Tax Tip: The More Obscure Medical Expenses

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

How do the new Tax Free Savings Accounts, on deck for investors starting in 2009, affect those who are leaving Canada? What are the right planning opportunities for minimizing departure taxes? These are questions advisors serving clients this tax season may hear. Consider these facts, from Knowledge Bureau Faculty Member John Mill, author of the Knowledge Bureau Certificate Course Cross Border Taxation, for his research on the subject: In Canada, the new Tax Free Savings Account (TFSA) is not caught by the departure tax rules. However, no TSFA contribution room is earned for those years where a person is non-resident. In addition, any withdrawals while non-resident cannot be replaced. The US does not recognize the TFSA, therefore any realized income ought to be non-taxable when removed after emigration. However any capital appreciation will be taxable. Therefore it will make sense to remove capital properties from the TFSA on a tax free basis immediately prior to emigrating and then trigger the deemed disposition on a nominal gain on departure. Residency and Non-residency issues are covered in detail in The Knowledge Bureau's EverGreen Explanatory Notes. . .can you really afford not to have EverGreen at your fingertips this month? For more information and to subscribe: click here.

Andrew Brash Update Andrew Brash, Knowledge Bureau Faculty member is en-route to Mt. Everest, against a backdrop of violence between Tibetan monks and the Chinese government. Andrew is in the right position to act quickly when climbing permits are handed out and start his trek to base camp. So after months of preparation and training, Andrew is ready for what lies ahead ... and to take The Knowledge Bureau flag ... and all of our best wishes for success, with him to the summit! We are monitoring the situation and will continue to keep you informed on Andrew's dangerous return to Mr. Everest, as a regular feature of Breaking Tax and Investment News or you can track his progress by visiting his website andrewbrash.com for live updates from the expedition. Stay tuned! To book Andrew on his return for your next educational event or conference please contact The Knowledge Bureau at 1-866-953-4769.  

Let's face it ... it's an impossible task for most business people ñ keeping the auto log to justify claims for auto expenses on the personal tax return.  The biggest audit trap for most employees, business owners and commissioned sales people who use their auto for both work and personal purposes may have become somewhat simpler, thanks to the February 26, 2008 federal budget. Starting in 2009 (after ìconsultationsî with the business community that will begin in 2008), it is proposed CRA auditors accept a logbook for a sample period of time, rather than the whole year, to represent how the motor vehicle is used, and support motor vehicle expense claims and taxable benefit calculations. In fact, most tax advisors in practice over the years know that CRA has accepted just such a sampling in their audit practices... nice to see it in print; however, to ensure consistent applications.    So keep working daily on keeping the log, but if you "fall off the wagon", you don't need to feel quite as guilty!     For more information about auto log and home office requirements, see Essential Tax Facts, and Make Sure It's Deductible, by Evelyn Jacks.

Retiring taxpayers may find their RRSP or locked in savings plan at risk if they acted on promotions of a particularly clever fraud schemes.  Amongst the schemes, perpetrators caused victims to purchase non-qualified investments in their RRSPs or use contents of RRSPs or RPPs as collateral for a loan. . .leaving the taxpayer to face not only a tax liability but funds that disappeared too!   CRA announced last week that over 300 investigators and other CRA officers have been executing search warrants across Western Canada to investigate alleged fraud related to fictitious Registered Retirement Savings Plans and other tax evasion scams.    This follows an earlier announcement last fall which said "RRSP and investment scams are popping up across Canada and the CRA is making its presence known by auditing and investigating the promoters who back these schemes."  A 2007 "Tax Alert" from the CRA indicated that 3,100 taxpayers had already been reassessed for participation in fraudulent RRSP schemes and that 1,800 additional taxpayers were being audited at the time of the Alert.   Typically, such schemes involve the use of a self-directed RRSP. The promoter of the scheme directs the RRSP holder to purchase a particular investment, such as shares in a private corporation, units in a co-operative, or a mortgage, often at inflated prices. The promoter then promises to return the money to the RRSP holder through a loan-back arrangement, off-shore bank account, or off-shore debit or credit cards. In some cases the promoter disappears with the funds and cannot be found.   On January 18, 2008, such a scheme lead to a conviction.  Laurent Boulianne, of Saguenay, Quebec was found guilty and fined $37,000 for his participation in a scheme in the 1997 to 1999. Mr. Boulianne was found to have enabled 16 taxpayers to not report amounts totalling $350,300 withdrawn from their RRSPs, RPPs, or LIRAs.   Taxpayers are warned to watch out for announcements which promise:  "Take advantage of your RRSP now - no tax to pay!!," or "I will loan you $5,000 to $250,000 over five years if your RRSP is locked in."   Participation in such schemes not only puts retirement savings at risk, but may also result in the inclusion in income of the full amount invested in ineligible investments or used as collateral for loans, plus interest and penalties for not reporting the income.   Best to check with a qualified tax advisor first before making a move.   

Boomer parents may be finding that with university graduations come new living arrangements and that takes some tax planning!  Surprises may be in store as they get ready to file 2007 tax returns for their adult children. Following is a checklist of tax facts to consider when conjugal relationships bloom into new living and filing requirements:   TAX CONSEQUENCES OF LIVING COMMON LAW Definitions for Tax Purposes: The Income Tax Act considers only those who are legally married to be ìspousesî. However, for tax purposes, spouses and common-law partners are treated equally. For common-law partners, there is no ceremony to fix the date at which the relationship can be deemed to begin so a definition is required. For tax purposes, a common-law partner is a person who is not the individual's spouse and with whom the individual are living in a conjugal relationship, and that person: has been living with the individual in a conjugal relationship for at least 12 continuous months, is the parent of the individual's child by birth or adoption, or has custody and control of the individual's child and that child is wholly dependent on that person for support. If the couple is no longer living together at the end of the tax year and is still separated 60 days after the end of the year, they are not longer considered to be common-law partners. However, they immediately become common-law partners again if they resume living together. Combine Net Income. As a common-law couple, individual tax returns must be filed, but net family income must be combined for purposes of refundable tax credits like the CTB, GST and provincial credits. One Tax Exempt Principal Residence. Common-law couples must be aware they can only have one tax-exempt principal residence per household (whereas singles can have one each). Spousal Credit Claims. Depending on the size of net income for each person, one may be able to claim the other for the $9,600 spousal credit (but this is reduced dollar for dollar by their net income). Options re Non-Refundable Tax Credits Claims. In addition common-law couples can claim each other's medical expenses (usually claimed on the return of the spouse with the lower net income for maximum benefit) and maximize their charitable contributions (it's best to combine receipts so that they are over $200 for a better tax break).  The amount for minor children can also be claimed by either spouse or split between them to maximize the use of the credit. Tuition/Education/Textbook Credits. Up to $5000 of tuition, education and textbook credits can be transferred to a supporting spouse if they can use the credits to reduce their taxes.  Spousal RRSP Contributions. If the couple expects to remain together, they may wish to start making spousal RRSP contributions to equalize deposits there. Money can be withdrawn on a tax-free basis from an RRSP under the Home Buyer's Plan, so this might be a way for them to save for their first home on a tax-advantaged basis. Attribution Rules. From an investment point of view a common-law couple is treated the same way as a married couple. That is, if a transfer of capital from the higher earner to the lower results in the earning of interest, dividends or capital gains, that income is reported by the transferee. These rules can only be avoided when an inter-spousal loan is drawn up so long as the rules that apply to the loan are adhered to. More information on basic tax principles can be found in Evelyn Jacks' Essential Tax Facts, which is a great gift to young adults who are setting out on an independent life.

The off-return implications of pension income splitting can vary significantly by province. Here's some feedback received from our readers. Dan Reynen of Dan Reynen Business Services in Campbell River BC writes: In BC the Per Diem rate charged to people in Care (Senior's Housing etc) is based on their Total Income from the previous year. This means their 2009 Per Diem rate will be based on their 2007 Income Tax Return. The government allows pensioners to file a form declaring they are separated due to medical reasons. They then only use the person in care's income in determining how much they are charged at the home. Splitting pension in this case can seriously affect how much is charged to the person in care. If the person in care is not the pensioner splitting the pension will increase the Per Diem. The Per Diem increase can be far more than the tax saved. Check carefully. You could have a situation where they are already paying the maximum Per Diem anyway so the splitting of pensions won't affect them. The two other items to be taken into account from this are, will one or the other be going into care in the near future and which one first. You really need to get to know your elderly clients well before deciding the best way to split the pension income. You could try to use your crystal ball. Since this does not actually affect them until two years (1.5 years) down the road. Peter Coles, Tax Research and Training Specialist of H&R Block writes: Ö it appears that the decision to split pension income may sometimes involve more than the tax considerations. For example, in Saskatchewan, nursing home fees could be adversely affected by an increase in the Line 150 amount of the pension transferee. The Alberta Seniors benefit could also be affected (although this would only affect low-income seniors who probably would not have much pension income to split). By the way, Nova Scotia Pharmacare works the same way as Manitoba Pharmacare and could be adversely affected by an increase in the pension transferee's Line 150 amount. We are hoping that the various provincial governments will fix their regulations to take pension income splitting into account. Manitoba Health has already advised us that they are currently reviewing pension income splitting provisions. However, it might be dangerous to assume that all provincial governments will follow through. It is also worth noting that where spouses or common-law partners are involuntarily separated (for example, where one of them is in a nursing home), the Guaranteed Income Supplement (GIS) that each receives will be recalculated based on their individual income. Transferring pension income in this situation could therefore adversely affect the GIS entitlement of the pension transferee. Ö there could be other government programs affected by pension income splitting that we are unaware of. Our policy is to ask our clients whether they are receiving benefits under any federal or provincial income-dependent programs. If they are, then we check them out to see if pension income splitting could have any adverse consequences.