Financial Planning, Investment Counselling, Tax and Accounting

Contents

A penny for your thoughts
How to use medical expenses to reduce your taxes
The ABCs of DCPPs

A penny for your thoughts

by Thomas Ryan, CFP

Well, perhaps not for much longer. The Canadian penny may well be headed in the same direction as the New Zealand and Australian pennies. Both countries have eliminated these coins from circulation. New Zealand did so in 1987, and Australia followed suit in 1990. Legislation was also introduced this summer in the U.S. Congress to eliminate the American penny.

Can the Canadian penny be far behind?

Well, with over 790,000,000 pennies minted in 2005, and no legislation pending, it would seem that the Canadian penny is not yet on the endangered list. The main criticism put forward by those who advocate for the elimination of this coinage is the costs associated with physically handling and counting the coins. And, depending on the price of raw materials, the cost to mint the coin may periodically exceeds its face value, thus making it wasteful to mint.

At the other end of the spectrum is the $1,000 bank note, which is the largest denomination of Canadian currency in circulation. The Canadian Government made the decision in the year 2000 to eliminate the $1,000 note from circulation. This is being done gradually over time with the cooperation of the Canadian chartered banks. Today, there are fewer than two thousand of these notes in circulation. However, unlike the penny, which is viewed more as a costly nuisance than as valuable form of currency, the elimination of the $1,000 note is part of the government’s comprehensive strategy to fight organized crime.

Note: A record 1,089,625,000 pennies were minted in 1999. Visit www.mint.ca, The Passion, for more interesting currency facts.

How to use medical expenses to reduce your taxes

by David Burnie, CFP

Under the Income Tax Act, certain medical expenses are recognized as allowable medical expenses that can be claimed as a non-refundable tax credit. The medical expense tax credit is a non-refundable credit that reduces the amount of federal tax payable. It is nonrefundable because even if you do not need the full amount of the credit to reduce your federal tax payable to zero you will not receive a refund for the remainder.

You_should claim the total medical expenses for both you and your spouse or common-law partner on one tax return. If both spouses have taxable income, it is usually better to claim the medical expenses on the return with the lower net income. This is because the lesser of $1,844 (federal tax, for 2005) or 3% of net income is deducted from the medical expenses to determine the amount to be used for the tax credit. However, if the lower income spouse does not have enough tax payable to offset the medical expense tax credit, it may be beneficial to move the expenses to the higher income spouse.

You can only claim medical or dental expenses for which you were not and cannot be reimbursed. Consequently expenses covered by either a public or private health insurance plan cannot be claimed.

Examples of qualifying medical expenses include:

• Payments to a doctor, dentist, or nurse, or to a public or private licensed hospital;
  Note - that for the cost of the service by a medical practitioner to qualify as an allowable medical expense, the person providing the service must be recognized as a "medical practitioner" according to the laws of the jurisdiction in which the service is provided. For instance, a massage therapist is not recognized as a medical practitioner in New Brunswick or Nova Scotia, but is recognized as a medical practitioner in BC and Ontario.
• Payments for artificial limbs, wheelchairs, crutches, hearing aids, prescription eye glasses, contact lenses, laser eye surgery, dentures, pacemakers, and prescription drugs;
• Expenses for guide dogs and hearing-ear dogs;
• Payments for certain prescription medical devices;
• Some of the expenses for modifying your home or motor vehicle to allow you, your spouse or a dependant to be mobile and functional if either you or they have a mobility impairment or lack normal physical development;
• The cost of visual or vibratory signaling devices, such a visual fire alarm, to help people with a hearing impairment;
• Payments for therapy to help people adjust to speech or hearing loss, including training in lip reading and sign language;
• The cost of traveling by ambulance to or from hospital;
• Medical travel expenses that qualify as medical expenses for the purposes of the non- refundable credit include transportation costs to medical and dental appointments at least 40 km away (provided treatment is not available locally), as well as meal and accommodation costs when travelling more than 80 km;
• The incremental cost of purchasing gluten-free food products for individuals with Celiac disease who require a gluten-free diet.
• Prescription medications can be included as medical expenses on a tax return, as long as they are prescribed by a doctor and "recorded by a pharmacist". This requirement that a medication be recorded by a pharmacist refers to the recording requirements found in legislation governing pharmacists in each province and territory. Unless that legislation requires a pharmacist to keep a record of the sale of a particular medication, the cost of the medication will not be a medical expense under the Income Tax Act, regardless of how it is sold or treated within a particular pharmacy (Melnychuk v. the Queen). Non-prescription medications are not deductible.

This list is far from exhaustive and you should check with us to verify if your expenses qualify. Additionally, a taxpayer may claim any eligible medical expenses for any person related to them by blood, marriage or adoption and who resided in Canada at any time during the year and depended on the taxpayer for support.

Medical expenses can be claimed for any 12-month period ending in the current tax year (and not claimed in the prior tax year), or in the year of death for any 24-month period ending in the current tax year. This makes for some attractive and flexible planning opportunities if you incur significant medical expenses either at the beginning or end of the year.

The medical expense tax credit is one of the more complex credits written into the Income Tax Act; however, with a bit of planning and foresight, we can make the most of this credit for your unique circumstances.

The ABCs of DCPPs

by Marc Lamontagne, CFP, R.F.P., FMA

With the recent announcements of the cancellation of Defined Benefit Pension Plans (DBPP) from major employers such as GM and Nortel Networks, it is becoming clear that more and more companies are switching to Defined Contribution Pension Plan (DCPP).

DBPPs, also know as traditional pension plans, pay an income at retirement based on a percentage of an employee’s earnings multiplied by their years of service. These traditional plans became problematic for employers due to the high cost of administration, the investment risk they must bear, and their annual funding requirements which vary from year to year. At present, a number of large private sector employer pensions are considered underfunded due to poor investment returns. In these cases the employer is required to make up the difference, which can hurt their bottom line. Consequently many employers are switching to DCPPs.

A DCPP works much like an RRSP. The difference is that the funds are locked-in until retirement. At that point you can begin to withdraw the funds, but only up a yearly maximum. The reason for the maximum is that in theory, it is designed so you don’t run out of money before death.

The employer decides the contribution rate up to an annual maximum. The rules are flexible enough to see significant variations between plans. For instance some plans require the employer to share the cost of contributions with the employee, while in other cases only the employer will make contributions. Typically, contribution rates are based on a percentage of salary.

The advantage of these plans for today’s mobile workforce is that they are easy to understand, their value can be known at any given time, most plans allow a choice of investment options, and they can be transferred easily when changing employers.

The downside is that the investment risk is now in the employee’s hands. Great care must to be taken in putting together a DCPP portfolio that fits with your entire retirement plan. A recent study found that when choosing between investment options, participants were strongly influenced by past performance.

Since most people do not have the experience or training to develop a diversified portfolio, they tended to use past performance numbers to select investments. They often didn’t realize that they may be buying “high” and didn’t recognize the need to mix investments that are negatively correlated (last year’s looser may be this year’s winner).

The study also found that most employees concentrate their investments in 3 or 4 securities at most, and tend to have the same percentage in each investment. Most professionally designed portfolios on the other hand are more likely to have a greater number of securities and will overweight certain asset classes to get a better risk-adjusted rate of return.
Another issue to consider is that the plan design can actually affect investment choices. According to research done on DCPP plan participants, if there were more equity funds than fixed income funds choices, then most participants tended to overweight their portfolios in equities by the same percentage. Interestingly, the person in the next cubicle has more influence over your investment choices than you may think. The research showed that there was a strong peer group correlation.

To alleviate some of these biases, there are new Capital Accumulation Plan guidelines for employers to follow. Essentially the regulations are designed so that employers who give employees the tools to save for retirement must bear some responsibility in showing them how to get the most effective use out of a pension plan. To mitigate the risk of making bad decisions most employers have instituted education seminars or provide default investment options. While neither is a substitute for personalized advice, they are nevertheless a good starting point.