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I can’t believe I forgot yet another Tax Freedom Day. I am so busy this time of year. I didn’t even get my Happy Tax Freedom Day cards out into the mail until last night. What an embarrassment.
But yes, Tax Freedom Day was last week, June 14th to be exact. Virtually every Canadian added some extra cash to their pay cheque as of June 14th and to be honest, it could not have come at a better time. It costs $100.00 to fill my car each week and the price of food (based on the price of corn) continues to climb along side.
I think Tax Freedom Day will always be a bit of a second-rate holiday for people like me. While it is an important day for most Canadians, it holds little importance for HSA owners. After all, they already enjoy a greater degree of tax freedom when it comes to their medical expenses. When an individual business owner experiences savings of $5,000-$10,000 a year for their high-cost medical expenses through an HSA, you can understand why Tax Freedom Day is a bit over-rated. After all, an additional $150.00 in their pocket from mid-June to December isn’t going to change the world. They have turned Tax Freedom Day into a year-long event. Sort of like those neighbors who leave their Christmas lights up all year long…because they can’t get enough of the holidays I suppose.
But I am always looking for a reason to celebrate and even though I missed the official date, I still have 30 people coming over on Saturday for a Tax Freedom Day BBQ. You know, the kind where you drink lower-taxed domestic beer versus imports and play games like “pin the tail on the finance minister”. That reminds me, I need to order my dollar-shaped cake for the party!
To continue with my dental experience, I decided to ask for a series of estimates for braces – the invisible kind not the kind Tutti wore back in the eighties. Many of you are asking yourself…why on earth would you want braces? Especially at your age? Well, I have always had a bit of an overbite and when my wisdom teeth came in, they caused my teeth to be extra tight. So, I am exploring the option of getting braces…..until I received the quote. The cheapest solution will probably be $6,000 for what I am looking for – the equivalent of two 42″ Plasma Screen TVs or new hardwood floors in the house!
I don’t need them right away and can start saving today. Since Gremolata is incorporated, I qualify for a Health and Welfare Trust. I don’t want to go overboard here deposit-wise, but I could easily allocated $300 a month towards an HWT in my name. This could be considered the core health benefit plan for the company. This would provide me with $3,600 a year in deposits less a 10% administration fee ($360). Using this schedule, I would have enough saved up for the braces in two years. The dentist suggested I wait 6 months before I even consider the consultations with the specialist, so this time line works well for me.
Let’s do some tax talking for a minute. The $3,600/year would become a business expense for the corporation as a cost of doing business – keeping me healthy. The $3,600 deposited into my Health and Welfare Trust, as an employee of the corporation, would be a tax-free benefit for me (as long as I continue to reside outside of Quebec). In essence, I am now receiving $3,600 in additional compensation I can use for braces without having to pay the income taxes on the amount.
So, there you have it. I can use my Health and Welfare Trust to pay for my braces and save both myself and the company money. I can be flexible with a deposit schedule I am comfortable with financially and use the funds when I have reached my goal. You now understand how to save money as well as my dental records. Ah, the internet.
The Alberta government officially said goodbye to the health tax in their recent budget effective January 2009, joining seven other provinces and territories (New Brunswick, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Saskatchewan and Yukon) that don’t collect specific health premiums or taxes. These provinces fund healthcare out of general tax revenue.
So, what is an Albertan to do with their new found wealth? After all, each resident is looking at savings in the range of $528 per individual and $1,056 per family. It is a great amount to use on a new television or perhaps a BBQ for summer entertaining. But if they are self-employed, like so many other Albertans working in the oil and gas industry, they could be putting these funds into a Health Spending Account to maximize the return.
If you think about the money they are receiving back as part of their total budgetary spending, they could simply deposit the equivalent into a Private Health Services Plan. There are several HSA suppliers in Alberta who would be happy to take the money for them and in return, the taxpayer now has access to a reserve of funds to keep themselves and their family healthy. The big perk, they can double dip on the tax break they receive by making it yet another tax deduction for themselves as a PHSP. Brilliant!
I hope all self-employed Albertans will think about this as an option. It might be a small amount of money you are getting back, but it is still a great way to make it work for you long-term.
I am a bit of a looser when it comes to taxes and I am probably the first Canadian to submit their return each year. I always get a reimbursement cheque and immediately put it back into my investment portfolio. For self-employed Canadians however, there is a better option!
A smart place to put your tax reimbursement is always a Health Care Spending Account (HCSA or HSA). But what should you think about before putting your money into one? Well, if you own your own business that is not incorporated, you may want to consider opening a Private Health Services Plan (PHSP) this year. If you do, you should take a few steps to consider if this is a good option for you…
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Do a headcount of your family members. To determine your maximum PHSP allowance each year, you simply add $1,500 for each eligible adult over the age of 18 years and $750 per dependent under 18 years old. If it is you, your spouse, and your son, then you are entitled to $3,750.00.
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Top-up or Not? Take a look at your finances (high-level) and get a sense of how much money you will be getting back from your return. If you have a financial planner or broker, speak with them about topping up your RRSP contributions. They will have access to several calculators to help you determine how much your return could be if you “maximized it”. You may want to top-up to get the reimbursement to equal your PHSP allowance.
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Take a look at your family and business finances and decide if you can go a year without the reimbursement. Some families rely on their tax reimbursement each year, so deciding not to take it can be a bit of an issue. If you can live without the money and put off that trip to Disney World with the kids for the coming year, why not make it work for you next year?
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Be sure to send in your return to Canada Revenue Agency sooner than later. Why? The earlier you receive your reimbursement, the better off you are for next year’s deductions with your PHSP. The deduction for the PHSP is pro-rated, so you will want to start your contributions early in the year to get the full benefit. The faster you get your money back, the faster you can open your account. But remember, you can always simply open the account and fund it yourself until you get reimbursed – but why use your own money?
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Finally, determine the final deposit amount for your PHSP. This is done by calculating the difference between your maximum PHSP allowance (less pro-rated months if you are not early) and your return reimbursement. If you are getting more back from CRA versus your PHSP allowance, congratulations! If not, you need to look at how much your family needs for healthcare and whether or not you want to top it up with your own money. Remember, what you put into your PHSP is a full deduction for you (unlike RRSPs), so you may want to go the extra mile here.
Well, that just about covers it. If you do decide to use your tax return to fund a PHSP, remember that the strategy here is to use the funds to pay for your healthcare costs while making a sensible tax move. The money you deposit in the coming months will be 100% deductible off your 2008 return as a business expense. If you think about the same money going into an RRSP, you would never receive the full amount as a tax deduction. If you are going to be making regular RRSP contributions throughout 2008, why use your 2007 reimbursement to get a small lift when you could get a full lift from a PHSP?
The recent federal budget got the whole Canadian insurance world up in a tizzy. While most people did not notice the entry, everyone in the benefits consulting and insurance world started freaking out over one paragraph. It wasn’t in the budget speech. Rather, it sat in the bowels of the 416 page budget details document. So what could have gotten everyone so upset? Well, on Page 282, Appendix 4, the following was documented…
Budget 2008 also proposes to clarify the METC provisions regarding the eligibility of drugs and medications.
Currently, drugs, medications and other preparations are eligible for the METC when they are both prescribed by a recognized medical practitioner (or a dentist) and recorded by a pharmacist. These two requirements are intended to ensure that only costs for substances not generally available to the public and required for medical reasons receive tax relief. However, recent court decisions have interpreted this measure to include, in some cases, the cost of vitamins, supplements and drugs that could otherwise be purchased without a prescription. Such an interpretation goes beyond the policy intent of the METC.
Budget 2008 therefore proposes to clarify the wording for eligible drugs and medications to ensure that those that may be purchased without a prescription remain ineligible.
Holy Cow Batman! Do you mean that I cannot claim Flintstone Vitamins from my HSA? I actually need to have a prescription from a doctor and actually see the pharmacist to get something a little more legitimate? What could the insurers and consultants be so upset about?
Well, they believe that this wording will eliminate ALL over the counter prescriptions. This is because there is a disconnect on what the government is trying to achieve and what the consultants and insurers understand as “the realm of their industry”. The goal here is to stop sole-proprietors from buying over-the-counter (OTC) vitamins then claiming them as eligible expenses on the METC. The consultants and insurers are assuming that the wording will eliminate over the counter drugs completely and not what the federal budget suggests “Items without a prescription”. There is a difference.
Yes, this may have some implications on certain health benefit plans and coverage. But certainly not anything to be too concerned with here. You can always assume that the CRA will look at each case with what is the best interest of CRA and whether the taxpayer (individual or corporate) acted in good faith given their interpretation of the rules. After all, they are not all evil monsters out to tax you to death. The problem here is that the wording regarding OTC drugs and the METC has been grey for far too long and has caused multiple headaches for sole-proprietors and CRA. So they want to clarify the rules.
Let’s just see what they come up with before everyone starts claiming that the sky is falling. PS – If you do get hit on the head be sure to see your Doctor first if you need some form of pain reliever – just to be safe!
Tax-free Savings Accounts (TFSA) were not the only thing announced during the federal budget this week. New allowances were made to the list of eligible claims in addition to some strong actions to be taken to tighten up the words and rules on prescriptions and vitamins. Go Flaherty, get tough with those supplement-poppin baby-boomers!
The budget approved the following items to be included as eligible expenses: altered auditory feedback devices for the treatment of a speech disorder; electrotherapy devices for the treatment of a medical condition or a severe mobility impairment; standing devices for standing therapy in the treatment of a severe mobility impairment; and pressure pulse therapy devices for the treatment of a balance disorder. Expenses for service animals specially trained to assist an individual who is severely affected by autism or epilepsy to cope with the individual’s impairment, was also added. Currently, the rules only recognize an individual who is blind, deaf or has a severe impairment that markedly restricts the use of the individual’s arms or legs.
Finally, the budget announced that it would revise the wording on prescription drugs. Currently, drugs, medications and other preparations are eligible for the Medical Tax Credit when they are both prescribed by a recognized medical practitioner (or a dentist) and recorded by a pharmacist. However, recent court decisions have interpreted this measure to include, in some cases, the cost of vitamins, supplements and drugs that could otherwise be purchased without a prescription. To clarify the issue, the government is going to clarify the wording for eligible drugs and medications to ensure that those that may be purchased without a prescription remain ineligible.
This is good news! By reinforcing the rules, the government is taking a serious stance on the importance of the Medical Tax Credit as well as Health Spending Accounts. This should be a taken as stern message to some of the fly-by-night HSA providers to shape up your adjudication and HSA knowledge, or ship out!
Ah, Budget Day! One of the few days in the year when the finance minister gets a new pair of shoes, accountants in Ottawa suddenly feel like movie stars, and the CBC has so much Class A news content to share that they nearly collapse from the pressure in the newsroom. Yesterday, the federal government announced a new tax-savings vehicle for Canadians designed to help people save money on taxes. But what are the true savings versus an HSA?
Tax-Free Savings Account. This flexible, registered, general-purpose account is designed to allow Canadians to save money, tax-free. Starting in 2009, Canadians can contribute up to $5,000 every year to a registered Tax-Free Savings Account, plus carry forward any unused room to future years. The investment income, including capital gains, earned in the plan will be exempt from any tax, even when withdrawn. Canadians can withdraw from the account at any time without restriction. There are no restrictions on what they can save for; and the full amount of withdrawals may be re-contributed to their Tax-Free Savings Account in the future, to ensure no loss in a person’s total savings room.
It is important to note here that the $5,000 is not a deduction. It is an allowance. This means that you will not have to pay any tax on the interest this $5,000 earns. So what are the savings? Well, let’s say you are an incorporated professional in the $100,000 income tax bracket and you deposit $5,000 into a TFSA. You then use these funds to invest and your rate of return is 4%. Well, you would be looking at a total annual tax savings of $27.00 versus a traditional taxable account.
Health Spending Account. Now let’s take the same $5,000 and have your incorporated entity deposit the funds into an HSA in the form of a Health and Welfare Trust. The $5,000 becomes a business deduction for the company and is a non-taxable benefit for you, the employee. In essence, you are receiving $5,000 tax-free to pay for your current after-tax healthcare expenses. If these expenses are already $5,000 per year, you just saved yourself roughly $2,029.00 in taxes in comparison to the current medical tax credit less related fees for administering the HSA.
Both a Health and Welfare Trust and the new Tax-Free Savings Account can be used as a savings vehicle for future spending. While the HWT does not earn interest, the initial tax savings far exceeds any reasonable return one could hope for from an investment using a TFSA. But a TFSA does sound like a great tool for short-term savings. The question is, which is a better strategy. Opening a TFSA on January 1st, 2009 and depositing $5,000 or opening an HWT for the same amount and taking the $2,029.00 in tax savings to fund a TFSA the following year? Sounds complex, but a better model for making your money work for you in my opinion.
It is the last week for Canadians to make contributions into their RRSP to take advantage of the tax-deduction for 2007. I myself have received numerous calls from my financial advisor reminding me to top-up my contributions for 2007 and letters indicating that my advisors will be available until the wee hours of the night to help me should I decide to add more to my investment plan. It makes me wonder, how many Canadian small business owners would put more into the RRSP each year if they could free up the extra money? Are they spent?
Financial advisors tend to focus on the after-tax money available to invest as opposed to looking at ways to free-up pre-tax dollars as a tool for investing. For many small business owners, the HSA is an unknown option. Each year, they take a few of their after-tax receipts and make a claim for the medical tax credit. A nice gesture from the federal government to reimburse for medical expenses but certainly not enough to give someone more money to invest. The reality is that if they had a Health Spending Account, they could be using the tax-savings to re-invest into their retirement plan.
Each year, some financial advisors look for ways their small business clients can contribute more without giving them any real options to free-up the funds to do it. To all my readers out there who are financial advisors with small business clients…get them an HSA today! Show them how they can make their current after-tax expenses into pre-tax business deductions. Show them how this will impact their taxable earnings and how they can use the savings to re-invest in their RRSP! Given the economic conditions and the tough time your clients have had this year, this is a great way to show them how resourceful you are in finding ways to build wealth for them using a readily available and sensible solution – the HSA.
Oh how I love thee Alberta, with your lucrative oil sands and snow-capped mountains. You shine across this great land with your quality beef, enormous shopping mall, and WestJet regional hub. You stay the course and never turn back on a decision…well, until yesterday that is.
In 1969, you jumped into the controversial world of health premiums by implementing a “user fee”, or friendly “here’s to helping you get better” tax. Albertan families paid an average of $1,056 a year in health premium taxes to the government last year alone. Your decision to change the course and eliminate them is a major reversal for a 37-year-old government that has resisted calls to stop collecting the much-loathed fees. Well, sometimes the message gets lost in the delivery and so we cannot blame you for not getting it earlier. After all, your neighbor British Columbia followed suit, as did Ontario. Could they be that bad a thing to have around? But why now Alberta? Why give up on something that has caused so much controversy for so long?
After all, you do have the highest number of incorporated professionals in the country saving money on personal taxes and the largest concentration of Health Spending Accounts per capita in Canada. Considering this, it would appear that taxes and healthcare are obviously not issues for Albertans. It certainly is an issue for Ontarians like me, but of course, we are still adapting to healthcare premiums and de-listed services. Give us a few more years and everyone in Ontario will be incorporated with their own Health and Welfare Trust. I wonder if Mr. McGuinty realizes this? It could be a budget balancing issue if everyone starts paying less tax through incorporation.
Oh well, at least we have those oil sands. Fort McMurray is just north of Sudbury, right?
The Canadian Taxpayers Federation, with the help of the CD Howe Institute, released a tax-proposal for the federal government this morning entitled Lower, Simpler, Faster – Towards a single tax rate for Canada. The proposal recommends the federal government embark on comprehensive tax reform with the goal of adopting a single personal tax rate. As an immediate first step, the authors (Mark Milke & John Williamson) recommend that Canada move to two federal income tax rates of 15% and 25% by 2012. There are currently four tax rates of 29%, 26%, 22% and 15%.
Their proposal also called for a decrease in the number of deductions available to Canadians. While they noted medical expenses as a deduction, I was disappointed to see less emphasis placed on reforming the current medical tax credit. The CTF plan proposes a generous personal exemption, stating that “Basic personal exemptions should be set at a generous level to exclude those with the lowest incomes and ensure the tax system remains progressive“. Supporters of the HSA could argue that the CTF proposal would have more support from other lobby groups (and the voting public) if it balanced their tax model with more sensible deductions.
A workforce with more money in their pockets is only beneficial if they are healthy and can produce. While I agree with the report, one could argue that the replacement of the medical tax credit with some of the HSA policies outlined in the US Medicare Modernization Act might prove to be an additional benefit. Allowing every Canadian to have access to an HSA and deduct it from their personal income taxes like an RRSP would be a good step forward to keeping Canadians healthier, and not just wealthier. While I understand the CTF proposal was focused on tax and not deductions, I certainly hope we see more discussion in Ottawa regarding the US-model for Health “Savings” Accounts as tax-savings vehicle to promote healthier and wealthier citizens.
HSA Information for Canadians 
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