan is sound but are suggesting some changes be made to the plan.  Changes have been recommended in order to provide greater flexibility for workers planning on retirement, or for those who would like to continue to work and beef up their pensions.   Some of the recommended changes that will improve flexibility and pension coverage for beneficiaries in the Canada Pension Plan are:   ∑         Eliminating the work cessation test ∑         Increasing the number of low-earnings drop out years ∑         Allowing them to continue to work and make CPP contributions   The CPP was established in the mid 1960's to provide working Canadians with some basic income for retirement, and was intended to replace up to 25 percent of the pre-retirement employment earnings (up to certain maximums). In 2009 the maximum pensionable earnings amount was $46,300, and the current maximum annual retirement pension amount is $10,905.   As mentioned above, one change that has been recommended to the CPP is the removal of the work cessation test, whereby individuals under the age of 65 are required to stop working or reduce their earnings before applying for CPP benefits. The change would take place in 2012 and workers could apply for early benefits, without having to stop working or reducing hours worked in order to qualify.   Another significant change that has been suggested for implementation is to increase the  general low earnings drop-out amount. Under the current rules, 15% of years where earnings were either low or nil are allowed to be dropped from the CPP retirement pension amount calculation. This drop-out amount allows for periods of unemployment or full time attendance at school to be disregarded for calculating the pension maximums. The proposed change would increase the drop-out rate to 16% in 2012, and 17% in 2014 and allow for an increase in the average career earnings amount due to periods of low earnings.   Another recommendation would allow recipients of the CPP pension to return to work and continue to make CPP contributions in order to increase their retirement benefit amount. It would allow workers to collect their pensions and at the same time build a secure source of income for the future.    The Chief Actuary of the CPP will be assessing the long-term financial implications of the changes outlined above and a bill will be tabled by the Government.   Questions or comments regarding these changes can be sent to the Federal Government by e-mail before July 31st, 2009 to CPP2009@fin.gc.ca.   We are also interested in hearing your feedback regarding the proposed changes to the Canada Pension Plan, and the state of retirement income planning overall.

With the June 15 filing deadline approaching for proprietors, tax and financial advisors to farmers should note that realized farm income amounted to $3.3 billion in 2008, up $1.3 billion (+63.2%) from 2007, according to a Statistics Canada report released May 25. This was the second consecutive annual increase after declines in 2005 and 2006. This could mean that for some, the taxes due on June 15 may be higher than last year. Should this happen, a variety of planning opportunities including averaging and capital cost allowance provisions may help. Advisors and their clients should confer this week to optimize, and clients should be aware that interest will be charged from May 1st forward if there is a balance due on June 15. In anticipation of the June 15th deadline, some of the common deductible items that can attract audit attention are: Home office expenses Auto expenses Interest costs Wages paid to family members Gross margins relating to purchases and inventory Personal consumption of tax deductible purchases. We will review the allowable deductions available when completing a tax return with home office expenses. Generally, deductions can include: supplies used up directly in the work (stationery, maps, etc.); salaries paid to an assistant (including spouses or children if Fair Market Value is actually paid for work actually performed); office rent or certain home office expenses. For the self-employed, deductible home workspace expenses include: utilities, maintenance and repairs including light bulbs and cleaning supplies; rent, insurance, property taxes, mortgage interest; Capital Cost Allowance (CCA) (although this is not recommended as the exempt status of the principal residence is then lost on the portion of the home on which CCA is claimed). You may claim expenses related to the home office space. To qualify, the space must be the place where the individual principally (more than 50% of the time) performs the office or employment duties, or is used exclusively to earn income from the office or employment and, on a regular and continuous basis, for meeting customers or others in the ordinary course of performing the office or employment duties. Help your clients arrange their affairs within the framework of the law and pay the least taxes possible! Educational Resources: For more information on preparing tax returns for the self-employed or farmers, register for Tax Preparation for Proprietorships, a certificate course by self study from The Knowledge Bureau. In this course, students will learn how to complete the income statement using the most recent tax laws and prepare tax returns for: self-employed, partnerships, farmers, fishermen, and professionals. For more information on this course and others go to www.knowledgebureau.com/sage. For a free professional development consultation call 1-866-953-4769.