Tax Tip: The More Obscure Medical Expenses

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

There is no doubt where readers of Knowledge Bureau Report stand concerning July's poll question,  "Should governments have regulated exorbitant credit card rates instead of mortgage amortization periods?î Of the 72 readers who responded, 83% believe governments should regulate the interest rates charged by credit card companies. In fact, regardless of how readers voted, they are in agreement on one thing: interest rates on credit cards ó be it 20% for bank credit cards or 30% for department store credit cards ó are way too high. And the economic reality is very few people can afford to pay their balances in full each month so the high-interest debt piles up. They are paying interest on interest. Where readers differ is on the cure. The "Noî vote thinks credit card debt is the individual's responsibility; if you don't have it, don't spend it. Consider Rosalind's comment: "Credit cards are intended to provide short-term credit. One should pay off credit cards every month, thus avoiding paying any interest charges at all. If you can't do that, don't make the purchase.î Some members of the "Yesî contingent put forward another solution: they suggest credit card rates bear some relationship to prime. As one reader pointed out: "They bear no correlation to prevailing rates in the marketplace!î As Ken White commented: "I know it's not that simple but I feel credit card rates should at least fluctuate with prime. "I have always felt that by dropping credit card rates,î White adds, "you will put cash into consumer's hands and increase their net worth within 30 days of doing so.î Other readers blame the easy availability of credit. Many Canadians have multiple cards and credit-card issuers are happy to raise the credit limits on those cards, taking the enthusiastic consumer further into debt. Then, in this environment of low-interest rates and high house prices, many consumers are consolidating their credit card debt in lower-cost lines of credit or mortgages. "It is too easy to get large credit card limits,î wrote a reader, "and have several credit cards. With the interest rates so high a lot of people take their cards up to the limit and then find they will never pay them off without getting a loan, consolidating with their mortgage.î Added Darren: "The problem goes far beyond mortgages and credit cards. It occurs when the individual rebuilds a debt load on top of existing 'consolidated' debt loads. What needs to be regulated is how the lenders of money can extend people too far. We consolidate, then keep the credit cards and line of credit 'just in case' and reconsolidate again. The serious issue will come when there is no more room for consolidation.îOne solution, suggested by yet another reader: set at a maximum credit card limit of 20% of the card holder's annual net income. There were certainly a few readers who were vocal about the government shortening the amortization periods. Granted, over the term of the mortgage, the mortgagee pays less interest and saves more. But in the short term, mortgage payments are higher with mortgages with 25-year amortization periods than with 30-year periods. "It is much more difficult to purchase a home without going into debt,î wrote Rosalind, "and with the cost of housing as high as it is, many families will find it harder than ever to afford the increased mortgage payment which results from the shortened amortization period.î Added another reader: "Longer amortization periods can definitely work in favour of a mortgage holder if he or she knows how to take advantage of the ability to continue to make the payments they can afford, and by doing so, pay down principal much quicker.î Knowledge Bureau Report would like to thank readers for responding to July's poll question and sharing their comments. August's poll asks: "Should Canadiansí retirement plans include leaving a legacy for their children?î We look forward to your comments. Additional Educational Resource: Debt and Cash Flow Management  

On July 25, the Department of Finance released draft legislation that aims to curtail the use of "stapledî securities in Specified Investment Flow-Through entities (SIFTs) and real estate investment trusts (REITs), thereby increasing the fairness of Canada's tax system. As Finance explains in its Explanatory Notes  to the legislative proposal, "a stapled security involves two or more separate securities that are ëstapled' together such that the securities are not freely transferable independently of each other.î Stapled securities allow SIFTs and REITs to take deductions that "frustrateî the policy objectives of Canada's Income Tax Act. The federal proposal, which was deemed to have come into effect on July 20, 2012, introduces two new sections to the Act that operate in conjunction with one another: section 12.6 and section 18.3. The latter introduces a regime that denies deductions for amounts that are paid or payable in respect of certain types of stapled securities. To avoid the application of section 18.3, an entity ó such as a SIFT or REIT ó must "un-stapleî its affected securities. The effect of section 12.6 is to disregard any un-stapling that is not permanent and irrevocable, explains the notes. When the federal government announced the Tax Fairness Plan in 2007, it indicated that, if structures or transactions that were clearly devised to frustrate policy objectives emerged, they would be subject to change. These amendments are meant to close some loopholes that clever tax planners have been using and, thus, the rules retain their tax fairness initiative. The proposed amendments to the SIFT rules are technical in nature, but not extremely complicated. Sometimes a corporation or a SIFT (alone or with a subsidiary) would issue equity and debt instruments, at least one of which was publicly traded, that are stapled together. Notwithstanding the general rules applicable to the deductibility of interest, the proposed amendments provide that interest that is paid or payable on the debt portion of such a stapled security will not be deductible in computing the income of the payer for income tax purposes. Arrangements that involve shares issued by publicly traded corporations, the distributions of which are treated as dividends for tax purposes, are not intended to be affected by this recent amendment. The amendments apply to the stapled securities of a trust, corporation or partnership, if one or more of the stapled securities is listed or traded on a stock exchange or other public market and any of the following applies: the stapled securities are both issued by the entity, one of the stapled securities is issued by the entity, and the other by a subsidiary of the entity, or one of the stapled securities is issued by a REIT or the subsidiary of a REIT. Overall, the amendments have placed SIFTs in a similar tax situation as public corporations. Prior to these amendments SIFTs were largely treated the same way individual taxpayers were ó having to pay tax instalments, for example. From now on, however, SIFTs will be required to estimate tax instalments and pay them on a monthly basis, just like corporations. In the backgrounder information relating to this news release the government stated that it "will continue to monitor Canadian tax planning for structures and transactions that might frustrate the policy objectives of the Tax Fairness Plan and will, as necessary, take appropriate corrective action.î Greer Jacks is updating jurisprudence in the EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.

The Canadian Securities Administrators (CSA), the umbrella group for provincial securities commissions, recently submitted a proposal for review that would require all mutual fund dealerships to provide an annual summary to each client of the fees and commissions paid to the dealer and to the client's advisor as a result of the client's account. The goal is clear and open disclosure ó and a better-informed client. For many years now, fee disclosure has been hotly debated and Canada has joined the discourse. In Australia and the United Kingdom, for example, imbedded trailing commissions in mutual funds have been banned or significantly modified. But, although the CSA proposal to disclose these fees appears practical in comparison, some advisors may take exception to the proposal. After all, in many businesses, the consumer is never privy to the profit margin or commissions paid to the salesperson. A classic example is a car dealership. While a consumer can negotiate the price of the car with the dealer, the consumer never really knows how much profit the dealer is making. Alternatively, when working with a real estate agent, it is clear from the start what the commission is likely to be should the agent sell your home for you. So, what are the implications of the CSA proposal? Regardless of your viewpoint, there are some interesting implications: ï The 80/ 20 rule. I fully expect that fee disclosure will be a non-issue for the vast majority of investors. The reason for this is simple: small to mid-sized investors are being subsidized by the largest investors. For example, Investment Executive research found that the average assets invested per family household was $190,000. Assuming that was invested in mutual funds, for which the advisor received a 1% trailing commission from the fund company, the account brought in $1,900, of which the advisor typically receives $1,425 or 75% with the rest going to the dealer. Although this is the average, 85% of the assets overseen by the advisors surveyed were in accounts of less than $500,000 and only 15% of their client accounts held investments greater than $500,000. Applying the 1% commission, the gross fee on a $500,000 account is $5,000, of which about $3,750 goes to the advisor and $1,250 goes to the dealer. But with 85% of accounts less than $500,000, the advisor would be making considerably less than $3,750. So, is the fee associated with the client reasonable given the size of the investment account? The answer to this question will be different for each client, but looking at this fee in the context of a professional, hourly wage, the fees could be increasingly difficult to justify the larger the client account. For example, based on a professional hourly fee of $300 an hour, $3,750 represents 12 hours of work on this client's file each and every year. Can this amount of time be easily demonstrated to the client, particularly in a sideways- or downward-moving market? In this same survey, 32% of the advisors' clients had investments valuing less than $100,000. This means that the advisor would receive $750 or less a year for each account. To go back to my original point, it appears larger client accounts have been subsidizing the smallest client accounts. The good old 80/20 rule is alive and well in the financial services business with the largest 20% of clients providing 80% or more of the advisor's income. But what happens to the advisor's business model when the largest 20% no longer feel comfortable with the fees they are paying? ï The impact on financial planning services. Today, many advisors provide financial plans to clients free of charge.  Although this appears to be of great value to the consumer, in fact, it can be argued that it causes greater confusion. The "freeî financial plan is really being subsidized by the trailing commissions paid by the fund company to the advisor for money invested on the client's behalf. So, what is the real cost of providing professional financial advice? Is the cost of this financial plan a couple of hundred dollars or is the real cost several thousand dollars? Based on the figures above, if the client has more to invest, then it would seem that this client is paying more for the same financial plan than the investor with less money to invest. You could also argue that, by providing a "freeî financial plan, financial services firms are placing less value on their own advice. Whether a plan costs $500 or $5,000, this value is something that should be easily demonstrated to the client. ï The impact on the discount brokerages. Some discount brokerage firms on occasion allow clients to purchase only mutual funds or exchange-traded funds that have imbedded trailing commissions, those same commissions the CSA wants dealers and advisors to disclose. As a result, the client pays a higher annual management expense ratio (MER) than he or she would if the client had access to a low-cost, "f-classî mutual fund. With an f-class unit, the client escapes the imbedded mutual fund commission that, in this case, is flowing to the discount brokerage to subsidize the cost of trading. By disclosing these fees, one outcome may be increased trading costs at discount brokerage firms. In other words, we may very well see once and for all what the real cost of transacting in this environment is. Over the past 10 years, I have been associated with Evelyn Jacks and the Knowledge Bureau and have been involved in the development of several self-study courses. The main theme of each course is the "systemizationî of important processes that will add hundreds of thousands of dollars of wealth to clients over time. In other words, the actual rate of return on the portfolio pales in comparison to the benefits of structuring your own or your clients' affairs on a tax-efficient basis. By paying attention to the "eroders of wealth,î by layering income tax-efficiently, by following important rules and principles year in and year out, and by focusing equally on the four elements of Real Wealth (accumulation, growth, preservation and transition), you can build an amazing amount of wealth over time with considerably less risk. For those clients with more than $500,000 to invest, these services and strategies will mean the difference between success and failure. As I have implemented these strategies with my clients in my practice, I have found that clients simply do not need to take as much portfolio risk as they do today. While the proposed disclosure of imbedded commissions may be a short-term disruption to some advisors and a non-event to the majority of investors, the good news is that this change may also trigger a revolution in financial-advice giving. As the saying goes, "Be wary of discounted advice when i) buying a parachute, ii) getting your brakes fixed and iii) receiving financial advice.î Douglas Nelson, CFP, CLU, MFA is the author of Master Your Retirement: How to fulfill your dreams with peace of mind. A financial planner in Winnipeg, Nelson specializes in Real Wealth Managementô in the areas of retirement income planning, business succession and portfolio construction.

Summer rocks in Manitoba: 100,000 glistening, fresh-water lakes; big music festivals under big, blue skies; and a hot sun that shines until well past nine o'clock at night. It's a time to count your blessings ó and your savings. After all, way too soon your winter escape will become a priority. But if you plan carefully, your tax refund can be the impetus for future fun. Here are some summer tax tips to consider: Summer Tip #1: Contribute your tax refund to your TFSA. A Tax-Free Savings Account is a great place to park your money because the income you earn in your TFSA is tax-free. When the time comes, you simply withdraw your accumulated savings; you pay no tax penalty, as you would with an RRSP. So, when choosing investments for your TFSA, think growth. Remember: the more you earn, the bigger your TFSA withdrawal and, because withdrawals open a like amount of contribution room, the more "re-contributionî room you will have in your TFSA. Now, go ahead, can scan the sales for your winter vacation. Summer Tip #2: Exercise outside. Now is a good time to change personal and financial habits. Give up your gym membership for the summer (especially if you never go) and exercise outdoors instead. Come winter, you can re-establish your gym membership, but in the meantime, drop those savings into your TFSA. Rethinking the need to spend and developing frugal habits allows you to leverage your savings in tax-efficient investments. That will put you on the fast track to building real wealth. Summer Tip #3: Preserve the sunshine and rethink Christmas. Lots of families veer off the financial track because they overspend at Christmas. This year, give the gift of summer memories. Take lots of photos on your vacation; then, make them tangible. In an electronic world, an emailed summer photo brings smiles at Christmas, especially when it captures fun family memories. Now, cross Christmas gift-giving off your list, calculate your savings over last year's spend and put the difference into your TFSA or RRSP. Summer Tip #4: Bottle the "yum.î You may need to ask the elders how to do it, but this year, pick, chop, bottle and freeze summer's fabulous bounty. Image pulling plump, sweet blueberries out of the freezer in winter! You can also wrap up your home-made jams and chutneys for sharing. Then, cross birthday presents off your list, calculate the savings and drop the cash into your TFSA or RRSP. You get the picture! Summer Tip #5: Reduce your tax withholdings. Summer savings can help you increase your RRSP contribution. If you are in line for a larger tax deduction in 2012, ask your employer to reduce your withholding taxes (Knowledge Bureau Report, July 4). Your take-home pay will increase, allowing you to reduce consumer debt and stay on track to meet investment goals. It's a great way to leverage both time and money. It's Your Money. Your Life. Do something different this year: give yourself the gift of summer fun, yum and financial freedom. By preserving your bounty in a variety of old-fashioned ways, including tax-savvy savings, you will extend summer's joy and unlock your potential to break up those long winter months. Evelyn Jacks is president of Knowledge Bureau, a virtual campus that makes financial education easy and convenient all summer long. Visit www.knowledgebureau.com for books and courses.  

Suppose you are fired without cause and receive a severance package as per your contract. Are you obliged to find another job as quickly as possible and forego severance payments in order to reduce costs for your former employer? In a somewhat surprising, albeit unanimous decision, the Ontario Court of Appeal held that there is no such responsibility. The recent decision ó Bowes v Goss Power Products Ltd (2012) ó has held that an employee who is fired without cause and is contractually entitled to a fixed severance is not required to find another job in order to mitigate his or her employer's losses ó unless the employment contract specifically says so. Absent clear language, then, an employer cannot deduct from the fired employee's severance pay the income he or she has earned in other employment during the notice period. As you might imagine, Bowes has shaken the employment environment in Canada. Usually, under common law, contractual agreements entail an obligation to mitigate any damages arising from some facet of non-performance, even if it is the fault of the other side. Say, for example, you own a butcher shop and you order 15 refrigeration units from company X Ltd. You and X agree that X will deliver the units to your shop door on Monday morning at 10 a.m., before you receive a big shipment of meat later that day. Unfortunately, X has a problem and, on Thursday, phones to tell you it won't be making next Monday's delivery. Under the law, any losses ófrom meat being unrefrigerated and going bad to lost sales ó can essentially be billed to company X, but you have to mitigate your losses. When X calls on Thursday, you can't just sit in your office and throw your hands in the air boiling with rage. You must contact another supplier and try to lessen the damages however reasonably possible. Now, Bowes demonstrates how the common law of contract has evolved in the employment sphere. Increased social consciousness, human rights and workers' rights movements, and legislation have all contributed to judgments in the past two decades that attempt to level the playing field in the employment-contract arena. This should be heralded, as employees are certainly more valuable and respectable than appliances, but rulings such as these can be tough to swallow, affecting both employers and the common law system. Legislative changes can amend this ruling at any time, however. The genesis of this case involved a civil suit that Bowes filed against his former employer, Goss Power. The senior sales executive was fired from his job without cause and his contract stipulated six-months severance. Three weeks later Bowes found a new job with similar pay. For that reason, Goss Power refused to pay Bowes his severance. The lower court judge found in favour of Goss Power, citing Graham v Marleau, a case that most considered "settled lawî on this subject. But the Court of Appeal disagreed. It reasoned that, when an employment agreement contains a stipulated entitlement on termination without cause, the amount in question is either liquidated damages or a contractual sum. "Either way,î said Justice Warren Winkler, "mitigation is irrelevant.î Employers across Canada are taking note of this decision. But they should proceed carefully: a mitigation clause cannot simply be added to an existing contract without the employee's consent and new consideration (payment). But you can bet amendments to future contract templates are underway across the country. Greer Jacks is updating jurisprudence in the EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.  

When the federal government tightened the rules on mortgage lending (Knowledge Bureau Report, June 27)  it was meant to slow Canadians in their accumulation of mortgage debt. But credit card debt is also a part of consumers' heavy debt load and the feds have not addressed credit card debt since May 2009. As Knowledge Bureau Report asks in its July poll, "Should governments have regulated exorbitant credit card rates instead of mortgage amortization periods?î Certainly mortgage debt deserves consideration. This era of rock-bottom interest rates has made home buying very attractive, leading to overextended households and overheated housing markets in some parts of Canada. It has provoked concern from both the Organization for Economic Co-operation and Development (OECD) in its Economic Survey of Canada (Knowledge Bureau Report, June 20)  and the Bank of Canada in its June Financial System Review (FSR)  that Canadian households are vulnerable to economic shocks, such as higher interest rates. Stated the FSR: "Both the share of indebted households with a debt-service ratio equal to or higher than 40% and the proportion of debt owed by these households have remained above their 2002ñ11 averages, despite record-low interest rates.î It seems mortgage debt and consumer debt (which includes credit card debt) go hand in hand. According to a Statistics Canada article entitled "Household Debt in Canada,î by Raj K. Chawla and Sharanjit Uppal, in 2009, households with mortgages accounted for 39% of the population but 58% of debtors. "Debt was concentrated among mortgagees,î reported the authors, "who held 82% of outstanding debt (averaging $161,200 per debtor). "The proportion of debtors with an outstanding credit card balance was 48%; 41% had an outstanding line of credit; 32% had other loans (e.g., personal loans); 18% had student loans; 3% had other debts (e.g., unpaid bills); and less than 1% had payday loans,î the article reported. So the feds have every reason to be concerned about mortgage debt. But there are other considerations. As the FSR points out, in the past six months or so, the rate of debt accumulation in Canada has slowed and credit card debt particularly. Total household debt grew by slightly more than 4% in June vs 6%-plus growth in December. Residential mortgage growth declined to 6% from 8% in December and consumer debt sank to about 1% from almost 4% in that time period. One explanation for the latter decline is that credit card holders are transferring their very high-priced debt to their very cheap mortgages. So the federal government may feel there is no need to interfere in credit card rates ó or it has no business interfering. The changes to the mortgage requirements, after all, were on new government-backed insured mortgages, which gives the government a vested interest. When it comes to credit cards, the feds have taken a more "consumer bewareî approach. In May 2009, Finance Minister Jim Flaherty introduced a number of measures meant to educate consumers on the dangers of credit cards and restrict the opportunities of card providers to take advantage of consumers. An amendment to the Cost of Borrowing Regulations, for example, requires providers to produce a summary box that sets key features, such as interest rates and fees. You can go to the Financial Consumer Agency of Canada  for more information. So should the feds have stepped up and curtailed interest rates on credit cards? Knowledge Bureau Report would like to hear your perspective. Please go to our online poll and give us your opinion.   Additional Education Resources: Debt and Cash Flow Management and The One Financial Habit  book.