Tax Tip: The More Obscure Medical Expenses

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

On November 27, 2008, Finance Minister Jim Flaherty presented the 2008 Economic and Fiscal Statement for Canada, providing an update of Canada's current and short term financial outlook, which points to a recovery by 2011 to the fiscal outlook predicted in the 2008 budget and some temporary tax relief for seniors as well, while taking the pressure off organizations struggling with current pension funding deficiencies caused by the world financial crisis. Special reports on these rules follow. Reduction in amounts required for minimum withdrawals in RRIFs for 2008 Economic and fiscal outlook statistics show recovery, soon Extension of private pension plan solvency funding from 5 to 10 years may provide reprieve In addition, spending limitations, including the elimination of $1.95 per vote subsidy by taxpayers to political parties effective April 2009 and annual wage increase limitations for public service employees of 2.3% for 2007-08, and 1.5% from 2009 to 2011. These two controversial measures may rock the boat for a minority government.

The Honourable Jim Flaherty, Minister of Finance will be presenting an Economic and Fiscal Statement at 4:00 pm EST on Thursday, November 27th. The Knowledge Bureau will be preparing an analysis of the statement and will provide you with a special report.  Expect the report in your e-mail inbox on Friday morning. To keep current with all financial and economic news try the EverGreen Explanatory Notes DEMO TODAY! Or call us to subscribe: 1-866-953-4769.

The Minister of National Revenue, the Honourable Jean-Pierre Blackburn, made an announcement recently regarding steps taken to make it easier for businesses to apply for the scientific research and experimental development (SR&ED) tax credit. Due to the onerous filings previously required by the CRA with respect to SR&ED claims, many small to medium sized businesses failed to apply for the SR&ED tax credit. The Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim and accompanying guide have been made more user friendly and organized, and with a web-based eligibility tool being provided, claimants will be more likely to apply for the tax credit program which could ultimately result in more Canadian research projects being undertaken. The changes being implemented were announced in the 2008 budget. More information on this program and the changes made are available at the CRA website located at www.cra.gc.ca/sred. For more information on SR&ED and other tax credit programs, go to EverGreen Explanatory Notes on The Knowledge Bureau website. EverGreen provides an ever current in-house research and analysis department, the most recent news from The Department of Finance and CRA compliance updates.

Leveraging Tax Preferences: Consider funding this new "bucket of savings" with your RRSP tax savingsóa great way to leverage two available tax provisions. But also look at your new investment options from the tax-exempt income within the TFSA. For example, it may make some sense to look at the tax-free income in the TFSA as a source for funding assets that will multiply on a tax exempt basis: for example life insurance, critical illness insurance or a tax exempt principal residence. TFSA or HBP? Consider whether it makes more sense to withdraw funds on a tax-free basis from within an RRSP to fund a new home purchase under the Home Buyers' Plan or whether the taxpayer should save and withdraw funds under the TFSA instead. As there are no tax penalties for failure to pay back the funds to the TFSA, and withdrawals automatically create new TFSA contribution room, it may make sense to accumulate money in the TFSA instead. TFSA or LLP? Education savings strategies should now be revisited as well. Saving within the TFSA allows you to accumulate funds on a tax-deferred basis and then withdraw them without penalty or a requirement to repay the funds. This is not so under the Lifelong Learning Plan, which allows for a tax-free withdrawal from the RRSP but requires an annual repayment schedule. The avoidance of income inclusion penalties therefore makes the TFSA a more attractive withdrawal vehicle for these purposes than the Lifelong Learning Plan. Better to leave the funds in the RRSP for tax deferred retirement savings. TFSA or RESP? This new account would also appear to be a better savings vehicle for education purposes than the RESP, which eventually could provide a tax penalty on withdrawal if intended recipients do not end up going to school. However, in making this choice the investor misses out on the Canada Education Savings Grant sweetener. Offsetting Pension Contribution Limitations. Contributors to employer pension plans are often precluded from making RRSP contributions because of their pension adjustment amount. Likewise those who have contributed the maximum to an RRSP ó 18% of earned income to $20,000 in 2008 and want to do more to supplement their savings on a tax-assisted basis, now have the opportunity to tap into another tax deferred savings opportunity. In particular the TFSA a good place to park interest-bearing investments. Supplementing Executive Pension Funding: Executives who earn more than $111,111 in 2008 will be unable to save for retirement on a tax assisted basis for income above this amount. The TFSA provides a small window of opportunity to shore that tax assistance up. This option should be employed in conjunction with planning for funding of top hat plans like Individual Pension Plans or Retirement Compensation Arrangements. New Tax Sheltering Opportunities for more Pre-Retirees: The TFSA is a great savings option for people who do not have the required earned income for RRSP contribution purposes and therefore have few opportunities for tax sheltered retirement savings. This includes those in receipt of passive income sources like pension income, investment income or employment insurance benefits. New Tax Sheltering Opportunities for RRSP Age-Ineligible Taxpayers: The tax shelter can continue for those who reach age 71 and don't need the money in their RRSP. While withdrawals must be generated under the usual rules, reinvestment into a TFSA will allow those tax-paid funds to grow again ñ faster in a tax sheltered account, as opposed to a non-registered account. Benefits for Single Seniors: RRSP Melt Down Strategy Enhancements: It has always made some sense to melt down RRSPs to "top income up to bracket" in circumstances where taxes will be higher at death than during life. We generally use that strategy for singles or widow(er)s as the RRSP funds cannot be rolled over to as spouse or common-law partner's RRSP. Now surplus funds can be deposited into the TFSA so that retirees can continue to build wealth on a tax deferred basis and keep legacies intact. TFSA Borrowing and Excess Contribution Penalties: Because income from the TFSA is not taxable, borrowing funds to contribute to a TFSA will not be tax deductible. Using borrowed money to invest in non-registered accounts makes more sense as interest is then tax deductible. Estate Planning Considerations. Also note that the TFSA loses its tax-exempt status after the death of the plan holder, meaning that the investment income will become taxable. However a rollover opportunity is possible when the spouse or common-law partner becomes the successor account holder. This will not be affected by the spouse's contribution room and will not reduce existing room either. When an adult child dies without a spouse, the plan should be collapsed or transferred to another appropriate savings vehicle. Marriage Breakdown: Investors in the TFSA will be able to transfer from one party to the split to the other on a no-penalty basis, however, the transfer in this case will not re-instate contribution room for the transferor. Nor will it affect the contribution room of the transferee. File a Tax Return: yet another reason to endear oneself to the tax system: a return is required to build TFSA contribution room and so it is folly to file late or miss filing a return. Remember there is a statute of limitations of ten years in filing late or adjusted returns. Don't cut into your tax exempt wealth accumulation potential by being tardy on this front. Investment Ordering Decisions. The New TFSA requires a second look at the order in which investors maximize accumulation activities. Taxable investors should consider family priorities and then contribute funds in this order: To an RPP To an RRSP (including spousal RRSP) To a the TFSA To RESPs (Registered Education Savings accounts to maximize Canada Education Savings Grants and Bonds) To RDSPs (Registered Disability Savings Plans to maximize Canada Disability Savings Grants and Bonds) To non-registered accounts Next week: More Tax Planning Ideas To Share With Your Clients!

On November 20, the minister of finance sent a letter to financial institutions regarding Registered Retirement Income Funds. The letter states: Dear ______: I am writing to seek your cooperation on an important issue for Canadian seniors, withdrawals from Registered Retirement Income Funds. Many seniors are understandably concerned about the impact of the recent deterioration in market conditions on their financial security and I believe it is important to ensure that they do not face undue obstacles in managing their assets in these challenging times. A common misconception is that seniors must sell assets to satisfy RRIF withdrawal requirements, something many may not want to do at this time given the recent decline in value of many assets. The income tax rules permit "in-kind" asset transfers to meet the minimum withdrawal requirements ñ they do not require the sale of assets. It has been brought to my attention that, in certain circumstances, there may be obstacles to in-kind asset transfers within financial institutions. It has also been suggested that some financial institutions may not be advising clients of this option where it does exist. To address this issue, I am expecting all financial institutions to accommodate in-kind transfers ñ at no cost to clients ñ or offer another solution that achieves the same result. I would ask that you ensure that all clients with RRIFs be made aware that this option exists. I would like to hear from you by Friday, November 28 to confirm that steps have been taken to ensure that in-kind asset transfers between RRIFs and other accounts are possible at no cost to the client and that RRIF clients will be made aware of this option. Thank you for your cooperation. Sincerely, James M. Flaherty As the letter indicates, in-kind payments from RRIFs are allowed but not common. Most taxpayers and financial institutions assume that the minimum RRIF withdrawals must be made in cash. To accomplish that, retirees with their RRIF investments in bonds or stocks would have to sell those investment instruments in order to have cash available to make those minimum RRIF withdrawals. The minister is asking financial institutions to facilitate in-kind RRIF withdrawals and to inform their RRIF holders that such withdrawals are possible. Although the RRIF annuitant could request that the stock certificates be delivered to them, a more likely scenario is that the financial institution holding the RRIF assets would transfer those assets to a non-registered trading account for the annuitant. For RRIF annuitants who require that RRIF income to live on, such withdrawals would be of little benefit, but they might allow RRIF annuitants who have other funds available to recover from large decreases they may have experienced this year in their RRIF investments, though not without some income tax consequences. See the example below. Example: In-kind RRIF Withdrawals Henry is 85 years old. His RRIF balance at the beginning of 2008 was $200,000, invested in blue chip stocks. His minimum RRIF withdrawals for 2008 are 10% of the beginning balance (rates rounded for clarity). With the melt-down in the markets in the latter half of 2008, his RRIF holdings now have a fair market value of $100,000. Scenario 1: Henry sells sufficient stocks to generate the required $20,000 cash for withdrawals. After Henry sells $20,000 worth of stock, his RRIF balance will be $80,000 with no tax relief for the loss in value of his stocks and no means of recovering that lost value, even if the value of the stocks increases in future years. He will pay tax on the $20,000 RRIF withdrawal in 2008. In 2009, his minimum RRIF withdrawal will be reduced to approximately $8,000 (about 10% of the remaining balance). If Henry needs the $20,000 to live on, he can expect that, even if the value of the remaining portfolio increases, more than the minimum withdrawals will likely be required for some time - and likely his RRIF balance will not last for long. Scenario 2: Henry makes an in-kind withdrawal of stock from his RRIF. After Henry removes $20,000 worth of stock from his RRIF, the remaining balance will be $80,000. There is no tax relief in 2008 for the loss in value of his stocks, but he now holds $20,000 in stocks outside of his RRIF. Should the stocks regain their value, he can recover those losses. Henry will have to pay tax on the $20,000 RRIF withdrawal in 2008. If the stock that was withdrawn does recover, he will have to pay capital gains tax on the increase in value. In 2009, his minimum RRIF withdrawal will be reduced to approximately $8,000 (about 10% of the remaining balance).   Taxpayers who may have already converted a portion of their RRIF stock portfolio into cash (and thereby locking in the losses) in order to withdraw those funds can still place themselves in the same position as those who have made in-kind withdrawals by repurchasing the liquidated investments in their non-registered portfolios. This, of course, is only possible if the taxpayer does not need the RRIF income for living expenses. Planning Opportunity? RRIF annuitants who hold their RRIF funds in stocks that have decreased in value but who fully expect that the value of the stocks will recover may find that in-kind withdrawal of RRIF assets may present a planning opportunity. By converting the stocks from RRIF assets (which will be fully taxable when the amounts are withdrawn) to non-registered assets, the increase in value will only be 50% taxable rather than fully taxable. Retirees who have funds available might consider converting the RRIF assets to cash at a low point in their value and then re-purchasing the same investments outside their RRIF allowing the recovered values to be taxed at the capital gains tax rate. To learn more about retirement planning strategies, see the Retirement Income Specialist program.

Last week the CRA issued the draft version of T4217 - Payroll Deductions Formulas for Computer Programs - 88th Edition - Effective January 1, 2009. This obscure document provides the details of the tax brackets and rates applicable to 2009. The indexation factor that applies to federal amounts is 2.5% for 2008. For the various provinces, the indexation factor varies from 0% for provinces who do not apply indexing to their rates and amounts to a maximum of 3.8% in Alberta. Federal Tax Brackets for 2008 and 2009 2008 Taxable Income Range   Tax Rate 2009 Taxable Income Range Up to $37,885   15% Up to $38,832 $37,886 to $75,769   22%   $38,833 to $77,664 $75,770 to $123,184   26% $77,665 to $126,264 Over $123,184   29% Over $126,264 Tax rates remain at the same levels, but the brackets have been indexed by 2.5% Federal Personal Amounts for 2008 and 2009 Personal Amounts 2008 2009 Basic Personal Maximum Claim $9,600 $10,100 Age Maximum Claim $5,276 $5,408 Base Amount $31,524 $32,312 Spouse or Common-Law Partner Maximum Claim $9,600 $10,100 Reduced by net income over $0 $0 Eligible Dependants Maximum Claim $9,600 $10,100 Reduced by net income over $0 $0 Children under 18 Maximum Claim (per child) $2,038 $2,089 Infirm Dependants Maximum Claim $4,095 $4,198 Reduced by net income over $5,811 $5,956 Canada Employment Maximum $1,019 $1,044 Public Transit Passes Maximum None None Children's Fitness Maximum $500 $500 Adoption Expenses Maximum Claim $10,643 $10,909 Pension Income Maximum Claim $2,000 $2,000 Caregiver Maximum Claim $4,095 #4,198 Reduced by net income over $13,986 $14,336 Disability Basic Amount $7,021 $7,196 Supplementary Amount $4,095 $4,198 Base Child Care Amount $2,399 $2,459 Tuition, Education, and Textbook Minimum Tuition $100 $100 Full-time Education Amount+ Textbook Amount (per month) $400+$65 $400+$65 Part-time Education Amount+ Textbook amount (per month) $120+$20 $120+$20 Medical Expenses 3% limitation $1,962 $2,011 Refundable Medical Expense Supplement Maximum $1,041 $1,067 Base Family Income $23,057 $23,633   Canada Pension Plan Contributions for 2008 and 2009 The maximum pensionable earnings under the CPP (Canada Pension Plan) for 2009 will increase from $44,900 to $46,300. This translates to a maximum employer and employee contribution in 2009 of $2,118.60, increased from a maximum of $2,049.30 in 2008. The basic exemption of $3,500 will remain the same in 2009 as will the contribution rate of 4.95%. The self-employed rate of 9.9% will also remain unchanged for the year. Employment Insurance Premiums for 2008 and 2009 The maximum insurable earnings for Employment Insurance purposes increase to $42,300 but the premium rate remains at 1.73% for a maximum annual premium of $731.79 for all provinces (up from $711.03) except Quebec where it is reduced to 1.38% for a maximum premium of $583.74. For 2009, the maximum earnings for the Quebec Parental Insurance Plan (QPIP) are $62,000 with a rate of 0.484% for a maximum annual premium of $300.08.