Tax Tip: The More Obscure Medical Expenses

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

On January 12th, 2009 the CRA announced the revocation of the charitable status of another organization, this time The Millennium Charitable Foundation, a Toronto area charity.   In recent past, several donation investment offerings have been created, many of which include the "flipping" of art or other items in return for charitable donation receipts which provide a tax benefit on the investment. The offerings usually worked like this: A promoter gives a person the opportunity to purchase one or more works of art or another item of speculative value at a relatively low price. The proposal is that the promoter will work with the person to make arrangements for donating the works of art or other items to a Canadian registered charity or other specified institution. The person donates the art or other item and receives a tax receipt from the charity or other specified institution that is based on an appraisal arranged by the promoter. The appraised value of the art is substantially higher than the cost paid by the person. When the person claims the receipt on his or her next tax return, it generates a tax saving that is higher than the amount paid for the art in the first place. CRA takes a dim view of these offerings. To date over 100,000 taxpayers have learned first hand that the Canada Revenue Agency considers the donation schemes a sham, and they want their money back. It is their view the appraisal generated by the individual associated with these schemes may not represent the fair market value of the acquired property. If it did, then the property would not be sold at the lower price. On December 5, 2003 new legislation was introduced (changes to S. 248) to limit the eligible amount of a gift made after December 5, 2003 to the cost of the property to the taxpayer if the property was acquired within three years of donating it and the property was acquired for the purposes of the donation (i.e. it was acquired under a gifting arrangement as defined in S. 237.1). CRA advises that anyone considering entering into a tax shelter arrangement should obtain independent professional advice before signing any form of documents related to the donation and: know who they are dealing with, and request the prospectus or offering memorandum and any other documents available in respect of the investment and carefully read them; pay particular attention to any statements or professional opinions in the documents that explain the income tax consequences of the investment. Often, these opinions will tell the investor about the problems that can be expected and suggest that the investor obtain independent legal advice; not rely on verbal assurances from the promoter or others-get them in writing; and ask the promoter for a copy of any advance income tax ruling provided by the CRA in respect of the investment. Read the ruling given and any exceptions in it. Individual taxpayers should be aware that their tax return can be reassessed up to three years after the date of assessment. Even if the benefits of the tax shelter were accepted upon initial assessment this should not be interpreted as acceptance of the claim, it may still be subject to audit by the CRA.   Evelyn Jacks, President, The Knowledge Bureau: knowledgebureau.com 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.    

Planning begins with maximizing the contribution to the TFSA and then having the money available to do so. Consider the potential of making a contribution into the TFSA for each individual: $5,000 invested at the beginning of each year for a productive lifetime of 45 year (age 20 to 65) is $225,000. Assume a marginal tax rate of 30% for these examples. Add a compounding rate of return of 5% to this invested inside a tax sheltered plan and that TFSA investment will grow to $838,426 inside the plan. (If invested outside the TFSA the amount would be only $547,420) At a 3% interest rate, the savings would be $477,507 inside the TFSA, and only $376,253 outside of it. At a rate of 3.5% the TFSA savings would be $547,420 and the non-registered value would be $412,294. TFSA RULES IN PLANNING: Age limitation. Contributions can be made by/for those who have attained 18 years of age and are residents of Canada. There is no upper age limitation. Earned income limitation. There is no earned income limitation. Contribution Deductibility: Contributions to the account are not deductible Earnings accumulate on a tax free basis.óincluding interest, dividends and capital gains. Contribution room. Every TFSA holder can contribute a maximum of $5,000 per year, and this amount will be indexed after 2009, with rounding to the nearest $500. Withdrawals (distributions) will create new TFSA contribution room. Carry Forward Room. Unused contribution room can be carried forward on an indefinite carry forward basis. You can take money out, in other words, spend it on whatever you want, and then put it back in when you can because the TFSA contribution room has been preserved. Excess Contributions. Such contributions are subject to a 1% per month penalty until the amounts are removed. Withdrawals (distributions) of both earnings and principal are tax exempt. Purpose: Recipients can take the money out for what ever purpose they wish and create new TFSA contribution room; which means they can put it back in a future year to grow when the withdrawal need is met and new savings are achieved. This will be welcome news to grandparents in particular. Income Testing Not Affected. Income-tested tax preferences like Child Tax Benefits, Employment Insurance Benefits or Old Age Security pension are not affected by earnings or withdrawals. Attribution Rules. There is no attribution rule attached to the TFSA, allowing parents and grandparents to transfer $5,000 per year to each adult child in the familyófor the rest of their lives. In addition, one spouse may transfer property to the TFSA of the other spouse without incurring attribution. Have grandparents, aunts, uncles gift into the TFSA, which they can also do without attribution TFSA Eligible Investments. The same eligible investments as allowed within an RRSP will apply to the TFSA. The account holder must deal at arm's length with the asset issuer - so, you can't invest in shares in a corporation you control, for example. Interest Deductibility. Interest paid on money borrowed to invest in the TFSA is not deductible. Stop Loss Rules. A capital loss is denied when assets are disposed to a trust governed by an RRSP or RRIF. The same rule apply to investments disposed to a TFSA. Departure Tax. The TFSA is not caught by the departure tax rules. In fact, a beneficiary under a TFSA who immigrates to or emigrates from Canada will not be treated as having disposed of their rights under a TFSA. No TSFA contribution room is earned for those years where a person is non-resident and any withdrawals while non-resident cannot be replaced. The US does not recognize the TFSA therefore any realized income ought to be non-taxable when removed after emigration. Capital appreciation will be taxable. Marriage Breakdown. Upon breakdown of a marriage or common-law partnership, the funds from one party's TFSA may be transferred tax-free to the other party's TFSA. This will have no effect on the contribution room of either of the parties. Death of a TFSA Holder. When the TFSA holder dies, the funds within the account may be rolled over into their spouse's TFSA or they may be withdrawn tax-free. Any amounts earned within a TSFA after the death of the taxpayer are taxable to the estate.

In a split decision, on January 8, the Supreme Court upheld the Tax Court of Canada's decision that Earl and Jordan's Lipson strategy to deduct their mortgage interest had breached the general anti-avoidance rules (GAAR). The Lipson's strategy was an extension of the strategy commonly known as the "Singleton Shuffle", named after Vancouver lawyer John Singleton whose strategy was upheld in a 2001 Supreme Court decision.  His strategy is now commonly used by investors to convert non-deductible personal debt into deductible debt.  The strategy involves selling existing investments, using the proceeds to pay off or pay down a mortgage on the personal residence and then taking out a mortgage to repurchase the investments.  The Supreme Court confirmed that this strategy is a valid way for the taxpayer to arrange his affairs to minimize his income tax liability. The Lipson's took the strategy one step too far and, in doing so, ran afoul of GAAR.  Here was their strategy: Mrs Lipson borrowed money to purchase shares in their family investment corporation from her husband at fair market value.  (She would normally not qualify for the loan but promised to repay it the following day and replace it with a mortage on a home show would then own.) Mr. Lipson then used the proceeds to purchase a family home. Mrs. Lipson then took out a mortgage on the home to repay the money borrowed to purchase the shares. When filing his tax returns for 1994, 1995 and 1996, Mr. Lipson relied on the attribution rules to report the income on the shares in his income and deduct the interest expenses paid on the mortgage. The net result of this strategy was that Mr. Lipson was reporting the same income on his return as he would have had he not sold the shares, and he was deducting the mortgage interest on a new home.  It was this last step - the use of the attribution rules to reduce his taxes that lead the Tax Court, and now the Supreme Court, that this transaction was an avoidance transaction (as defined in S. 245(4)).  As such, under 245(5) the deduction of the interest expense on the mortgage is disallowed. Investors need not be concerned that the Lipson decision will have wider consequences - unless their strategies, too, rely on the attribution rules to transfer interest deductions on a intra-family transaction.  The "Singleton" strategy is still valid and allowable. Had Mrs. Lipson had income of her own and reported the dividends on her return and claimed the interest deduction (as is allowed as the transfer was at fair market value), the strategy would not have been deemed an avoidance transaction and would therefore have been allowed.

<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com🏢office" /> Now available for investment purposes, the new Tax-Free Savings Account (TFSA) is a registered account in which investment earnings, including capital gains accumulate tax free. 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. 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 will they be included in net 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 under the taxpayer relief provisions. Manitoba is proposing legislation under their Retirement Plan Beneficiaries Act that will allow the designation of a TFSA beneficiary outside of a will so that probate fees that would normally apply can be avoided. Manitoba Finance has advised the designation of beneficiary can be made now, however, the designation will only have effect once the Manitoba legislation has received Royal Assent.  In the event the TFSA account holder passed away before the legislation was brought in and a designation of beneficiary had been made for TFSA assets which differed from the will, an executor may have difficulty determining who the asset should be distributed to. 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.

LATE YEAR ANNOUNCEMENTS IMPORTANT TO AMATEUR ATHLETES According to a news release by the Department of Finance on December 29, 2008 amateur athletes who are members of a registered Canadian amateur athletic association and eligible to compete in international sporting events will qualify for an expanded income deferral opportunity starting in 2008. Income from endorsements, prizes and other remuneration related to athletic endeavours will be deferred in the same manner as income contributed was to the account, and then taxed on the earlier of the date of distribution to the athlete or eight years after the last year in which the athlete was eligible to compete as a Canadian national team member. To qualify for the deferral in the 2008 tax year, the qualifying income amounts may be placed in a qualifying account by March 2, 2009.    

The Knowledge Bureau has submitted its pre-budget consultation recommendations to the Federal Government.  Please indicate whether you agree:<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com🏢office" />  ® yes                    ® no        ®  why?  1. Reduce Tax Withholdings:   Governments should withhold less tax at source so that Canadians can  invest more, and sooner, to an RRSP and then to  TFSA.  Reduce business and personal taxes by increasing tax free zones.   $1400 INVESTED ANNUALLY FOR A 40 YEAR WORKING LIFE GROWS TO:                                     (30% marginal tax rate assumed)   At 5%                    At 2%                    RATE DIFFERENCE INSIDE RRSP                       $177,576              $86,254                         $91,322 OUTSIDE RRSP                   $122,513              $75,430                         $47,038 TAX SAVINGS                    $  55,063               $10,824                         $44,239   $980 ANNUAL TAX SAVINGS REINVESTED IN A TFSA                                                          At 5%                    at 2%                     RATE DIFFERENCE INSIDE TFSA OUTSIDE TFSA TAX SAVINGS      TOTAL SAVINGS BY LEVERAGING RRSP AND TFSA CONTRIBUTIONS:                                                   At 5%                    at 2%                     RATE DIFFERENCE RRSP SAVINGS TFSA SAVINGS TOTAL TAX SAVINGS        Source:  Knowledge Bureauís EverGreen Explanatory Notes: Retirement Income Calculator   ® yes                    ® no        ®  why?   2.       Income splitting:  anyone generating a periodic pension from superannuation, RRSP, RRIF, LIFs, annuities should be able to split pension income with the spouse.  Currently the rules discriminate again those with RRSP/LIF, who must wait to age 65 to take advantage of pension income splitting.  Other families should be able to income split on any income source.   ® yes                    ® no        ®  why?   3.       Bring Back Income Averaging:  Hard economic times bring unintended business results.  Income averaging over a period of 5 years should be allowed, as in prior years.   ® yes                    ® no        ®  why?     4.       RRIF/LIF Minimums/Fund Access Barriers.  Abolish them.  This is not practical or desirable.       TO REGISTER FOR THE KNOWLEDGE BUREAUíS COMPLETE T1 TAX UPDATE WORKSHOP TO PREPARE YOU AND YOUR STAFF FOR TAX SEASON 2009, CLICK HERE: