Tax Tip: The More Obscure Medical Expenses

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

Meet the Erosion Twins, Inflation and Taxes. Inflation has been out of the country for a while; Taxes is a homebody. They have a voracious appetite, respectively, for capital and income, and they need your support. Take Inflation for example. He's a growing boy. A June 19, 2008 news release from Statistics Canada confirmed that consumer prices rose 2.2% in May compared with May 2007, up from the 1.7% increase reported in April. According to the release, the 0.5 percentage point acceleration in the all-items Consumer Price Index (CPI) was the sharpest since September 2007. The main culprit? Over the past year, crude oil prices almost doubled. As a result, gasoline prices increased substantially across the country, rising the most in Quebec and Ontario. Higher mortgage interest costs were also a contributing factor to the rise in consumer prices in May; however, new housing prices continued to exert more upward pressure on this index than mortgage interest rates themselves. Canadians paid 1.9% more in May for store-bought food items compared with the same month last year, up from the 0.9% increase posted in April. Those households with a sweet tooth were most heavily burdened: prices for bakery products increased 13.2%, the fastest 12-month rise since October 1981. Inflation and Taxes together are big dependants in any household. Consider this scenario, as computed by The Knowledge Bureau's Retirement Savings Planner, (you can try a free demo at www.knowledgebureau.com/evergreen) Savings: $1,000 invested each year for 30 years at an average 5% return $69,761 Taxes: What's left after an average effective tax rate of 30% per year $38,513 Inflation: What's left after an average inflation rate of 2% per year $29,497 The Erosion Twins have been expensive. . .together they've eaten $40,264 of savings in a generation!

By now, most Canadians have achieved tax freedom ó for tax year 2007, at least ó and are well on their way to working for themselves now. Think about it. .. You've come through the March 15 quarterly income tax instalment, the April 30 tax filing deadline, the June 15 instalment and small business filing deadline, your corporate tax filing deadline and property tax payment deadline too. You've even paid up all your GST instalments, not to mention renewals of provincial auto, property and health insurance! And, you've probably received your tax refund, or are about to. For most Canadians this is the most significant financial event of the year ó an average of $1400 according to a recent news release from CRA. Fortunately there are so many great ways to leverage those interest-free, tax eroded dollars with a multitude of new tax-assisted savings plans to invest your tax refund into . . . The RRSP contribution maximum has increased for 2008: save up to 18% of your earned income to a maximum of $111,111 or $20,000 this year, less your Pension Adjustment amounts. Check your Notice of Assessment to determine your exact RRSP contribution room. You can start saving now to sock away up to $5000 per family member each year in the new TFSA ó the Tax-Free Savings Account. Your eligibility to contribute to the plan, starting in 2009 depends on whether or not you have filed a tax return. . .so tell the delinquents in your family to do so quickly. You can invest more into your child's RESP ó Registered Education Savings Plan: there is no annual limit and the lifetime limit has increased, too, to $50,000 The new RDSP ó Registered Disability Savings Plan, which is expected to be available by at least some financial institutions will provide a government-assisted asset-back savings plan for the vulnerable in our society. . .a great way to get involved in community assistance even if there is no disabled person in your family. What's the bad news? Let's face it, governments are still in your pocket. . .you'll see it through various increasing user fees, like often cost-prohibitive provincial and federal park entrance passes, or fuel taxes which add to high vacation travel costs; and increasing fees on utilities needed to run home air conditioners or heat the family pool! It's all very expensive. . .enough to tempt some to take a little extra comfort nipping from that wine cellar. . .even if the taxes on alcohol consumption make that cost prohibitive, too! Oh well, try to enjoy your after-tax dollar in the summer sun. . .and multiply its effectiveness by taking advantage of all the tax assistance you can get, because the Erosion Twins. . .Taxes and Inflation, clearly have an increasing appetite for your money. Next Time: Meet the Erosion Twins

With tax freedom day behind us many Canadians start working for themselves and their communities in July. CRA has issued a new guide for charities: RC 206: Basic Guidelines for Maintainng Charitable Registration. In addition, many taxpayers are interested in speaking to their advisors on the subject well before the end of the year. Following is an excerpt from the Tax Efficient Retirement Income Planning Course, dealing with this issue: Facts on Canadian Philanthorpy 5.7 million Canadians contributed $6.9 billion to charitable organizations in 2006 Statistics Canada reported that the total market value of stock held by Canadians at the end of 2006 was $1.4 trillion, an increase of $100 billion over the previous year Approximately one-half of that market value represents unrealized capital gains, suggesting that the opportunity for many shareholders to donate stock and save tax is very significant TD Economics estimates that the market value of stock held by Canadians in 10 years time could exceed $3 trillion, with as much as two-thirds of that in unrealized gains (tdeconomics.com). Demographic Trends Potential for philanthropy is immense: In Canada, between $15 and $20 trillion is expected to shift from parents to their children between now and middle of the century Baby boom generation is having significant impact on the world of charitable giving: not content to simply write a cheque and move on, donors expect transparency and accountability - they want to be involved. Many charities are revisiting the way they operate in order to attract these younger philanthropists General Rules At some point during the year many Canadians give to charities. Those gifts, usually of money, will be claimed on schedule 9 of the tax return. Unclaimed donations from the previous five years may also be claimed in the current year. Donations made through payroll deductions should also be claimed. These will show on the T4 slip. Generally you can claim all or part of your total donations, up to a limit of 75 percent of your net income reported on line 236. For the year a person dies and the year immediately prior year, this limit is 100 percent of the person's net income. It is generally most beneficial to claim donations made by both spouses together on one tax return. This is because the first $200 of donations is eligible for only a 15 percent tax credit, while any additional donations attract a tax credit of 29 percent. Combining donations will ensure the couple is subjected to the 15 percent limit on the first $200 only once, not twice. Donations made during the year do not have to be claimed on that years' return and may be carried forward to a subsequent year, up to five years. This may be of benefit, if, for example, you already have sufficient non-refundable tax credits to completely eliminate taxes payable. Only donations made to Canadian registered charities and other qualified donees may be claimed. A registered charity will show its charity registration number on the receipt. The slip must also indicate the Web address of the CRA. Click for more information and to registered in the Retirement Income Specialist program.

Several changes occur on July 1 for vigilant taxpayers and payroll departments: The Federal TD1 Personal Tax Credit Return has been updated to include the new deduction rates for living in a prescribed northern zone, increased to $8.25 per day (single) and $16.50 per day (living with a dependant). Please see the revised TD1 form to adjust source deductions for persons meeting this criteria. Provincial Personal Tax Credits. Please note that increased personal tax credits and income levels have been tabled for Alberta and Saskatchewan for the Disability Tax Credit, Caregiver Amount and Amount for infirm dependant over 18. Check out the following link for the revised TD1 forms effective July 1: (AB and SK). Also, effective July 1, BC and NL have reduced their provincal tax rates. Check out the details at the following links: BC Budget 2008 NL Budget 2008 With an average refund of $1,400 last year, many Canadians overpay their taxes every month, at the expense of savings in tax deferred vehicles like RRSPs or non-registered accounts. Assuming 4.5% interest rates, this costs Canadians plenty over an average working life of 40 years. Consider the following, calculated on the assumption an average refund of $1,400 is reinvested each year for 40 years: Lost savings in RRSP: $208,000 (with re-investing additional refunds @ 35% MTR from contributions) Lost savings in non-registered account: $106,000 (after paying tax on earnings @ 35% MTR) Lost non-deductible interest savings on an average principal residence mortgage (6% rate) on which $1,400 was invested each year for 20 years: $37,000

  Contributions to an RRSP by an employee can be made in two ways. He or she can fund the RRSP contribution from the after-tax take-home pay he or she receives. In this case, the employer has no involvement in the amount the employee contributes and the contribution has no effect on the employer's obligation to withhold income tax from the employee's net pay.  It is not uncommon, however, for the employer to make the RRSP contribution directly to the employee's RRSP on his or her behalf. The employer may have established a group RRSP for its employees collectively, for example, or the employee may have directed the employer to withhold and remit a portion of the employee's wages directly to an RRSP. Where the employer funds the RRSP contribution directly, the employer can take the amount of the contribution into account in determining the amount of income tax to be withheld from the employee's net pay. In this event, however, the CRA requires that the employer have "reasonable grounds" to believe that the RRSP contribution will be deductible to the employee involved (remember that RRSP deduction room is based on the employee's overall earned income, not just employment income.) CRA suggests that an employer will have reasonable grounds where the employee has provided an assurance or, better yet, a copy of his or her RRSP deduction limit statement, which accompanies each year's Notice of Assessment. The RRSP contribution is deducted from net pay otherwise determined in the same way that union dues and employee pension plan contributions are. Excerpted from Advanced Payroll for Professional Bookkeepers, one of the courses that comprise the DFA, Certified Bookkeeping Specialist designation program.

As with other employees, drivers must meet all the following criteria in order to claim travel expenses: They must be normally required to work away from your employerís place of business or in different places. Under their contract of employment, they must be required to pay their own travelling expenses. They must not receive a non-taxable allowance for travelling expenses. They must have a copy of Form T2200, Declaration of Conditions of Employment, completed and signed by their employer. In addition, in order to claim food and beverage expenses they must be away for at least 12 consecutive hours from the municipality and the metropolitan area where they normally report for work (home terminal). Generally the claim for food and beverage expenses is limited to 50% of the actual amount spent. Claiming Using the Simplified Method Drivers who work for employers who are in the business of transporting goods or passengere may use form TL2 Claim for Meals and Lodging Expenses and my use the simplified method for calculating their food and beverage expenses. Employees whose main job function is the transport of goods or passengers may also claim using the simplified method even if their employer is not in the business of transporting goods or passengers, so long as they meet the criteria listed above. Under the simplified method, employees are not required to claim their actual expenses but may, instead, claim a fixed amount per meal. For 2007, the fixed amount was $17 per meal. The employee is still required to keep a log book which details the travel and meals purchased. Alternatively, the employee may claim for the actual amount spent (detailed method) if they maintain the receipts for meals to back up their claim. Under either the simplified or detailed method, there are limits on the maximum numbers of meals that may be claimed. CRA will allow a claim for one meal after every four hours starting at the time of departure. A maximum of three meals per 24-hour period (again starting at departure time) may be claimed. Where the employee is normally required to be away from his or her home terminal but is sometimes scheduled for a trip lasting 10 hours or less, the maximum claim allowed is for one meal. Employees regularly scheduled on trips lasting 10 hours or less do not meet the criteria listed above for claiming meals. Alternatively, members of work crews, who purchase groceries and prepare their own meals (either individually or as a crew) may claim using the batching method, which allows a maximum claim of $34 per day. With the exception of long-haul drivers (see below), the calculated claim for meals (under any of the three methods) is multiplied by 50% to calculate the allowable deduction. Special Rules for Long-haul Truck Drivers A long-haul truck driver is an employee whose main duty of employment is the transportation of goods by way of driving a long-haul truck. A long-haul truck is a truck or tractor that is designed for, and primarily used for, hauling freight, and has a gross vehicle weight rating of more than 11,788 kg. For trips after March 18, 2007, long-haul drivers on eligible runs are allowed to deduct 60% of their meal expenses (rather than the 50% limit for other claims). An eligible run for this claim is a trip of at least 160 km from the home terminal and that requires the driver to be away from the home terminal for at least 24 hours. Thus, a long-haul truck driver that is scheduled on a shorter run is not allowed the additional 10% claim. The 60% limitation will be raised by 5% each year until 2011 when it will be capped at 80%.