Tax Tip: The More Obscure Medical Expenses

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

There was a young man who was being trained by his father to take over a large clothing store. The father had emigrated from Europe after the war, and had started the business with only a pack of needles and a spool of thread. He walked his son through the large store which was stacked to the ceiling with bolts of cloth, dresses, suits, shoes, coats, boots, etc. "How do you keep track of inventory, Dad?" the young man asked. His father opened a drawer and took out a pack of needles and a spool of thread. "This is inventory, son," he said. "Everything else is profit." There may have been a time when a business required as little information as the father did in order to operate successfully, but that time has long since passed. Today even the smallest business requires timely information about a variety of the attributes of the business, if it is to succeed and thrive. It is the job of the management accountant to produce the financial and other information that is needed to manage a business enterprise. In the first course of this Professional Bookkeeping series, we examined the role of the bookkeeper in identifying, classifying and recording financial transactions arising from a business undertaking. We reviewed the importance of the bookkeeper ensuring that such information is complete and accurate, that it is recorded on a timely basis, and that it is reported to the owners and managers of the business. We reviewed how that information ultimately ends up in the general ledger, from which the enterprise's financial statements are prepared. Virtually every business, however, needs to "get behind" the financial information that is reflected in a business's financial statements. It is almost always true that the aggregate information reflected in financial statements does not give the complete story. Example ñ Making a Business Decision on Incomplete Information The general manager of Universal Construction was under pressure from the business owners to meet the sales targets for the year. In order to boost sales, he authorized his sales team to offer a 10% discount to any customer who placed an order before year end. Sure enough, there was big boost in sales revenue. However, it soon came to light that several large customers had long-term standing orders for Universal's products, and they were upset to find that customers ordering in the short term were getting a better price. The general manager had not been aware of the significance of the long-term supply agreements to Universal's business. In order not to alienate the long-term customers, Universal had to give them a 10% discount too, and many of them insisted on having the discount apply to all their purchases for the year. When the adjustments were reflected in the financial statements, Universal fell well short of its sales goals for the year. This is a simple example, but it is illustrative of the need for the management accountant to be involved in providing information to be used in making business decisions. There is no place in the general ledger or the financial statements that a business owner or manager can go to find the dollar value of sales that are made to customers with long-term supply contracts. That information must be accumulated outside the regular financial systems, analyzed and reported separately. Universal's general manager would obviously have been well advised to have that information before he instructed his sales force to offer a 10% price discount. It is the role of the management accountant to accumulate this information, in order to assist the owners and managers of a business in making rational business decisions. In many businesses, the responsibility for accumulating and reporting this information rests with the professional bookkeeper, as it is the bookkeeper who knows best how the information flows through the business's information systems. However, the bookkeeper cannot accumulate this management information in a vacuum. It flows from an understanding of how management decisions are made. Excerpted from Managerial Accounting for Professional Bookkeepers, one of the courses that comprise the Certified Bookkeeping Specialist program.

Renting out a property? Know the tax consequences? If not, this might be a good time for a tax refresher, especially if you are a rookie landlord or find yourself in this position quite by default! Income received from the rental of property is generally considered to be "income from property" rather than income from an active business, which means that it is considered to be "passive" rather than "active" in nature. The result is that tax deductibility of certain expenses can be restricted, and some special rules must be followed. Those in the business of leasing boats or equipment, for example, would report earnings as income from a business. This would also be true where the rental of assets is a minor part of another larger business, or where the enterprise provides a myriad of services other than the rental of property, such as the business of running a hotel. Income resulting from the rental of a home, apartment, condo, etc., is clearly rental income, however, and is reported on line 126 of the tax return. It is also reported in detail on Form T776 Statement of Real Estate Rentals. Unlike most unincorporated business ventures, which can generally choose a non-calendar fiscal period, net rental income must be reported on a calendar year basis. There are several other differentiating factors between the reporting of the two income types, as illustrated below: Net profit from rental income does not qualify for Canada Pension Plan contribution purposes, as business income would. Capital Cost Allowance (CCA) may be taken on capital assets related to rental property, as it can be on business property. The maximum CCA claim is subject to the regular CCA rules (i.e. half-year rule, etc.). However, there is a further restriction on the maximum CCA claim on rental properties. A rental loss cannot be created, or increased, by claiming CCA on rental assets. This rule applies collectively to all rental properties owned by the taxpayer, not to each individual property. Thus a taxpayer who has net rental income after CCA on one property may claim CCA on another property to create a loss on that property so long as there is no net rental loss on the properties collectively. Buildings Costing over $50,000. There are some additional CCA rules pertaining to rental buildings that cost more than $50,000. Where these buildings were acquired after 1971, they must be placed in separate CCA classes. This means that when a rental building is disposed of, the undepreciated capital cost of another property cannot be used to shelter a recapture of CCA on the one sold. If each building was not required to be in a separate CCA class, recapture could be avoided by continuing to hold additional properties. Terminal Loss. If a building suffers a decline in value, a terminal loss may arise. This occurs if a rental property is sold for an amount less than the remaining undepreciated capital cost (UCC). The underclaimed CCA must be deducted (as a terminal loss) in the year of disposition - however, note the additional restrictions below. For audit purposes, there must be a reasonable expectation of profit in the venture to allow rental loss deductibility against other income of the year. Land. Land is not a depreciable asset, and so in the first year a property is acquired, the value of the land must be separated from the value of the building. This can generally be ascertained by looking at tax assessments or legal documents. Sale of Land and Buildings When the taxpayer disposes of a rental property, proceeds and outlays and expenses must be allocated separately to the land and to the buildings (and any other depreciable property). Capital gains may occur on the land and/or the building as well as recapture on the building. A capital loss may occur on the land and a terminal loss on the building. However, a special rule applies when the proceeds allocated to the land exceed the cost of the land and the proceeds allocated to the building are less than the UCC of the building. In this case, the allocation is adjusted so that the lesser of the gain on the land and the loss on the building is added to the proceeds from the disposition of the building and subtracted from the proceeds of disposition of the land. This rule is to ensure that the taxpayer is not able to include in income both a capital gain that is one-half taxable and a terminal loss which is 100% deductible. Mortgage foreclosure When a taxpayer purchases a rental property and subsequently loses the property as a result of a mortgage foreclosure, the balance of the outstanding debt is considered to be the proceeds of disposition of the property. The result will normally be a capital loss but in circumstances where debt, including accrued interest exceed the cost of the property, a capital gain may result. Partnership vs. Co-ownership When two or more taxpayers own a rental property jointly, it is necessary to determine whether they own the property as co-owners or as partners. Generally when two or more individuals, such as spouses own a rental property as an investment, they will be considered to be co-owners. The CCA restriction noted above applies separately to rental properties owned by a partnership and to rental properties owned by the taxpayer (either exclusively or as a co-owner). CCA on partnership property is claimed by the partnership, so that the income allocated to the partners is already net of any CCA deduction. Co-owners may each make different CCA claims in respect of the same rental property. Common Rental Expenses Most expenses in order to earn rental income will be deductible in the year paid. However, some exceptions apply. Expenses must be matched to the rental income. For example, if the taxpayer pays insurance in advance, only that portion of the insurance that relates to the rental period may be deducted. Repairs that improve the property beyond its original condition or the addition of new appliances or equipment are considered to be capital expenditures and must be deducted over the life of the asset created using Capital Cost allowance. The following checklist of common expenses should be carefully noted and all receipts retained in case of audit. Advertising ñ Amounts paid to advertise the availability of the rental property are deductible. Insurance ñ Cost of insurance coverage for the year is deductible. If the insurance is paid in advance, claim only the portion that applies to the rental year. Interest ñ Interest on a mortgage to purchase the property plus any interest on additional loans to improve the rental property may be deducted. However, if an additional mortgage is taken out and the proceeds are used for some other purpose, the mortgage interest is not deductible as a rental expense. If the mortgage funds were used for another investment, then they may be deductible as carrying charges. Other charges relating to acquisition of a mortgage are not deductible in the year paid but amortized (under S. 20(1)(e)) over a five-year period starting at the time they were incurred. If the interest costs relate to the acquisition of depreciable property, the taxpayer may elect under S. 21(1) to add the interest to the capital cost of the asset rather than deduct it in the year paid. Maintenance and Repairs ñ The cost of regular maintenance and minor repairs is a deductible expense. For major repairs, it must be determined if the cost is a current expense or capital in nature. Management and Administration Fees ñ If the taxpayer paid a third party to manage or otherwise look after some aspect of the rental property, the amount paid is deductible. Motor Vehicle Expenses ñ If the taxpayer owns only one rental property, then motor vehicle expenses to collect rent are not deductible. CRA considers these to be a personal expense. However, if the taxpayer personally makes repairs to the property then the cost of transporting tools and materials to the property may be deducted. If the taxpayer owns rental properties at two or more sites away from the taxpayer's place of residence then CRA will allow motor vehicle costs to collect rent, supervise repairs or otherwise manage the properties. Office Supplies ñ supplies needed to earn rental income are deductible Legal, Accounting and Other Professional Fees ñ Legal fees to prepare leases or to collect rent are deductible. Legal fees to acquire the property form part of the cost of the property. Legal fees on disposition are outlays and expenses which will reduce any capital gains on the sale. Accounting fees to prepare statements, keep books, or prepare the tax return are deductible. Property Taxes ñ Property taxes applicable to the period when the rental was available for rent are deductible. Travel Costs ñTravel costs do not include the cost of accommodation, which CRA considers to be a personal expense. Utilities ñ The cost of light, heat, water, etc. paid by the landlord and not reimbursed by the tenant are deductible. Amounts charged to tenants are deductible if the amount paid by the tenants is included in rental income. Other ñ the following are some miscellaneous costs that may be deducted: Landscaping costs may be deducted in the year paid; Lease cancellation payments ñ deduct that portion of the payment that relates to the period of the cancelled lease in each year; Condominium fees applicable to the period when the rental condo was available for rent may be deducted; Renovations made or equipment purchased to make the rental property accessible to individuals with a mobility impairment may be deducted. Capital vs. Current Expenditures If an expenditure extends the useful life of the property or improves upon the original condition of the property, then the expenditure is capital in nature. A repair that returns the property to its original state, such as replacing the carpet, is a current expense. Expenditures that are capital in nature must be added to the undepreciated capital cost of the asset improved. Rentals to Family Members S. 18(1)(a) of the Income Tax Act precludes the taxpayer from deducting any expense that is not made for the purpose of gaining income from business or property. Therefore, when a taxpayer rents a portion of his or her home to a family member for a nominal rent and the purpose of the arrangement is not to earn income, then the taxpayer may not claim a rental loss by deducting expenses. In this case, the taxpayer need not include the rent in income. The article above was excerpted from The Knowledge Bureau's EverGreen Explanatory Notes. When it comes to questions about taxes, we make you smarter!© To subscribe, click here.

Just like Santa Claus, tax practitioners like to make their lists and check them twice before delivering a complete tax filing service, which includes tracking their clients' "carry over provisions". The following list, excerpted from best-selling tax author and Knowledge Bureau President, Evelyn Jacks' Essential Tax Facts, will provide conversational guidance for taxpayers and their advisors before this year's tax files are stored for potential audit retrieval, or more happily, tax season 2009! Period Significance Three years back To apply non-capital losses to capital gains in those years. To adjust most provincial tax credits. Previous 10 Years To correct errors and omissions for most federal provisions, including the GST Rebate (Line 457) 24 month period In the year of death, to apply medical expenses in the best 24-month period ending at date of death Current and immediately preceding year Application of capital losses to other income in the year of death, as an option rather than an application to other capital gains of the prior three years. Preceding 11 months Recovery of unpaid Child Tax Benefits and GST Credits Recovery of overpaid EI premiums in cases where employee did not qualify (i.e. significant or majority owner of a corporation) Following year Unclaimed medical expenses of the previous year to make a claim for the best 12 month period ending in the tax year. Next five years Application of charitable donations Deduction of student loan interest Next seven years Application of Minimum Tax Balances to regular taxes Next 10 years Application of Business Investment Losses Next 20 years Application of unused non-capital losses to other income Application of Manitoba Tuition Fee Income Tax Rebate Indefinite application RRSP deduction when there is RRSP room (or if no longer age-eligible, must contribute to a spousal RRSP if spouse is under age 71.) Capital losses to capital gains. . .until year of death. Unused RRSP deductions. . .until year of death Tuition and education amounts

The double entry bookkeeping system is based on the following principles: an expense or an increase in an asset is reported as a debit, an increase in a liability, an increase in equity and revenue are all reported as a credit, conversely, a decrease in an asset and a reduction in an expense are reported as a credit, similarly, a decrease in a liability, a decrease in equity and a reduction in revenue are reported as a debit, all financial transactions are recorded as both a debit and a credit, but to different accounts, for any transaction the total of all debits must equal the total of all credits. The first four principles are simply accounting conventions ñ the rules of the road, as it were. Thus, by convention, an asset account and an expense account will normally be a debit account or, more accurately, a positive balance in such an account will be referred to as a debit. Similarly, by convention, a positive balance in a liability account, an equity account or a revenue account will be referred to as a credit. The fifth principle, that each financial transaction results in both a debit and a credit, is a reflection of the fundamental accounting equation. Recall: Equity = Assets ñ Liabilities + Current Period Revenue ñ Current Period Expenses The final principle, that debits always equal credits, provides a self-checking mechanism in double entry bookkeeping. Because of this rule, it is easy to check whether accounts have been posted accurately. If the total all debit accounts equals the total of all credit accounts, you can be sure that this is true. Note, however, that the fact that total debits equals total credits does not ensure that the proper accounts were posted ñ only that the numeric values assigned to debits and credits are equal. Excerpted from Basic Bookkeeping for Business, one of the courses that comprise the Certified Bookkeeping Specialist program.

Andrew Brash Update Andrew Brash, Knowledge Bureau Faculty member is in the middle of climbing purgatory. The issues in Tibet and China's desire to take the Olympic flame to the top of Mt. Everest has had an impact on climbers from around the world. While the flame makes its way to the summit on the Tibet (north) side, the entire mountain has been 'closed'. This includes the Nepal side, leaving Andrew and his team in limbo. "Yes, as if any year on Everest wasn't weird, I've had to make special mention that this year really is peculiar. Guns, army, ambassadors, foreign secretaries ... admittedly there hasn't been much else to do but read while we wait for a certain group of people to summit this mountain on a certain route, carrying a certain piece of flaming hardware to the top. A tall order they've given themselves, let's face it, and it's the reason we're now waiting the strangeness out in the teahouse village of Dingboche. I have to say though, that I'm glad I'm here giving this a go and not sitting on the sidelines at home. Nothing ventured, nothing gained, as they say.", Andrew writes in his latest online posting.Further, Andrew writes: "Uncertainty, glumness, irritability - staples of any expedition, are now rising forces in base camp (thus the escape). If the bit of fire doesn't arrive at the top very soon, climbers waiting for restrictions to be lifted on the south side of the big E will face big odds against summiting. Crowding on the route will be grim and time is going to be strained to the point where not everyone will get their chance this time around ... you really do have to wonder just how unpleasant things are going to get." The Knowledge Bureau is a proud sponsor of Andrew's return to Mt. Everest. We will continue featuring an ongoing update on his climb to the summit as part of Breaking Tax and Investment News or you can track his progress by visiting his website http://www.andrewbrash.com/ for live updates from the expedition. Stay tuned for updates! And don't forget to book Andrew as a keynote speaker for your next conference or educational event by contacting The Knowledge Bureau now: 1-866-953-4769.

An experienced advisor in the industry seemed to hit it on the head last week, when he declared May first as the start of the next phase of tax season ó adjustment and audit season! When it comes to taxes, it's not only about getting those returns filed on time, but most importantly, it's about storage and retrieval! The "ff-season"is fraught with the potential for tax audit activity by CRA and the need to adjust returns for omissions, missed slips, and of course, the inevitable errors made during the rush! What should you do if you missed an important provision or document? Most advisors will tell their clients to come back and see them immediately upon discovery They will also cover an important technique in avoiding expensive gross negligence or tax evasion penalties: voluntary compliance (you tell CRA about errors or omissions before they tell you, on that off chance that you overstated deductions or credits, or understated income.) The following filing milestones should also be noted to answer these and other questions about tax compliance responsibilities all year long: Adjusting a return to correct an error or omission: 10 years following the end of the relevant taxation year. Appeals with the Tax Court: No later than 90 days from the date of mailing of a Notice of Reassessment or confirmation of an assessment No earlier than 90 days following the date of mailing of a Notice of Objection, if CRA has not responded to the Objection Collection of taxes owing: Generally, 10 years from the date of assessment. A collection action cannot generally be undertaken until 90 days after the relate Notice of Assessment or Reassessment has been mailed Where a Notice of Objection has been filed, or an appeal has been made to the Tax Court, collection of the tax debt will be suspended until the dispute is finalized Filing Deadlines: Final Returns of Deceased Taxpayers: Where the individual dies before October, April 30 or June 15 (the normal filing deadlines Where the individual dies after September, 6 months following death To defer payment of income tax by making up to 10 equal consecutive annual payments: first instalment must be paid on or before the day on which payment of tax was otherwise payable. Filing Deadlines: Trust Returns March 31 for inter vivos trusts No later than 12 months following death for testamentary trusts, and annually thereafter Filing Deadlines: Corporations: 6 months following the end of the taxation year Instalment Payments: Corporations: On or before the last day of each month Objection to a Notice of Assessment or Reassessment: Generally, 90 days from the date of mailing of the Notice Individuals and testamentary trusts can file within one year of the due date of the related return Record retention, Individuals: Generally, six years from the end of related taxation year. Record retention, Corporations: Permanent corporate records must be retained for two years following dissolution Registered investments: Manage registered investment accounts around these milestones: Contributions, RRSP: During the calendar year or within 60 days of the year end Deduction, Refund of Unused RRSP Contributions: Form T746, with tax return filed for the year in which amounts were withdrawn. Penalty for Excess Contributions: For 2007contributions, Form T1-OVP by by March 31, 2008. Refunds from the CRA: Generally, three years from the end of the related taxation year. However, individuals and testamentary trusts can apply for refunds for up to ten years following the end of the related taxation year. Where the application for a refund reflects a loss carryback, the application period is generally extended to six years, and to seven years for corporations that are not Canadian controlled private corporations Refunds, Overdeducted CPP or EI Premiums: File separate from PD24 for each worker with T4 information return within the following time limits: CPP Contributions: no later than 4 years from end of year in which overpayment occurred EI Premiums: no later than 3 years from end of year in which overpayment occurred For more information on tax planning provisions and compliance requirements subscribe to The Knowledge Bureau's online tax reference for taxpayers, financial advisors and their clients: EverGreen Explanatory Notes. Next time: Low hanging Fruit: Let Carry-Over Provisions Ripen for Tax Season 2008