Tax Tip: The More Obscure Medical Expenses

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

On March 6, 2008, Bill C-253 (a private members bill) was passed in the House of Commons in spite of opposition from the minority Conservative government. If this bill is passed by the Senate, it will allow a deduction for the lesser of RESP contributions in the year, not in excess of the taxpayer's contribution room and $5,000. The Bill would also make all amounts received from an RESP taxable if that amount has been deducted by the taxpayer. This bill, originally introduced in 2006 would apply to taxation years after 2005, based on the wording of the bill.   On the other side of the coin, when RESP contributions are removed from the plan, they will be taxable, presumably to the recipient (student).   The government has indicated that, if the bill is passed, they would move to diminish its cost. On March 11, they followed through on that promise. See the Notice of Ways and Means Introduced below.

We'd like to thank all our readers who sent us feedback on our articles on pension income.  The following are some points brought up.   Is Pension Income Splitting Always a Good Idea? There are instances where splitting of pension income between spouses or common-law partners can have more negative effects than positive.  One area not discussed in our previous article is the claiming of medical expenses.  Since medical expense claims are reduced by 3% of the taxpayer's net income, the possibility exists that the transfer of pension income could reduce or eliminate a claim for medical expenses.    Since the credit for a medical expense claim is only 15% of the claim, adding $1,000 to a taxpayer's income will reduce the claim by $30 and the credit by $4.50.  This is more than offset by tax reductions for the transferor if he or she is a higher tax bracket, but if the two spouses are in the same tax bracket, the net effect may be negative.  The scenario, then, for this negative effect is both spouses are taxable both spouses in the same tax bracket one spouse is claiming medical expenses Where one of the spouses has no pension income, tranferring enough to claim the full pension income amount may still be beneficial although transferring more would be detrimental.   You should also look at the effects on provincial taxes as the brackets often do not coincide with the federal ones and the amount of the pension income credit will also vary for many provinces.   The effects of this election are not always straightforward so be sure to work out the optimum transfer for each client situation.   German Pensions In our article on pensions from the Republic of Germany we mistakenly indicated that private pensions received by Canadian residents were not taxable in Canada.  In fact, such pensions are subject to taxation in Canada and will likely have income tax withheld which is eligible for the foreign tax credit.  We apologize for this error.

What kind of service have you been receiving from the CRA? If you're not satisfied with it, there are now more options available to you to resolve any problems. The Taxpayer's Bill of Rights outlines the following right for individuals: to receive entitlements and to pay no more and no less than what is required by law to service in both languages to privacy and confidentiality to a formal review and a subsequent appeal to be treated professionally, courteously, and fairly to complete, accurate clear, and timely information not to pay income tax amounts in dispute before you have had an impartial review to have the law applied consistently to lodge a service complaint and to be provided with an explanation of CRA findings to have the costs of compliance taken into account when administering tax legislation to expect CRA to be accountable to relief from penalties and interest under tax legislation because of extraordinary circumstances to expect CRA to publish their service standards and report annually to expect CRA to warn you about questionable tax schemes in a timely manner to be represented by a person of your choice Plus CRA's commitments to small business: to administering the tax system in a way that minimizes the costs of compliance for small businesses to working with all governments to streamline service, minimize cost, and reduce the compliance burden to providing service offerings that meet the needs of small businesses to conducting outreach activities that help small businesses comply with the legislation we administer to explaining how we conduct our business with small businesses These rights and commitments are explained in the CRA's publication RC17 Taxpayer Bill Of Rights Guide: Understanding Your Rights As A Taxpayer. If you find that a CRA representative is not respecting any of these taxpayer's rights of commitments to small business, you should follow up on taxpayer right #9: ìto lodge a service complaint and to be provided with an explanation of our findings.î Probably the most common complaint we here is of the service received from the CRA. Some common service complaints noted in RC17 are: undue delays in meeting service standards errors, omissions, or oversights on CRA's part poor or misleading information received in your dealings with CRA, and unprofessional behaviour from CRA staff. The CRA even has a form (RC193 Service-Related Complaint) for you to file such complaints. If you're feeling that you're getting nowhere with the CRA, the government has recently appointed Mr. Paul Dubé to act as a Taxpayer's Ombudsman to help resolve issues with CRA. According to the Taxpayer's Ombudsman website Mr Dubé's mandate is to: ensure that CRA respects taxpayer's service rights conduct impartial and independent reviews of service-related complaints about the Canada Revenue Agency (CRA); facilitate taxpayer access to assistance within the CRA; identify and review systemic and emerging service-related issues within the CRA that have a negative impact on taxpayers; and provide advice to the Minister of National Revenue about service‑related matters in the CRA. To file a complaint to the Taxpayer's Ombudsman, you must file the Tax Ombudsman's Complaint Form which is available online. The complaint form can be mailed or faxed to the Ombudsman's office (along with any supporting documentation).   The ombudsman cannot review complaints dealing with tax policy or legislation, or decisions that can be dealt with by the courts.

By John Mill A non-resident is required to file a tax return in Canada if they are employed, carry on business, or if they sell "taxable Canadian property" (TCP). This article considers the Budget 2008 rules that relate to a subset of TCP known as treaty protected property (TPP). TCP is appreciable capital property owned by a non-resident. When a non-resident disposes of appreciable capital property s. 116 imposes a 25% withholding obligation on the purchaser. Canada has an extensive treaty network and a number of those treaties exempt a non-resident from Canadian capital gains tax unless the property, directly or indirectly, derives its value from Canadian real estate. There are exceptions to the real estate rule for business properties. Recently the venture capital industry in Canada has lobbied the government on behalf of US venture investors citing the drag on investment created by the s. 116 procedures. US investments in shares of non-real estate companies are TPP; however, until Budget 2008 s.116 applied across the board and caught TPP in its dragnet. Budget 2008 proposes three changes to the s.116 process more efficient. TPP exemption: TPP will be exempt from the s.16 withholding requirement, there is a 30 day (after sale) notice requirement for related party transactions; Purchaser exemption: It is not enough to exempt TPP, because s.116 applies to the purchaser. Purchasers need assurance as to when they no longer have to withhold if they are wrong then they become personally liable for the 25% withholding plus penalties and interest. "Reasonable Inquiry" Protection: Purchasers will be exempted from s.116 if they make reasonable inquires. Currently purchasers are exempt from s.116 if they sell to Canadian residents. The reasonable inquiry is satisfied upon receipt of a declaration sworn under oath from the Vendor (unless the circumstances indicate otherwise) that they are a Canadian resident. Budget 2008 proposes a reasonable inquiry protection for purchasers if three points are satisfied (taken from the Minister's notes) : the purchaser concludes after reasonable inquiry that the vendor is, under a tax treaty that Canada has with a particular country, resident in that country; the property would be treaty-protected property of the vendor if the vendor were, under the tax treaty referred to above, resident in the particular country; and the purchaser sends to the Minister of National Revenue, on or before the day that is 30 days after the date of the acquisition, a notice setting out basic information about the transaction and the vendor. Some commentators have raised concerns regarding the purchaser's ability to verify residency. In addition to declarations under oath: a number of tax authorities including the IRS will issue a "certificate of residency". US citizens and green cards holder are considered US residents. TPP identification can be dealt with by an opinion from the vendor's lawyer or accountancy firm. Return exemption From Filing Returns A new twist is that for the first time non-residents will no have to file tax returns on the disposition of TCP; the conditions are (again from the Minister's notes): no tax is payable under Part I of the Act by the non-resident for the taxation year; the non-resident is not currently liable to pay any amount under the Act in respect of any previous taxation year (other than an amount for which the Minister of National Revenue has accepted, and holds, adequate security under section 116 or 220 of the Act); and each TCP disposed of by the non-resident in the year is "excluded property" for section 116 purposes ó which, under the first change described above, will now include certain treaty-protected property, or a property in respect of the disposition of which the Minister of National Revenue has issued to the non-resident a certificate under section 116 of the Act. These changes will apply in respect of dispositions that take place after 2008. John Mill has practiced corporate commercial law as a sole practitioner in Windsor, Ontario for 15 years. He is the author of The Knowledge Bureauís certificate course entitled Cross Border Taxation. To Book John for your next educational event, check out his biography and call 1-866-953-4769.

Personal Tax Changes Tax-Free Savings AccountA Tax-Free Savings Account (TFSA) is a registered account in which investment earning, including capital gains accumulate tax free. Starting in 2009, taxpayers over the age of 17 may contribute up to $5,000 each year to such an account. If a taxpayer's contribution room is not used in one year it may be carried forward to the next year allowing for a larger contribution in that year. In some ways the TSFA is similar to an RRSP and in a lot of ways it is not. Contribution room in TFSA does not depend on "earned income" but is a flat $5,000 per year. Unlike the RRSP, contributions to a TSFA do not result in an income tax deduction and withdrawals from a TFSA are not reported as income nor be included in income for any income-tested benefits, such as the Canada Child Tax Benefit or Goods and Services Tax Credit. The CRA will establish contribution room for all taxpayers on the basis of income tax returns filed. Taxpayers who do not file for a number of years may establish their contribution room by filing those returns. WithdrawalsThe proposed TFSA will be flexible in that when a taxpayer withdraws funds from a TFSA, those withdrawals will be added to the taxpayer's contribution room in the following year thereby allowing full access to the funds in the account with no penalty for withdrawal. However, like the RRSP, excess contributions will be subject to a 1% per month penalty tax. TFSA InvestmentsThe same rule for eligibility of investments within an RRSP will apply to investment within an TFSA. The budget proposes to implement additional rules to prohibit a TFSA from making investment in any entity with which the account holder does not deal at arm's length. Like RRSPs, the cost of borrowing to invest in a TFSA are not deductible. AttributionThe attribution rules will not apply to income earned within an TFSA so taxpayers may freely contribute funds to allow their spouses to take advantage of their TFSA contribution room. DeathUpon death of the TFSA holder, the funds within the account may be rolled over into their spouse's TFSA or they may be withdrawn tax-free. Any amounts earned within a TSFA after the death of the taxpayer are taxable to the estate. Other TransfersUpon breakdown of a marriage or common-law partnership, the funds from one party's TFSA may be transferred tax-free to the other party's TFSA. This will have no effect on the contribution room of either of the parties. Leaving CanadaUpon leaving Canada, a taxpayer may continue to hold a TFSA, however, no additional contribution room will be earned and no additional contributions may be made to the TFSA while the taxpayer remains a non-resident. Other Proposals Registered Education Savings PlansThe budget proposed to extend the period of contribution for RESPs by 10 years, beginning in 2008. For most beneficiaries, the current limit of 21 years will be extended to 31 years. For beneficiaries eligible for the Disability Tax Credit, the 25-year contribution period will be increased to 35 years. Likewise the deadline for termination of the plan will be extended by 10 years - from the 25th anniversary of the plan to the 35th for most plans and from the 30th anniversary to the 40th anniversary for plans where the beneficiary is eligible for the Disability Tax Credit. The age limit for beneciaries will also increase from 21 years to 31 years. The budget also proposes that beneficiaries under an RESP be allowed to receive of Educational Assistance Payments for up to six months after ceasing enrolment in a qualifying educational program. Northern Residents DeductionThe current rates of $7.50 and $15.00 per day is increased to $8.25 and $16.50 per day for 2008 and subsequent years. Medical ExpensesThe maximum reduction in medical expense claim as a result of the 3% reduction will be increased from $1,926 to $1,962 for 2008. Medical expenses previously allowed only to taxpayers who are blind, deaf or have a marked restriction to the use of their arms or legs are extended to those with severe autism or epilepsy. Such expenses include the cost of acquiring, caring for and maintaining an animal to assist the taxpayer travel, board and lodging expenses for attending a school or other facility for training in the use and handling of such animals. Additional medical deductions for 2008 and subsequent years: altered auditory feedback devices for those with speech impairments electrotherapy devices designed to be used by a person with a medical condition or a severe mobility impairment standing devices designed for those with a severe mobility impairment to undertake standing therapy pressure pulse therapy devices designed for use by those with balance disorders Registered Disability Savings PlansMinor adjustments to the proposed RDSP plans were announced. The plan is still to make RDSPs available sometime in 2008. Mineral Exploration Tax CreditThe current Mineral Exploration Tax Credit, which was first introduced in 2000 will be extended to flow-through share agreements entered into on or before March 31, 2009. Donation of SecuritiesThe budget proposes to extend the current capital gains exemption on the donation of publicly-traded securities to include capital gains on the exchange of unlisted securities for publicly traded securities that are donated within 30 days of the exchange. This exemption will apply to donation made on or after February 26, 2008. Dividend Gross-Up and Dividend Tax CreditAs a result of proposed reductions in the corporate tax rate, the treatment of eligible dividends will be adjusted starting in 2009 with the adjustments being finalized in 2012. The following table shows the proposed adjustments:

Finance Minister Jim Flaherty characterized this budget as "Responsible Leadership for Uncertain Times". The focus of this budget was on spending with only a few tax-related items, most of which are of little consequence to the majority of Canadians. The most significant of these is the new Tax-Free Savings Plan which is discussed elsewhere in this issue. Debt reductions continue, but at a significantly reduced pace. The roughly $10 billion slated for debt reduction this fiscal year reduces to approximately $2.3 billion next year and $1.3 billion the following year. Many were disappointed that no provision for the deferral of capital gains, originally promised in the last election, this provision was expected by many to be implemented in this budget.