Tax Tip: The More Obscure Medical Expenses

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

Has your income changed since filing last year's return? If so, your eligibility for certain refundable tax credits may increase or decrease this year. Always monitor new benefit levels and "clawback zones"; that is, the income thresholds used to phase out your eligibility for the Working Income Tax Benefit (WITB), the Canada Child Tax Benefit (CTB), and GST Credit. Income distributed through these credits begins again in July 2009, if you file family tax returns on time and report net income (line 236 on the tax return of both spouses) within various clawback zones. Again, an RRSP contribution might help you maximize these credits, which can really help with cash flow throughout the year. The Working Income Tax Benefit (WITB) is a refundable tax credit that can provide some tax relief for individuals and families that are employed in low income jobs. It also helps to encourage those not currently in the workforce to enter it by accessing the tax credit incentive. Taxpayers could be eligible for the WITB if: They are 19 years of age or older at the end of 2008 and; They were a resident of Canada for income tax purposes throughout the year Note that if the taxpayer was under 19 years old during the year and had a spouse, common-law partner or eligible dependant in 2008, they could also be eligible for the benefits. Taxpayers are not eligible for the benefits if they don't have an eligible dependant and were enrolled as a full time student for more than 13 weeks in 2008 at a designated educational institution. Entitlement is also lost if they were confined to a prison or are not required to pay tax as an officer or servant of another country or are a family member of such a person. All benefit levels and thresholds are indexed each year. Qualifying taxpayers must apply for the credit by filing a tax return and completing Schedule 6. Individuals can apply to have 50% their current year's estimated WITB prepaid. Prepayments will be made on the same payment cycle as GST credits are paid but the entire prepayment will be paid over the number of remaining GST payment dates left in the year. So, for example, an application made in April 2009 will earn 1/3rd of 50% of the estimated WITB in July, October and January. Prepayments will be reconciled to the actual entitlement when a return is filed by adding the prepayment amount to taxes owing.

But it's not all bad news: if you have cash you may be your bank's new best friend An editorial by Evelyn Jacks Last week, Desjardins Securities issued a news release stating the obvious when it comes to pension funding in Canada: corporate pension plan funding levels have hit an all-time low thanks to plunging stock markets, leaving company plans with assets worth just 72 per cent of their obligations under current conditions. Stats Canada agrees. In a report issued in July 2008, it was noted that since the beginning of 2000, under-funding of defined benefit pension plans have required employers to do a number of things including adding defined contribution components to their existing defined benefit plans, and injecting money into defined benefit plans to ensure adequate funding. In fact, in 2006 employer contributions accounted for 72% of total contributions to RPPs, up from 70% in 2005, and those increases came mainly from special payments for unfunded liabilities and solvency deficiencies, which increased by 44% at that time. Now, because more than 60% of large corporations' pension assets are invested in equities, according to Standard & Poor's analysis, the problem is even worse. Their senior analysts predict that even if equity markets remain flat for the remainder of 2008, defined benefit plans may end up with a combined under-funding well in excess of the record $219 Billion experienced in 2002. Companies are facing massive expenses as a result of equity valuation declines of 20% and more. Executives at Boeing for example, estimate that the company's pension expenses could rise to about $1,000 in 2009, even though its pension was overfunded at the end of the third quarter this year. Underfunding poses a significant threat to current and future pension receivers according to Mario Jametti at York University, who recently studied the problem, particularly for defined benefit plans. It is interesting to note this is of particular concern to Canadian women, who have been the sole reason for the increases in memberships in employer registered pension plans' growth since 2006. Membership was around the 6 million level in 2006, when 83% of women had a defined benefit plan, compared with 77% for men. The public sector accounts for only 10% of all registered pension plans, but the growth in membership appears to come largely from women working in the public sector. The problem therefore is well documented, primarily due to the fact that boomers were to begin retiring en masse in 2010 or so, a decision that certainly is being rethought by many due to the current economic climate. In fact according to Stats Canada, two-thirds of pension plans in Canada were in the red back in mid-2003. Both longevity as well as the decline in long-term interest rates have had a significant effect on the value of pension liabilities relative to the assets of the plan. Therefore, the problem is complex relating to the design, administration, and regulation of pension plans, according to Jack Selody, of the Legal Services Department at the Bank of Canada who authored a paper entitled Vulnerabilities of Defined Benefit Pension Plans back in May of 2007. There are several consequences: Companies must fund pensions according to the rules within a regulated time period. To do so, revenues must increase or expenses must be cut. If they can't do it, individuals will face layoffs and this is already happening. Bankruptcy is the most severe consequence; everyone loses under this option. Governments can relax the rules for funding and/or guarantee pension benefits. This requires quick co-operation and plans of action, which are unlikely. Ontario is the only province in Canada which has created a Pension Benefits Guarantee Fund, but it only guarantees the first $1000 per month of pension benefits. The Manitoba Pension Benefits Act and Pension Benefits Regulation, on the other hand, require an actuarial valuation of a pension plan to be performed at least every three years on both a going concern and solvency basis. Where the solvency ratio of the plan is less than .9 an annual valuation is required. Under the legislation the employer is required to fund unfunded liabilities revealed in a going concern valuation over 15 years and solvency deficiency revealed in a solvency valuation over 5 years. The legislation does not provide any general solvency relief due to the economic environment. Individuals must take responsibility for their own futures and shore up their retirement funding options with proper planningóthe sooner the better. So, it's back to Personal Finance 101 for investors. Time to see your tax and financial advisors to discuss projections for retirement incomeóand the younger you are the more effective this will be. Remember also that 90% of Canadians underfund their RRSP contribution room. It's time to rethink that. In a world where people think nothing of spending $4 a day on coffee, remember this: invested inside a tax deferred plan that $1,460 you spend each year on coffee (yes, $4 x 365 is $1,460!!) will grow to about $8,300 in only 5 years . . . and that's without the initial double digit tax savings the RRSP contribution will produce! Seems like a no-brainer to cut down on the coffee (better for you too!) Doug Nelson, financial advisor and lifecycle coach with the Knowledge Bureau, adds "perhaps we are all beginning to realize that the investment returns seen between 1982 and 2000 were well above the long term averages and that now we need to plan for more conservative long term returns and perhaps even a more modest lifestyle. This may be the beginning of redefining the 'normal retirement date' for most pensioners and the beginning of the end of full or partial indexing, two components that are a significant expense to most pension plans". Nelson also emphasizes that most people inappropriately focus on their gross annual, before-tax income or their gross pre-tax investment returns when evaluating the strengths or weaknesses of their current financial situation. "Clients must begin to focus on after-tax income and after-tax investment returns. By doing so they will find that with some small changes they can receive significantly more after-tax income and have greater financial security with considerably less portfolio risk. In today's uncertain environment, it doesn't matter what you have, it only matters what you keep." At the 2008 Distinguished Advisor Conference Nelson presented what has been referred to as "The Premier Retirement Planning Process in Canada". Doug is the co-author of the certificate course Tax Efficient Retirement Income Planning, which teaches the process to advisors. The last word goes to Robert Ironside, Knowledge Bureau faculty member and course author, who adds some important wisdom to the pension funding issue: "As the Canadian banks are reducing their level of funding in the money market, due to the current turmoil in the financial sector, they are very actively searching for personal deposits. If you have money to invest, you have just become your bank's new best friend. All of the Canadian banks want your term deposit and they are willing to pay you well for it. It is not often that you can obtain a return on a savings account that is higher than Prime, but today you can." "Investors looking for a safe and secure haven for cash they might need over the next few years would be well advised to shop aggressively among the banks to see who will offer the best rate. Investors requiring periodic cash inflows could set up a laddered series of GIC investments to both match the need for periodic cash and capture the benefit of longer deposit periods." In short, while we are seeing that our most trusted institutions and savings plans are under threat, there is also significant opportunity. To win in this environment, individuals and their advisors must step up and secure their own futures with proper planning, good health and high doses of productivity as the ultimate antidotes to the financial disease around us today. Evelyn Jacks is President of The Knowledge Bureau, a leading educational institute teaching professional development and personal finance to investors and their advisors. Your comments are welcome. For more information visit www.knowledgebureau.com.

The global financial crisis, which is of significant concern to investors and retirees in planning the right outcomes before the end of 2008, must also be considered by executors dealing with the financial consequences at death for Canada's aging demographic. The opportunity to add value as an informed executor of the estate of grandparents, parents, and siblings is both an honour and a large responsibility that can be extremely costly when the correct tax consequences are missed. Evelyn Jacks and a detailed workshop on planning with trusts with John Poyser. Tax and financial advisors who want to be up to speed on the latest information to maximize tax savings on personal transitions, will want to participate November 14 to 21 in Winnipeg, Toronto, Calgary, Vancouver and Edmonton. "Practical education on year end planning for families and individual investors in this critical time will be discussed in detail," says Evelyn Jacks, President and Founder of The Knowledge Bureau. "However, we also are very pleased to review the astute preparation of the final return of those who pass away this year, in conjunction with various trust structures available. We believe this is of particular relevance in light of the significant financial turbulence we are experiencing today." John Poyser, LL.B. from the firm Inkster, Christie, Hughes and Knowledge Bureau Faculty Member, will host a detailed discussion on that subject. Did you know, for example, that when a person passes away and their estate passes, in whole or in part, to a spouse or spouse trust, it is possible to "harvest capital losses?" John will show that is achieved by opting out of the rollover available under subsection 70(6) on an asset by asset basis. To the extent that assets might have a pent up capital gain and certain other assets might have pent up capital losses, the executors can trigger gains and losses on a targeted basis to cross-cancel them in the deceased's income tax return rather than carrying them forward into the estate where they might not be effectively used. Advisors and the executors they work with, must also be aware of rules relating to qualified farm property and qualifying small business corporations, where a capital gains exemption is available. Depending on the terms of the trust, the designation does not have to be made evenly or equally among a collection of beneficiaries, but can be made in a way where the gains are allocated to the beneficiaries who have the most opportunity to take advantage of it, and other forms of income are allocated to other beneficiaries. Early registration for The November Year End Tax Planning Workshops ends October 31. To register call 1-866-953-4769 or enrol online. Dates, cities and venues appear below:   Date City Venue November 14 Winnipeg The Manitoba Club Register Now November 17 Toronto East Crowne Plaza Don Valley Register Now November 18 Toronto West Crowne Plaza Hotel Toronto Airport Register Now November 19 Calgary Carriage House Inn Register Now November 20 Vancouver Terminal City Club Register Now November 21 Edmonton Four Points by Sheraton Edmonton South Register Now Click here for more details.

As January 2009 is fast approaching, Tax-Free Savings accounts are often seen in the headlines or being advertised at your local bank. The new Tax-Free Savings Account (TFSA) is a registered account in which investment earning, 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 be 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. Some common questions regarding TFSAs are as follows: Q: Can a corporation hold a Tax Free Savings Account (TFSA)? A: Legislation provides that an individual (other than a trust) who is resident in Canada and 18 years of age or older would be eligible to establish a TFSA.  S. 248 of the Income Tax Act defines an individual as a person other than a corporation.  Thus, a corporation is not be eligible to establish a TFSA.   Q: What slips are associated with a TFSA? A: At this time the only form that has been provided for a TFSA is Form RC236 Application for a TFSA (Tax-Free Savings Account) Identification Number.  This form is for use by the issuers of a TFSA.  No forms have been announced for use by individuals. CRA has announced that it will provide taxpayers the amount of the available TFSA contribution room each year on their Notice of Assessment, based on information provided by the issuers of the TFSA.  CRA has also indicated that taxpayers will have to file returns in order to establish their contribution room. In addition, the CRA has provided details of the information that TFSA issuers must provide each year.  These details include: Name, date of birth, and Social Insurance Number of plan holder, TFSA Account Number, Details of each contribution, withdrawal, transfer in, and transfer out, Fair Market Value of the plan at December 31 of the taxation year. The deadline for the issuers to file their TFSA returns is 60 days after the end of the taxation year. Given that contributions are not deductible and withdrawals are not taxable, it may well be that there will be no reporting requirements by the individual plan holder.  However, CRA has not made its intention clear in this respect.  CRA has confirmed that there will not be a prescribed form for transfer of TFSA amounts between financial institutions. Q: Can a Flow-Through Limited Partnership be held within an RRSP? Within a TFSA? A: The same rules apply to an RRSP and TFSA.  There are no specific restrictions in the Income Tax Act for flow-through shares or limited partnerships that invest in flow-through shares from being held within an RRSP or TFSA, so long as they are listed on a prescribed stock exchange in Canada.  Typically, flow-through shares will not be publicly traded during the first 18-24 months and will then be rolled over into a mutual fund that is publicly traded.  During the period that the flow-through shares are not publicly traded, they are not eligible RRSP or TFSA investments. Caution should also be exercised when considering flow-through shares (or limited partnerships that invest in flow-through shares) in either an RRSP or a TFSA.  Since neither an RRSP nor a TFSA can benefit from the flow-through expenses, it may not make sense to purchase the flow-through shares in an RRSP or TFSA.  Investors may consider whether it is a good idea to transfer those shares or partnership units into their RRSP or TFSA after they have deducted the flow-through deductions.  If the shares are traded on a prescribed exchange, such a transfer will result in a deemed disposition for income tax purposes at the fair market value (FMV) of the shares.  The adjusted cost base of the shares will be zero so the entire FMV of the shares will be reported as a capital gain. If the shares or units increase in value the capital gain within the TFSA will be tax-free.  If they decrease in value, then the loss will not be deductible.  Given the tax-preferred treatment of capital gains, investors should consider whether a registered account is really the best place to hold such investments.  On the other hand if the investor feels that the investment will yield fully-taxable income, then the tax-free status of the TFSA or tax-deferred status of the RRSP may be beneficial.

For many Canadians, the filing of a personal income tax return is the most significant financial transaction of the year. In order the get the biggest bang for your buck when filing your personal tax return in 2009, it is important to know the various non-refundable tax credits that are available to you. In the October 30, 2007 Economic Statement, the minister announced changes to the basic personal amount, the amount for spouse or common-law partner and the amount for an eligible dependant. For 2007 and 2008, these amounts are set at $9,600. For 2009, these amounts are set at $10,100. The income threshold at which these amounts are reduced is set at zero. Definitions S. 118(1)(b) provides that a taxpayer who did not claim the Spouse or Common-law Partner Amount was not married or living common law or was married or living common law but did not live with a spouse or common-law partner and did not support or was not supported by a spouse or common-law partner and who supports and lives with a dependant in a home which the taxpayer maintains, may claim a specified amount for that dependant as a non-refundable tax credit against taxes payable. This credit was previously referred to as the "equivalent-to-spouse" credit, and is typically claimed by a single parent with whom a dependent child resides. Specified Amount The amount is identical to the Spouse or Common-Law Partner Amount. The claim is reduced by the dependant's net income for the year. The amounts prescribed in the Income Tax Act are indexed annually under S. 117.1 to reflect changes in the average consumer price index. However, these amounts have been set at $9,600 for 2007 and 2008 and at $10,100 for 2009. Filing Requirements Use Schedule 5 Details of Dependant to list the dependant and the claim being made; calculate the amount on the Federal Worksheet; and claim the amount on line 305 of Schedule 1 Federal Tax. Qualifying Dependants To qualify, the dependant must be a child, grandchild, brother, or sister of the taxpayerby blood, marriage, common-law partnership, or adoption, the taxpayer's parent or grandparent by blood, marriage, common-law partnership, or adoption or either under 18 years of age or wholly dependent on the taxpayer because of mental or physical infirmity. These qualifications need not be met throughout the year but must be met at some time during the year. S. 118(4) contains the following rules that apply to claiming the amount for an eligible dependant: S. 118(4)(a) - only one person can claim the Amount for Eligible Dependants in respect of the same dependant S. 118(4)(a.1) - no one may claim the Amount for Eligible Dependants if someone else is claiming the Amount for Spouse or Common-law Partner for that dependant S. 118(4)(b) - only one claim may be made for the Amount for Eligible Dependants for the same home. Where more than one taxpayer qualifies to make the claim, the taxpayers must agree who will make the claim or no one will be allowed to. S. 118(4)(c) - if a claim for the Amount for Eligible Dependants is made in respect of a dependant, no one may claim the Amount for Infirm Dependants or the Caregiver Amount in respect of the same dependant. In addition, S. 118(5) provides that no amount may be claimed by a person who is required to pay support to a spouse or common-law partner, or former spouse of common-law partner with respect to the person for whom the claim would be made. This provision applies where either the person lives separate and apart from the former spouse, or claims a deduction for spousal support. Example: Amount for an Eligible Dependant Issue: John and Joan separated during the year. They have two minor children, Jessie and Julie, who live two weeks a month with Joan and two weeks a month with John. Under federal guidelines, John is required to make monthly payments to Joan for the maintenance of the children. John and Joan agree that she will claim Jessie as a dependant and that John will claim Julie. Will this work? Answer: It will not. Joan is entitled to claim a credit for either Jessie or Julie as an eligible dependant, as she is married but not living with John, and she supports both children in the home she maintains. John also meets these tests, but he is required to make child maintenance payments to Joan and is therefore not eligible to claim the credit. Definition of Infirmity The term "infirm" is not defined in the Income Tax Act and CRA takes the position that the term takes on its ordinary meaning (see Appendix A of IT 513). The only guidance given is that the degree of the infirmity must be such that it requires the person to be dependent on the individual for a considerable period of time. Temporary illness is not classed as infirmity. Infirmity is not the same as disability. Death of a Taxpayer In the year of death, the Amount for Eligible Dependants may be claimed in full on the final return and on any of the optional returns filed for the deceased. Part-year Residents Part-year residents must pro-rate the Amount for Eligible Dependants under S. 118.91 according to the number of days they are resident in Canada divided by the number of days in the taxation year. Bankruptcy Where an individual becomes bankrupt in the year, the Amount for Eligible Dependants on the pre- and post-bankruptcy returns must be pro-rated according to the number of days in each period. Non-Residents Deemed residents may claim the Amount for Eligible Dependants. Non-residents filing under S. 217 may be eligible for some or all of the amount. Other non-residents filing under S. 216 or S. 216.1 may not claim the Amount for Eligible Dependants.   Subscribe to EverGreen Explanatory Notes for more information. Or attend The Knowledge Bureau's November Year End Tax Planning Workshop coming to a city near you November 14 to 21.

The status of federally regulated private pension plans has been a point of discussion for many people, as the large drop in equity markets has caused major funding deficiencies. Under current rules, the decline in market values would require many of the pension fund sponsors to make large contributions to these funds and this requirement could endanger the economic viability of those firms leading to job loss, or worse, bankruptcy. In a recent editorial in this publication, the problems faced by organizations who cannot meet pension funding requirements was discussed. The majority of Canadians are rightly concerned about the current market conditions and how this will impact their financial futures, in particular as it relates to their jobs, and the stability of their retirement savings. In light of these concerns, the Federal Government has proposed to extend the solvency funding payment schedule to 10 years from the current time, for solvency deficiencies determined as of December 31, 2008. These extensions will be subject to certain conditions: both members and retirees would need to agree to the extended schedule alternatively, the difference between the 5- and 10-year payment schedule would need to be secured by a letter of credit. Either one of these two conditions would need to be met by December 31, 2009 for the extension to be granted. If neither were secured by the end of 2009, the plan would be required to fund the deficiency over the following 5 years. Note that the structure and requirements for solvency funding will be the subject of consultations in 2009 for the purpose of reviewing the Pension Benefits Standards Act, 1985 and the changes required to the funding framework required by law to address the issues facing defined benefit and defined contribution pensions. FOR THE MOST UP-TO-DATE FISCAL AND TAX NEWS AFFECTING CANADIANS AND THEIR ADVISORS ENROL IN EVERGREEN EXPLANATORY NOTES.