Tax Tip: The More Obscure Medical Expenses

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

Most of us are aware that on November 27, 2008 the Government proposed that the minimum RRIF required withdrawal be reduced by 25% for the 2008 tax year. The following should be noted with regard to the RRIF withdrawals and re-contribution amounts. Changes to RRIFs Payouts could reduce taxes. Registered retirement income funds or RRIFs and the requirement to withdraw certain minimums from them every year. This was of particular concern to many retirees given the financial crisis of late 2008. No one wanted to be required to realize losses because of the financial meltdown if they could afford to wait it out. The RRIF withdrawal rules do not provide for such an option. For example, if an individual would be required to make a $20,000 withdrawal under the current rules then that minimum amount would be reduced to $15,000 under the new rules. Taxpayers who have already withdrawn more than the reduced minimum amount would be allowed to re-contribute the excess amount (up to $5,000 in this example) back into the RRIF. The deadline for recontribution to RRIFs, Life Income Funds or other locked-in RRIFs is the later of March 1, 2009 and 30 days after the proposed rules receive Royal Assent (which has not occurred at the current date). Taxpayers making these recontributions will be allowed to claim a deduction for the amount recontributed on their 2008 returns. Note that RRIF annuitants who turned 71 in 2008 and who withdraw a minimum amount are not affected by the proposed changes as the 2008 minimum amount for these people is deemed to be nil after changes in the law in 2007. Therefore significant milestones for the month of March 2009 are the following: March 2 Age eligible taxpayers with unused RRSP contribution room may make contributions to that plan. March 15 Quarterly instalment payment due Later of March 1, 2009 or thirty days after legislation passes (which has not occurred yet) - Recontributions to an RRIF   For more tax tips, purchase a copy of Essential Tax Facts written by The Knowledge Bureau's President, Evelyn Jacks, to learn how to ace your 2008 tax return and save money all year long.

Does a recession increase or decrease an advisor's need to get, keep and grow his/her client base?   By Jim Graddon The answer, of course, is that these challenging economic times put a premium on all three of these important objectives. But what may not be as obvious is ìhow?î How do you get new clients? What do you do to retain your best clients? And what are some of the strategies for growing your existing client relationships? Now is the time to plan for the ìother side of the valleyî when business will be picking up (and you won't have the time to improve your infrastructure). You have a window now to make changes and invest in your own business to ensure you prosper in the face of adversity and fierce competition. Now is the time to leverage technology and automated processes to streamline operations and reduce the burden on people and salaries. The core technology of an advisor's business is a CRM, or customer relationship management software. An advisor-focused CRM delivers a combination of scheduling management, activity management, contact management, and sales/service workflow automation in a single integrated platform. Implementing a web-based advisor practice management system recruits the evolving resources of the Web for you and frees you forever from the limitations of office-bound systems. Today, many advisors access a myriad of proprietary websites and transaction systems. This can be compared to asking an airline pilot to constantly cross-reference a myriad of airline, weather, and airport systems while in flight. The result would be disastrous. Similarly, a financial advisor's ëcockpit' that lacks an integrated set of information and controls places the advisors' own ëpassengers' at a high level of risk. What should an advisor ëcockpit' ñ or CRM ñ address? At a minimum, a CRM should address these three critical areas: 1- Get Clients ∑ List management (including do not call list identification) ∑ Marketing campaigns (including automated follow-up scheduling) ∑ Mail merge & full integration with Microsoft Office ∑ Lead/opportunity tracking integrated with website leads ∑ Event management and registration tracking 2- Keep Clients ∑ Detailed client file including notes, documents, emails, policy and investments data ∑ Access data 7/24 wherever you are through web browser and/or wireless device ∑ Automated compliance audit trail and client review processes and scheduling ∑ Holistic client account aggregation and valuation of on book and off book data ∑ Automated triggers and alerts to drive client interaction and reviews ∑ Client data privacy and security meeting international security standard levels 3- Grow Clients ∑ Mine client data and automate cross-marketing campaigns The most efficient advisor CRM is one designed by and for Financial Advisors. Though this is the worst recession in memory for most advisors, the survivors will not freeze like a deer in the headlights. Instead, stay cool, keep your poise, and take the opportunity to bring your own practices and systems to the next level. Jim Graddon is the GM of the Canadian subsidiary for E-Z Data, creators of the web-based SmartOffice advisor platform. Jim has been a change catalyst for insurance and investment operations and technology for over three decades, with a focus on Canadian financial advisor technology since 1981. He can be reached at 866-568-9809, jgraddon@ez-data.com; or by referencing contact info at www.ezdata.ca.

Tax practitioners, financial advisors and their clients should be aware of a new audit focus for taxpayers reporting German pensions which they were entitled to receive prior to 2005. These taxpayers qualify for a 50 percent exemption on Line 256; however, that exemption will become a fixed amount, in Euros, starting in tax year 2007, based on the amount of qualifying pension income received by the client in 2006. Once the fixed amount has been calculated, it is used for the balance of the taxpayer's lifetime, except in the year of death. This is clear as mudóif not outright misleading--on the CRA website, which only makes reference to this ìfixationî under the explanation of the tax treatment for those who qualified for the pensions after 2005, leading most readers to believe that the 50% treatment for pensions started before 2005 is not affected.   Worse however, is the fact that the audit process, which focuses on the 2007 tax return, has been disallowing the entire claim on Line 256, even though the taxpayer qualifies for this ìfixed amountî of exemption. Be sure to request an adjustment.   As no other or clearer information is available on this provision, taxpayers or practitioners who claimed an exemption of 50% on Line 256 may wish to make an appeal under the Taxpayer Relief Provisions, to reverse interest charges.   Evelyn Jacks, President, The Knowledge Bureau.  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.

As discussed in a previous issue of Breaking Tax and Investment news, the RDSP may be established for an individual who has a severe and prolonged physical or mental impairment and qualifies for the disability tax credit during the year of establishment, or would have if the restriction for the attendant care amount were disregarded. Contributions may not be made to the plan in years for which the individual is not DTC-eligible. In that case the plan must be terminated by the end of the year following the year in which the beneficiary ceases to the DTC-eligible.  The deadline for contributions for the 2008 year is March 2, 2009 so don't miss out on the government sweeteners as outlined in our article on January 21st. Some additional points to note regarding the Registered Disability Savings Plans are as follows: The maximum annual CDSB contribution is $1,000 and is earned where family income does not exceed $21,278. The CDSB amount is phased out completely when family income is $37,885. Again, the limits are 2008 amounts and will be indexed annually. There is a lifetime maximum of $20,000 for CDSBs. Like the CDSG, CDSBs will not be paid after the beneficiary of the RDSP turns 49. Note: Repayments of all CDSGs and CDSBs will be required in the ten years preceding one of the following events: (a) a withdrawal from the plan, (b) loss of eligibility for the DTC or (c) death of the beneficiary. Death or Cessation of Qualification Where the beneficiary dies, or ceases to qualify for a RDSP (presumably when the disability ceases), any CDSG or CDSB funded to the plan within the ten years preceding death, and the income earned on such amounts, must be repaid. Amounts in excess of contributions, after taking into account the repayment, will be included in income of the beneficiary in the year of death (or cessation of disability). It is not clear what happens if withdrawals and/or investment performance result in the RDSP having less than is required to be repaid. Presumably any shortfall represents a debt of the estate. Impact on Other Means-tested Support RDSP withdrawals will not affect any other means-tested support delivered through the income tax system including, in particular, the OAS or Employment Insurance benefits. The Federal government intends to work with the provinces to ensure that the benefits of the RDSP are not eroded by a clawback of provincially provided support. Director of the Plan. An RDSP may have one or more directors responsible for the principal decision making with respect to the plan including directing investments and the amount and timing of payments out of the plan. This could include, for example, the mother and father of the beneficiary, a parent and the beneficiary of the plan, once that beneficiary reaches the age of majority, a parent who is a successor director (in the event of the death of one parent); and an entity which acquires the rights of a director in the event of that director's death. Directors are jointly liable with the beneficiary or the beneficiary's estate for taxes arising in a non-compliant plan, described below. Non-taxable Portion of RDSP Payments. The non-taxable portion is the same as the proportion that contributions to the plan is to the total value of the plan's assets, less the assistance holdback amount, described below. Assistance Holdback Amount. A disability assistance payment will not be allowed to be made if the payment causes the fair market value of the plan's assets to fall below the ìassistance holdback amountî. This is the amount that could be required to be repaid under the Canada Disability Savings Actóthe total amount of grants and bonds paid into the plan by the government in the ten-year period preceding the disability assistance payment, plus associated investment income. Should the plan become ìnon-compliantî it will be automatically deregistered and the taxable portion will be included in income. If a repayment is subsequently made, a deduction is possible. Repayments of amounts received under the Canada Disability Savings Act, effective the 2007 tax year will qualify for a deduction on Line 232. ITA Section 4(3)(a) and 60(z). Withholding taxes. It is expected that the Regulations will allow $15,000 to be withdrawn annually without the requirement for withholding taxes. Payments over this amount will be subject to the same withholding rules as RRIFs. Only the taxable portion of the payment are taken into account for these purposes. Interest on money borrowed. Amounts borrowed to make a contribution to a registered plan, including a RDSP is not deductible. Interest is usually deducted on Line 221 Carrying Charges for eligible investments. ITA Section 18(11). Gains and Losses. Taxpayers who sell investments outside a registered plan to invest into one will be prohibited from claiming the losses on the disposition of the assets for that purpose. This rule is extended to the RDSP investor effective 2008. ITA Section 40(2)(g). Attribution Rules. Contributions made to an RDSP will not be subject to the usual attribution rules which require that income from property transferred to a spouse or common law spouse or other individuals under 18 must be reported by the transferor. ITA 74.5(12)and 75(3)(a) Tax Free Rollovers. A tax-deferred rollover of property may be accomplished when the transferor is a RDSP trust so that funds can move from one such plan to another on a tax free basis in cases where the beneficial ownership  does not change. ITA 107.4(l)(j). Trusts and Their Beneficiaries. The 21 year deemed disposition rule will not apply to RDSPs. ITA 108(1) GST Credits. For the purpose of this refundable federal credit, the definition of adjusted income will exclude  payments from an RDSP so as not to reduce GSTC payments, effective 2008. ITA 122.5(1) Canada Child Tax Benefits. For the purpose of this refundable federal credit, the definition of adjusted income will exclude payments from an RDSP so as not to reduce CCTB payments, effective 2008. ITA 122.6 OAS Benefits. For the purpose of recovering OAS benefits, the definition of adjusted income will exclude payments from an RDSP from the base upon which the tax on OAS benefits is calculated. ITA 180.2 Changes in Residency. Beneficiaries of RDSPs will not be treated as having disposed of their rights under an RDSP upon immigration or emigration, similar to the rules in place now for RRSPs and other deferred income plans. ITA 128.1(10) Death of a Beneficiary. In this case, the plan must allow for remaining amounts to be paid into the beneficiary's estate and for the plan to be terminated by the end of the year following the year of the beneficiary's death. ITA 146.4(4)(n)   For more tax tips, purchase a copy of Essential Tax Facts written by The Knowledge Bureau's President, Evelyn Jacks, to learn how to ace your 2008 tax return and save money all year long.  

By Evelyn Jacks It's curling season and apparently CRA has it's eye on the rock too, given a recent question I was asked about the tax status of income received by curlers for their athletic endeavors. That's prompted this overview of taxation of prizes, and it might be a good idea for professional advisors to review these rules with their star clients to avoid protracted and expensive legal challenges that could just be distracting enough to force their winning eyes off the curling rock. And that would be a shame. Athletes are taxable on their income like all other taxpayers but may qualify for special tax treatment depending on their circumstances. What we need to review carefully is under what circumstances the income is earned and whether it may be exempt, deferred or reduced by expenses. Windfalls. Income may be tax exempt for example, if the taxpayer received a ìWindfall.î CRA's IT 334 discusses miscellaneous income sources including windfalls to determine whether any aspect of the win is taxable. In general a "windfall" is not subject to tax but factors indicating that a particular receipt is a windfall include the following: the taxpayer had: ∑ no enforceable claim to the payment, ∑ made no organized effort to receive the payment, ∑ neither sought after nor solicited the payment, ∑ had no customary or specific expectation to receive the payment, ∑ had no reason to expect the payment would recur, ∑ the payment was from a source that is not a customary source of income for the taxpayer, ∑ the payment was not in consideration for or in recognition of property, services or anything else provided or to be provided by the taxpayer, and ∑ the payment was not earned by the taxpayer as a result of any activity or pursuit of gain carried on by the taxpayer and was not earned in any other manner. The factors above are based on those set out in the decision of The Queen v. Cranswick, (1982) CTC 69, 82 DTC 6073 (F.C.A.). Gifts and Other Voluntary Payments. Amounts received as gifts, that is, voluntary transfers of real or personal property without consideration, are not subject to tax in the hands of the recipient. However, when a benefit is received by an employee from an employer, or from some other person, the amount of the payment or the value of the transfer or benefit is generally included in income. Certain tax free benefits are specified in the act. Similarly, voluntary payments (or other transfers or benefits) received by virtue of a profession or by virtue of carrying on a business are taxable receipts. Some related issues are discussed in the current version of IT-490, Barter Transactions Games of Chance. Under circumstances discussed in CRA's IT 213, which outlines taxation of games of chance or other one-time prizes: IT 213 points out: Is it a lottery scheme? Amounts received under this arrangement is not taxable as either a capital gain or income unless, unless due to the circumstances applying to the lottery scheme, the prize can be considered to be income from employment, business or property or a prize for achievement referred to in paragraph 56(1)(n). Is it a game of chance? A lottery has been defined as a scheme for distributing prizes by lot or chance among persons who have purchased a ticket or a right to the chance. If real skill or merit plays a part in determining the distribution of the prize the scheme is not a lottery (unless it is based essentially on chance and the degree of skill is minimal). Again, when the chances of a prize are obtained wholly gratuitously, as for instance, a prize awarded to the winner of a game, the scheme is not a lottery. Is it a pool betting system? A "pool system" of betting is defined in the Athletic Contests and Events Pools Act as a pool system of betting on any combination of two or more professional athletic contests or events. The fact that a degree of skill is involved in the selection of the outcome of the contest or event in the pool betting distinguishes it from a lottery scheme. No taxable capital gains or allowable capital losses arise from the disposition of a chance to win a bet or a right to receive an amount as winnings on a bet in connection with a pool system of betting referred to in section 188.1 of the Criminal Code. The nature of pool system betting is such that the only winnings are in the form of cash from the respective pool. Consequently, no additional capital gain or loss tax consequences could arise on subsequent disposition of the winnings and therefore it is not necessary to deem the winnings to have been acquired at fair market value. Is it a gift? When the prize has been received as a gift, it is not included in computing income at the time of receipt. However, the recipient will be deemed to have acquired the prize at its fair market value , which means that a subsequent disposition of the prize will result in a capital gain on any increase in value since the time of its acquisition. A prize can be reasonably considered to be a gift from the viewpoint of the recipient, even though chance and/or skill may have been involved in the win. Ordinarily a gift is not considered to have been made until the donee has received delivery of the gift and accepted it in a completed and irreversible transaction. Is it Income? The prize will be received as income where it is received by virtue of the recipient's employment , received by virtue of the recipient's business or received in respect of an achievement in a field of endeavor ordinarily carried on by the recipient pursuant to paragraph 56(1)(n) (see IT-75R2). Is it an Achievement in a Field of Endeavor? The amount of a prize for achievement in a field of endeavour ordinarily carried on by the taxpayer can be considered to be an award to a particular person selected from a group of potential recipients and given for something that is accomplished, attained or carried out successfully. The amounts are generally included in income under in subparagraph 56(1)(n)(i) however, the type of prize contemplated is restricted. The criteria for awarding the prize must be such that a recipient is rewarded for success in an area in which the recipient regularly applies effort. Therefore, an amount generally qualifies as a prize for purposes of subparagraph 56(1)(n)(i) if it is paid in recognition of a genuine accomplishment in a challenging area, whether it be of an academic, vocational or technical nature. A prize that is not included in subparagraph 56(1)(n)(i) is considered to be a "windfall" and is not required to be included in income unless it is also a business receipt or income from employment. If an employee receives, from his or her employer, a prize or other award related to sales or other work performance, the fair market value of such an incentive is regarded as remuneration for services. Accordingly, this amount must be included in income under subsection 5(1). If there is no employer-employee relationship between the payer and the recipient of an amount and it can be established that the amount is a business receipt, the amount is included in income under subsection 9(1). However, if the amount received is a prize for achievement in a field of endeavour ordinarily carried on by the taxpayer and it cannot be regarded as a business receipt (and is not a prescribed prize as discussed in ∂20), then the amount is included under subparagraph 56(1)(n)(i). Is it an Entrance Fee or Reimbursement of Costs? Where the prize is not received as income and is not a gift, no amount will be included in income upon receipt of the prize and the provisions of paragraph 69(1)(c) will not apply. Such a situation would arise where the contestant has incurred a cost towards winning the prize such as purchasing a ticket or paying an entrance fee entitling the contestant to participation in the contest. In such a case, while there are no tax consequences resulting from receipt of the prize, any subsequent disposition of that prize may result in a capital gain or loss. In computing any such gain or loss the taxpayer's cost of the prize will be the original cost of the ticket or entrance fee rather than the fair market value of the prize. Where "personal use property" is involved, the $1,000 exemption contained in subsection 46(1) may eliminate any capital gains on disposition of a prize. Is it a Prize Received by an Amateur Athlete? As you may have read recently in The Knowledge Bureau's Breaking News, changes were recently made to Amateur Athletic Trusts which allow for a deferral of income received from prizes, endorsements, etc. in order to preserve the athlete's status as an amateur so that he/she can continue to compete at an amateur level. Taxation of prizes will only happen when the amounts are distributed to the athlete. The rules have recently been extended to a broader category of athletes including an amateur who is a member of a registered Canadian amateur athletic association and eligible to compete in international sporting events as a Canadian national team member. Specific filing rules as per CRA's recent bulletin link here.   These revenues will generally be taxed on the earlier of the following two dates: the date the funds are distributed to the athlete; eight years after the creation of the trust or the last year in which the athlete was eligible to compete as a Canadian national team member in an international sporting event, whichever comes first. Eligible income earned in 2008 that is contributed to a qualifying arrangement before March 3, 2009, will be deemed to be income of the amateur athlete trust for 2009 and not the athlete's income for 2008 provided the athlete elects to do so by the filing due date of the athlete's 2008 tax return (generally April 30, 2009). Is it Business Income? Income that does not qualify under the rules above should be reported as self-employed earnings, as per the story below, but remember that when you report your share of business income, you can also write off expenses against it including your share of travel, hotel, meals, etc. Volume Discounts and Rebates. Volume bonuses or rebates from suppliers are included in computing a purchaser's business income. However, where a supplier provides customers with free tickets for a draw for a prize with the winning ticket to be drawn strictly by chance, the prize is ordinarily considered a gift. Its value is not included in the recipient's business income. On the other hand, if real skill or merit is involved in the win, it will be a question of fact to be determined in accordance with the circumstances in each case whether the prize is a gift or whether its value is business income to the recipient. Evelyn Jacks is President of The Knowledge Bureau and author of Master Your Taxes and Essential Tax Facts which can be purchased from www.knowledgebureau.com. Copies of this article may be purchased for a fee by calling 1-866-953-4769.

By John Mill LL.M. Recently I was asked by a student in The Cross Border Taxation Course whether US stock purchased through a Canadian broker is a ìtangibleî for US estate tax purposes. This is a good question because in general terms non-resident aliens only have to worry about US estate tax attaching to tangible property situated in the US. The term used to describe this category of property is ìUS situs propertyî. The answer to the question is ìno ñ US stock is always an intangibleî. However, when it comes to the US estate tax consequences, US stock, the situs of the stock and the mode or manner of stock purchase are irrelevant. The estate tax sections in ìSubchapter BóEstates of Non-residents Not Citizens of the United Statesî set out the US estate tax consequences of owning US stock at death: IRC ß2104. Property within the United States (a) Stock in corporation For purposes of this (estate tax) subchapter shares of stock owned and held by a non-resident not a citizen of the United States shall be deemed property within the United States only if issued by a domestic corporation. However, once a stock is gifted it no longer forms part of the estate for estate tax purposes. Gifts of US stock are treated differently than bequests of US stock because the IRC says intangibles are exempt from Gift tax, US stocks are intangibles: ß2501. Imposition of (Gift) tax (a) Taxable transfers (1) General rule A tax, computed as provided in section 2502, is hereby imposed for each calendar year on the transfer of property by gift during such calendar year by any individual resident or non-resident. (2) Transfers of intangible property Except as provided in paragraph (3), paragraph (1) shall not apply to the transfer of intangible property by a non-resident not a citizen of the United States. Now let's switch gears to the old ìcash in the mattressî debate: is ìcashî an intangible? On the one hand cash represents a ìrightî to a certain value; on the other it is a fungible ìbearerî instrument that you can hold in your hand. The IRS says cash located in the US is tangible property subject to US estate tax; others disagree. I am not aware of any cases one way or the other. There is no list of US situs assets, the facts surrounding each asset are unique and must be considered. IRC ß2105 gives some guidance including the fact that bank deposits held by NRAs are considered property ìwithoutî the US. IRC ß2105. Property (of NRAs) without the United States": (a) Proceeds of life insurance For purposes of this subchapter, the amount receivable as insurance on the life of a nonresident not a citizen of the United States shall not be deemed property within the United States. (b) Bank deposits and certain other debt obligations For purposes of this subchapter, the following shall not be deemed property within the United Statesó (1) amounts described in section 871 (i)(3), if any interest thereon would not be subject to tax by reason of section 871 (i)(1) were such interest received by the decedent at the time of his death, (2) deposits with a foreign branch of a domestic corporation or domestic partnership, if such branch is engaged in the commercial banking business, (3) debt obligations, if, without regard to whether a statement meeting the requirements of section 871 (h)(5) has been received, any interest thereon would be eligible for the exemption from tax under section 871 (h)(1) were such interest received by the decedent at the time of his death, and (4) obligations which would be original issue discount obligations as defined in section 871 (g)(1) but for subparagraph (B)(i) thereof, if any interest thereon (were such interest received by the decedent at the time of his death) would not be effectively connected with the conduct of a trade or business within the United States. Notwithstanding the preceding sentence, if any portion of the interest on an obligation referred to in paragraph (3) would not be eligible for the exemption referred to in paragraph (3) by reason of section 871 (h)(4) if the interest were received by the decedent at the time of his death, then an appropriate portion (as determined in a manner prescribed by the Secretary) of the value (as determined for purposes of this chapter) of such debt obligation shall be deemed property within the United States. (c) Works of art on loan for exhibition For purposes of this subchapter, works of art owned by a nonresident not a citizen of the United States shall not be deemed property within the United States if such works of art areó (1) imported into the United States solely for exhibition purposes, (2) loaned for such purposes, to a public gallery or museum, no part of the net earnings of which inures to the benefit of any private stockholder or individual, and (3) at the time of the death of the owner, on exhibition, or en route to or from exhibition, in such a public gallery or museum. (d) Stock in a RIC (1) In general For purposes of this subchapter, stock in a regulated investment company (as defined in section 851) owned by a nonresident not a citizen of the United States shall not be deemed property within the United States in the proportion that, at the end of the quarter of such investment company's taxable year immediately preceding a decedent's date of death (or at such other time as the Secretary may designate in regulations), the assets of the investment company that were qualifying assets with respect to the decedent bore to the total assets of the investment company. (2) Qualifying assets For purposes of this subsection, qualifying assets with respect to a decedent are assets that, if owned directly by the decedent, would have beenó (A) amounts, deposits, or debt obligations described in subsection (b) of this section, (B) debt obligations described in the last sentence of section 2104 (c), or (C) other property not within the United States. (3) Termination This subsection shall not apply to estates of decedents dying after December 31, 2007. Some other rules that may assist are: Annuity contracts enforceable against a U.S Corporations are U.S. situs property. Treas. Reg. ß20.2104- 1(a)(4). Partnership interest have situs where the partnership business is carried on. Rev Rul 55- 701, 1955-2 CB 836. A beneficial trust interest that does not terminate at his/her death, situs is determined by the situs of each asset held by the trust.7 See Comm'r v. Nevius, 76 2d 109 (2d Cir.), rev'g 30 BTA 70, cert. denied, 296 US 591 (1935). As stated in the course material the Competent Authority (CA) assists taxpayers, who make a formal request, in resolving cross border disputes with tax authorities. The CA does not provide advice or assist in the filing of returns. John Mill LL.M., is a Canadian lawyer specializing in cross border issues and author of The Knowledge Bureau's Cross Border Taxation Course.