Insurance Journal – Page 19

Exercise and the medical expense tax credit

At issue

The scope of expenses that may be claimed under the medical expense tax credit (METC) is limited to the criteria outlined in subsection 118.2(2) of the Income Tax Act.

For a medical “service” to qualify, the payment must be made directly to a licensed medical professional, or to the corporation employing that professional. For any “device or equipment” to qualify, it must be prescribed (in the medical sense) by a medical practitioner to qualify, and also be prescribed in the legislative sense. This prescribed list of about two dozen types of equipment and devices appears in Income Tax Regulation 5700.

Though on the face of it, these rules are fairly black-and-white, they are often the subject of inquiries to the Canada Revenue Agency (CRA) and appeals to the court system.

Roberts v. The Queen, 2012 TCC 319

The taxpayer had prostate cancer, and suffered from incontinence following a radical prostatectomy. His doctor recommended that he join the local YMCA and engage in an exercise routine. Correspondence from the doctor confirmed that the symptoms of incontinence decreased dramatically after joining the club.

The disallowed METC claim was “regrettably” upheld on appeal, as there is no provision for health club membership within s.118.2(2). The taxpayer’s alternative argument was that the CRA allows for recreational programs to qualify as medical expenses, but the judge clarified that this would only apply for individuals entitled to claim the disability tax credit.

Anthony v. The Queen, 2012 TCC 334

The taxpayer suffered from severe chronic panic, for which her doctors recommended she purchase and use a hot tub. This alleviated the pain and significantly assisted her ability to walk. Even so and even though CRA did not dispute the effectiveness of the hot tub, the METC claim was denied on reassessment.

On appeal, the judge considered ITA paragraphs by which the hot tub might constitute a home renovation that is “of a type that would not normally be incurred by persons who have normal physical development” and/or whether it is a “device that is exclusively designed to assist an individual in walking where the individual has a mobility impairment.” [The emphasis appeared in the judgment.]

Though the judge was explicitly sympathetic, on both grounds she found that a hot tub is something “commonly purchased by persons who do not suffer severe disabilities and is not exclusively designed to assist persons with a mobility impairment.” Accordingly it did not fulfill the legislative intent, and the appeal was dismissed.

CRA 2011-0402881E5 – Weight Loss Program as a medical expense

The CRA was asked about METC qualification for a few types of expenditures, including fees paid for a weight-loss program.

The author took the view that such a program undertaken by an individual for the treatment of obesity may qualify if provided by a licensed medical practitioner for therapeutic or rehabilitative purposes. On the facts presented however, the opinion was given that the intended claim would be unlikely to succeed.

Practice points

Patients should take their medical advice from qualified medical practitioners, but as taxpayers they should not assume that a treatment or device automatically qualifies for the METC just because it was medically prescribed.
Where alternative treatments, devices and/or device features are presented, it would be prudent to review the METC criteria before making a final decision.
Guidance on the CRA’s approach is available on its website. Search for Interpretation Bulletin IT-519R2 (Consolidated), Medical Expense and Disability Tax Credits and Attendant Care Expense Deduction.

Whether a gift to an executor is taxable compensation

At issue

Compensation received by an executor is income from an office, and thereby taxable.

Where an individual is both named as executor and provided a legacy or bequest in the Will, there is a presumption that that gift is in lieu of compensation. For distinction, a legacy is a dollar amount, whereas a bequest is an item of property. Either way, the amount of compensation would be the fair market value of the gift. Ironically in the case of a large single property bequest, an executor who lacks cash liquidity may have to dispose of the item in order to pay the corresponding tax bill.

The executor may rebut the presumption that a gift is compensation by offering evidence of the testator’s contrary intention, either through the Will or by surrounding circumstances.

Boisvert v. The Queen, 2011 TCC 290

Guy Boisvert and a notary were named as liquidators (the proper term for executor in Quebec) of the estate of Marcel Sauvé. The Will provided that as a “token of gratitude” for the services as liquidator, Mr. Boisvert would be bequeathed the deceased’s residence and contents. In time, Mr. Boisvert was assessed for income from an office in the amount of $68,080, as quoted in the estate’s declaration of transmission.

On appeal, Mr.Boisvert testified that, despite the words in the Will, he had a very small role in the estate administration, deferring much to the notary. In turn, the value of the property should be seen as disproportionately large to be characterized as remuneration.

The court held that even if he played a small role, he “had accepted the office and the responsibilities that came with it” and therefore the presumption of compensation was not rebutted, and the tax assessment was upheld.

Re Hayes (Estate of), 2006 ABQB 427

This matter came before the court as a contested passing of accounts, opposed in part by the Public Trustee on behalf of minor beneficiaries who were grandchildren of the deceased. Among the arguments offered, it was asserted that the gift of a residence to one of the executors constituted compensation, and therefore there should be no further claim for personal expenses of the executors.

After summarizing the arguments, the judge simply stated the view that “the gift to Delwin Hayes as Bert’s son was personal and therefore the presumption has been rebutted.” Though this was not a tax case, the opposite finding would certainly not have been helpful to Mr. Hayes in dealing with his subsequent tax return.

Capital Trust Corpn. Ltd. v. The Minister of National Revenue, [1937] S.C.R. 192

Joseph Mackenzie was one of a number of executors of the estate of his father, who died in 1923. A Codicil to the Will provided that Mr. Mackenzie should be paid $500 monthly, which was to be in addition to any entitlement that “courts or other authorities may allow him in common with the other executors.”

For reasons unexplained, the monthly amount was not paid until a catch-up payment of $19,500 was made in 1927.

Mr. Mackenzie’s argument that this constituted a gift was not successful as he would not have been entitled to it had he not accepted the appointment. Furthermore, he was taxed on the full amount as received in 1927, and specifically was not allowed to allocate the amounts proportionately across the intervening years.

Practice points

A testator should understand that where a gift is closely tied to an absence of compensation, it is likely that the executor will be taxed on that amount. Bear in mind as well that it is often the case, especially with small and quickly administered estates, that there is little or no corresponding tax deduction to the estate, effectively resulting in a gratuitous windfall to the government.
An executor who is a beneficiary of a bequest or legacy may wish to review the Will before accepting the appointment. Depending on phrasing, this could bring a gift under tax scrutiny that might not have occurred had the individual been strictly a beneficiary. On the other hand, if there is a direct connection between accepting executorship and the gift, a taxable gift is likely better than nothing at all.

Discharge of a deceased bankrupt

At issue

As one of its main objects, bankruptcy law seeks to provide relief to those who might otherwise face an interminable condition of debt servitude. The bankruptcy process fosters their rehabilitation to again be effective economic contributors.

Under the Bankruptcy and Insolvency Act (BIA), insolvency is the state of being unable or unwilling to pay one’s debts as they come due. Alternatively it can be measured as having less net realizable assets than one’s current and accruing debts.

Bankruptcy is the legal status of a person who has either him/herself made an assignment, or against whom a bankruptcy order has been issued, following which that person’s assets generally form the bankrupt estate. Discharge is the step whereby a person is released from the legal status of being a bankrupt.

How then might a discharge be reconciled where a bankrupt estate is that of a deceased person?

Re Simoes, 2011 BCSC 63

In this set of four applications before a registrar sitting in bankruptcy chambers, all of the subject bankrupts were deceased. As the judgment details, the law surrounding discharge of a deceased bankrupt is thin, and therefore the registrar took it upon himself to research the matter in order to provide context for the decisions, and guidance in future matters.

There are three competing interests involved in a discharge application, being those of the bankrupt, the creditors and the public’s faith in the integrity of the system. Rehabilitation of the bankrupt is obviously moot where the bankrupt is deceased. With respect to creditors and the public interest, the personal representative of the deceased could be called upon in appropriate circumstances to make a payment into the bankrupt estate to ascertain a conditional discharge.

In three of the cases before the court, the registrar determined that the respective bankrupt was in substantial compliance with his or her legal obligations, and an absolute discharge was granted. In the fourth case, the trustee had filed an objection, but the registrar could find no evidence that the shortcomings were willful, so ordered a brief one-week suspension before granting the discharge.

Bankruptcy of Lyle Coleman, 2011 MBQB 300

Lyle Coleman died in March, 2009. His daughter was appointed as administrator of the estate in February 2011, and shortly thereafter in March 2011 she obtained leave from the court for an assignment of the estate into bankruptcy.

In support of the present application for discharge, the bankruptcy trustee reported to the court that “all of the assets of the deceased have been liquidated and distributed in conformity with the provisions of the BIA.”

The judge lauded praise upon the daughter for her “commendable behaviour” as estate administrator in undertaking the bankruptcy assignment “without any possibility of personal benefit to herself.”

Still, he distinguished the Simoes cases under which the living person made the assignment, as compared to the present estate administrator’s initiation. Further, he emphasized that there is no practical effect of the BIA‘s rehabilitative objective if a bankrupt is deceased.

The judge then declined the discharge based in the main on the possibility that there may be “pay equity benefits, unknown but now valuable fractional mineral rights” and other potential future receipts. Of note, he earlier acknowledged that “the assets and debts could be considered as modest”, with the realized assets having been $17,000 for distribution among eight creditors claiming $23,000.

Practice points

Clearly an estate administrator should tread carefully before making a bankruptcy assignment, lest the result be an open-ended commitment as in Coleman.
It should be emphasized to a person in the midst of debt problems how important it is to maintain existing life insurance in force. The proceeds could obviously provide direct estate liquidity. As well, where the estate contains assets that have emotional value, a direct insurance beneficiary could nonetheless choose to contribute into an estate to secure a conditional discharge, rather than allow those assets to be liquidated in order to pay out creditor claims.