Tax Tip: The More Obscure Medical Expenses

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

Turns out, mom was right. Taking time to choose the right mate has huge benefits, not the least of which are financial. Statistics Canada research tells us that women who have enduring relationships are much better off in old age than divorced and even widowed women. Its June study should be required reading in all high schools. In "Impact of widowhood and divorce on income replacement among seniors, 1983 to 2007î StatsCan looked at Canadians who became widowed or divorced later in life and remained so. Using data from its Longitudinal Administrative Databank, StatsCan compared the family income of married people at ages 54 to 56 with the family income of always married, widowed, or divorced or separated people at age 78 to 80. These comparisons took into account changes in family size. The first thing to note: for men, separation and divorce had little effect on income maintenance in old age. Widowhood, in fact, increased their financial resources, largely because they no longer shared family income. But for married women, the story was different. Here's what we learned: If you remained married at age 78 to 80, statistically you had a median family income that was 83% of your family income at age 54 to 56. If you became a widow after the age of 55, your income at age 78 to 80 was 79% of earlier income. But if you became divorced or separated in your senior years, you had only 73% of the family income you had in your mid-50s. That is 10 percentage points less than the woman who was still married and living with her husband at the age of 78 to 80. The impact is felt even more among women who married wealthy men with lots of pension and investment income. Amongst the 20% of women at the top of the family-income distribution range, those in their mid-50s had the best income security 25 years later if they remained married; they lived on 74% of the income they had in their mid-50s. But if they got divorced, their median family income dropped to 53% of what it was. If they outlived their husbands, the replacement income ratio was 65%. Presumably, however, if you were in the top 20% of income, that 65% represented more income than someone in the lower income ranges. The issue for these women is access to their husbands' pension and investment assets after the relationships have ended. Seeking professional assistance before that event and planning for tax-efficient transfers is probably a good idea. As for those at the bottom of the income scale, widowhood and divorce didn't have a negative effect. Thanks to Canada's public pension system, low-income women all had higher incomes in their late 70s than they did in their mid-50s. It's Your Money. Your Life. This could change, of course, as women's participation in the workplace continues to evolve. But it doesn't alter the lesson. Couples who stay together and share their pensions and investments are financially better off. You cannot always anticipate divorce or loss of a spouse, but you should always be prepared. Shore up your own pensions and investments so, if you are alone at 79 to 80, you can have the kind of retirement you anticipated while together with your spouse. And be prepared to look after yourself in case of disability. Evelyn Jacks is president of Knowledge Bureau, best-selling author of close to 50 tax- and wealth-planning books and keynote speaker at the Distinguished Advisor Conference in Naples, Florida, Nov 11 to 14.  

The German Tax Office (Finanzamt Neubrandenburg RiA) is giving Canadian residents who receive German pensions some relief from filing German income tax returns. To speed up the process, Canadian residents no longer need to file tax returns to Germany. Instead, the German Tax Office will send you an assessment. Effective Jan. 1, 2005, Germany changed its law on taxation of pensions, making social security pensions received from Germany taxable in Germany. (Knowledge Bureau Report, Dec. 28, 2010.) That meant Canadian residents who receive German social security pensions had to file a German tax return to determine their tax liabilities. As the Canada Revenue Agency (CRA) explains, only a portion of the pension received is taxable in Germany. (The CRA website provides guidance on how this is calculated.)  As a result of this change, Germany issued "requests to fileî to Canadian residents who received such pensions in the 2005 to 2009 tax years. Those request proved too much for many older pensioners. So, the German Tax Office changed its approach. It now automatically sends assessment for taxes owing each year alleviating the need to file a German tax return. This year, Germany is assessing only the tax years 2005 and 2006; next year, it will assess the years 2007 to 2011. In June, the German Tax Office began sending reply letters (Antwort) to all pension recipients whom it had not yet reached. Should you receive this letter, there is no need to do anything. Usually, about one week later, the official assessment notice (Bescheid) follows. One you receive the assessment notice, you have about two months to pay the required taxes. After you paid your taxes to Germany, you will need to file a T-1 Adjustment (Foreign Tax Credit) with the CRA in order to get back the part that has been double taxed. Article 18 of the Taxation Agreement states that the country paying the pension has first right to taxation. Article 23 states that if you live in a country that also taxes the German pension, that country has to refund via the Foreign Tax Credit any double taxation amounts. If your non-German income is below a pre-determined limit, you can file an objection. As a result, you will be evaluated as "unrestricted.î If approved, you may qualify for paying a lower tax or no taxes at all. Quite often if you receive government supplements, you may qualify for the unrestricted tax category. Only for the unrestricted category do you submit a Declaration with the proper documentation every year. It is important to know that the German Tax Office cannot apply an automatic deduction from your pension. If this is something you would like, then contact the Federal Ministry of Finance in Germany requesting the law to be changed to allow for such an option. Siegfried Merten, MFA, is the head of Merten Financial Inc.,  a tax preparation and financial planning practice in St. Catharines, Ont. He is fluent in English and German and you can reach him at mertenfinancial@cogeco.net.   Additional Educational Resource: EverGreen Explanatory Notes  

On Aug. 11, the federal government pre-published its first package of proposed regulations for the Pooled Registered Pension Plan (PRPP) Act, opening a 30-day public comment period prior to final consideration. A second package of regulations under the PRPP Act will follow at the earliest opportunity, the Department of Finance promises. This first package of proposed regulations addresses the following provisions: ï the licensing conditions for a potential administrator of a PRPP; ï the management and investment of funds in members' accounts; ï details with respect to the investment options offered to members; ï criteria against which the requirement to provide low-cost PRPPs can be assessed; ï conditions under which a PRPP member is allowed to set his or her contribution rate to 0%; and ï information that plan administrators must disclose to plan members, employers and the Superintendent of Financial Institutions. As the government's impact analysis statement explains: ï The Office of the Superintendent of Financial Institutions (OSFI) will be the licensing body for PRPP administrators. Any Canadian corporation may administer a PRPP providing it submits a five-year business plan, demonstrates that it has the financial resources and operational capacity required to administer a PRPP, demonstrates that the officers and directors are of good character, and provides any other information required by OSFI. Licensing fees will be levied on a cost-recovery basis. ï To provide a minimum level of protection for plan holders, the Regulations will curtail concentration risk by limiting the amount of assets an individual member can invest in any one entity or associated entities to a maximum of 10%; provide a quantitative limit on control of corporations (i.e. a maximum of 30% on voting rights to elect directors); and, limit administrators' investments in related parties. ï Administrators may provide plan members with a maximum of six investment options, including a default option, that represent a mix of risk and expected returns. If a plan member does not communication his or her choice within 60 days, the default option would automatically apply. ï A member may set his or her contribution rate to 0% at any time after 12 months from when he or she begins to contribute to a PRPP account. The rate can stay at 0% for between three months and five years. There will be no limit on the number of times that the contribution rate may be set to 0%. ï To facilitate transparency and comparability across PRPPs, industry standards relating to the disclosure of mutual funds and capital accumulation plans will apply to PRPPs, as appropriate. Administrators will provide information on a website and on the request of a member or employer, such as a description of each investment option, a statement of transfer options available to plan members, and a description of any fees, charges or other levies. A written annual statement will include information such as the investment option in which the member is invested in, account balance information, a summary of transactions and specific information related to the member's investment option. The second package of regulations will address the transfer of funds from a member's account, the manner and frequency of remittances, the form and content of notices, locking-in rules, variable payments, electronic communications, and other technical rules related to the implementation of the framework. PRPPs will be available across Canada once federal tax legislation is passed and the provinces implement their PRPP legislation.   Additional Resources: FREE TRIAL - Tax Efficient Retirement Income Planning, Master Your Retirement    

With Canada's economic growth a modest 2% and inflation about 2%, it is hard to grow new wealth in today's fragile world. One sure solution is keeping firm control of the costs that will erode your wealth. That means monitoring investment fees and limiting the amount of income taxes you pay, two things in an otherwise unpredictable environment that you can control. Let's talk about tax efficiencies first. Consider investing any new money in the order in which it will most boost your after-tax results, choosing the biggest booster first. For example, a contribution to an RRSP would take precedence over a contribution to a Tax-Free Savings Plan (TSFA). If you have taxable income, are age eligible and have RRSP contribution room, the RRSP will provide a win for you because of the tax savings it generates. Thanks to your ability to deduct the amount of your RRSP contribution from your taxable income, you will pay less income taxes ó and generate extra dollars for investing ó by the amount of your marginal tax rate. For example, if you are in a 30% marginal tax bracket, every $1,000 invested in the RRSP takes $300 off your income taxes. If you don't have RRSP contribution room or don't qualify to contribute to an RRSP, a TFSA is the next best choice because income earned in your TSFA account is not subject to taxes. However, TFSA contributions are not tax deductible the way RRSP contributions are and they are limited to $5,000 annually. You also need to be a resident of Canada to contribute. But, if you have available TFSA room, a TSFA is a great place to park savings and earn tax-free investment income. What's next in your tax-efficient investing plan, once you have topped up your RRSP and TFSA? Now, you should consider non-registered accounts and the tax implications of various types of investment returns. How much of your non-registered portfolio should be generating interest, dividends or capital gains to get the after-tax results you need? Given recent public pension reforms, you should also consider how long you intend to work. If you work past the age of 60, you can increase future income by continuing to contribute to the Canada Pension Plan. By July 2013, you'll also be able to postpone taking your Old Age Security for up to five years, thereby increasing pension benefits later. These are important opportunities that should be carefully considered when you are planning your retirement. Let's turn now to the fees you pay for having your money managed. How much do you pay each year to invest your money? Should you pay an investment-management fee based on a percentage of your capital, or a cost per transaction? Are there savings to be had? Depending on how much money you have invested, you can sometimes negotiate lower investment-management fees. And investment-management fees are tax-deductible, unlike the fees changed for mutual funds and transaction costs. Either way, you'll want to factor in exactly how much more of a return you will need over a defined period of time to offset the fees. Then, weigh the costs of the advice against the value of the advice. If the good advice received and the consistent process for sound decision-making helps you get better results, it will be worth it. It's Your Money. Your Life. When returns on investments are low and unpredictable, investors must manage risks more closely. The returns needed to cover the effects of inflation, taxes and fees must be part of your planning. Whether you invest on your own or within a collaborative professional team, be sure these factors are considered in constructing ó and reconstructing ó your investment portfolio. Evelyn Jacks is president of Knowledge Bureau, best-selling author of close to 50 tax- and wealth-planning books and keynote speaker at the Distinguished Advisor Conference in Naples, Florida, Nov 11 to 14.   Additional Educational Resources: FREE TRIAL - Elements of Real Wealth Management, Financial Recovery in a Fragile World Book.    

Recently released economic data suggest Canada is feeling the impact of the global financial turmoil with disappointing growth in gross domestic product (GDP), a widening trade deficit, shrinking employment and a cooling housing market. But in all those numbers, there may well be a silver lining. Consider Canada's trade deficit, for example. According to Statistics Canada, Canada's merchandise trade deficit widened to $1.8 billon in June from $954 million in May, the third consecutive monthly deficit. A slight increase in exports ó 0.2% to $39.1 billion ó was offset by a healthy 2.3% increase in imports, to $40.9 billion. The only sector making gains on the export side of the ledger was automotive products, up 13.9% to $6.3 billion in June as volumes increased 13.2%. So, where's the good news? Economists say import levels are indicative of the ongoing resilience of all-important domestic demand. As CIBC economist Peter Buchanan wrote in an Aug. 10 Economic Flash: "While [export levels] suggests weaker growth abroad is taking a toll on Canada's economic performance, the recent momentum of imports is a hopeful sign that domestic spending is still showing some signs of life.î Economists also like the 3.2% increase in imports of machinery and equipment ó to a record high of $11.2 billion. The optimists hope these numbers reflect increasing business investment that could improve Canada's competitiveness and pay dividends down the road. Wrote TD Bank economist Francis Fong in a Aug. 9 report: "Imports of machinery and equipment have now surpassed their prerecession peak and are at their highest level on record ó a sign that businesses in Canada are making good use of their superior financial position.î As the C.D. Howe Institute argues, business investment is a key driver of economic growth. In a report entitled From Living Well to Working Well: Raising Canada's performance in non-residential investment, authors Benjamin Dachis and William Robson compared gross non-residential capital spending per worker in Canada to the average among Organisation for Economic Co-operation and Development (OECD) member countries and the United States. In the early 2000s, they say, Canada lagged. From 2001 to 2005, for every $1 per worker invested across OECD countries, Canada invested 94¢; for every $1 per U.S. worker, Canada invested 79¢. "Since then, Canada's performance has improved,î report the authors. "From 2006 to 2010, our businesses invested 99¢ per worker for every $1 invested across the OECD, and 88¢ for each $1 invested by U.S. businesses. Preliminary 2011 data show Canadian businesses investing more per worker than the OECD average ó 102¢ per $1 across the group ó and maintaining the late 2000s average of 88¢ per $1 invested in the U.S.î Perhaps the most disheartening news has been the 30,000 jobs lost in July following mediocre gains in May and June, with unemployment rate rising 0.1 percentage points to 7.3%. Year over year, said StatsCan, employment increased a mere 0.8% or 139,000 jobs. There is a silver lining, however, as the composition of jobs shifted from part-time to more lucrative full-time positions. While Canada lost 51,600 part-time positions in July, it gained 21,300 full-time jobs. "That continues a trend that has seen Canada add 30,000 new jobs per month on average over the past six months,î wrote TD Bank economist Leslie Preston recently, "but lose an average of 8,000 part-time jobs.î Another bright spot was the 3.9% year-over-year gain in the average hourly wage rate for permanent work. "Wage growth has outpaced inflation for four months now,î said Preston, "a welcome development after lagging through much of last year.î On the housing front, StatsCan tells us the total value of building permits fell 2.5% to $6.8 billion in June, following a 7.1% increase in May. But the non-residential sector was behind the downturn, with contractors taking out $2.5 billion in permits, a decrease of 12.3%. In the residential sector, the value of permits rose 4.2% to $4.4 billion in June, a second, consecutive monthly increase. New home starts did slip to 208,500 units in July, from 222,100 units in June. But, as TD Economics reported, "Housing starts have seen some big swings over the past five months, but remain quite healthy nonetheless. Indeed, the three-month moving average is sitting at 216,200 units." The biggest area of concern is the "volatile multiples segment.î As for GDP, economists rue its lack of momentum. It edged up a mere 0.1% in May, after a slight 0.3% increase in April. According to StatsCan, the output of service industries rose 0.1% in May on the strength of retail trade and the finance and insurance sector. Goods production was unchanged in May as the increase in mining and oil and gas extraction was offset by declines in manufacturing and, to a lesser extent, construction. But it is still on the positive side and, for many countries, growth, no matter how small, still looks good. Bank of Montreal economist Mike Gregory noted in the Aug. 10 Focus, that Canada has become a safe haven. "Foreign investors,î he wrote, "purchased a record $24 billion (net) of Canadian fixed-income securities in May. There was strong demand for both bonds ó at $16.7 billion, the third highest on record ó and money market instruments ó at $7.3 billion, the second highest on record. In recent years, Canada has been perceived as a prime destination for fixed-income portfolio diversification. However, Mayís results symbolically marked the emergence of Canada as a destination for safe-haven flows as well.î   Additional Resources: Master Your Retirement, Financial Recovery in a Fragile World    

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