Tax Planning & The Disability Tax Credit

By Halldor K. Bjarnason

When it comes to saving money on income taxes, having a disability, or a dependent with a disability, can be a real benefit! With the income tax season upon us, it seems like the perfect time to look at how the Disability Tax Credit (the “DTC”) can benefit you and your family.

The DTC is a non-refundable tax credit which can be claimed by persons with disabilities who have “prolonged impairments” of their physical or mental functions. While it is a “tax credit” for having a disability, it has a number of benefits that stretch beyond those of a typical tax credit. For example:

a) it acts as a tax credit to reduce the taxable income of a person with a disability;

b) when it is not used by the person with a disability, it can be transferred to a spouse or supporting family member to reduce their taxes;

c) if the person with the disability is the beneficiary of a trust created by themselves, their spouse, a parent, or grandparent, the DTC permits the trustee of that trust to file a “Preferred Beneficiary Election”. The PBE permits the trust’s unused income to be taxed in the beneficiary’s hands – without actually paying it out, taking advantage of the beneficiary’s various personal tax deductions to minimize the income tax payable by the trust; and

d) the DTC is also the admission ticket for establishing a Registered Disability Savings Plan. An RDSP is a great magnet for attracting government grants and bonds – an annual contribution of $1500 nets up to $4500 in government contributions each year.

In addition, if the person who qualifies for the DTC is a minor, his or her parents will also qualify for the Child Disability Benefit (the “CDB”). The CDB is a supplement to the Canadian Child Tax Benefit, and is paid on a monthly basis. The CDB provides a bit more income each month to assist with the care of a child with special needs.

The main challenge in obtaining the DTC is the application process. The process begins with what appears to be the simple filing of a form (a T2201). The form is required to be filled out by a physician, but it is based on limits to daily functions and NOT the person’s diagnosis. What this means is that for the purposes of the application form, the physician either really needs to understand his/her patient, or will need to receive detailed input from the patient or family members. However, he or she also needs to appreciate the need to use the correct phrases on the form, in order for it to pass the Canadian Revenue Agency’s (the “CRA”) screening process.

The physician must assess daily physical activities such as walking, speaking, hearing, and feeding, and/or routine mental functions, such as social interactions, memory, goal setting, self-care, and judgment. The test is fairly subjective, but to qualify, the physician needs to determine that the applicant either has two or more daily activities where they face significant restrictions or one activity where they are markedly restricted. There is a third way to qualify, in which the applicant is receiving life sustaining therapy.
Providing that the physician can verify that the applicant is significantly restricted in two or more daily functions, markedly restricted in one daily function, or receiving life sustaining therapy, he or she must then estimate how long the condition will last. In an effort to reduce the number of DTCs issued, the CRA will often only issue DTCs for a set period of one to five years, unless there is conclusive evidence that the disability is permanent.

Once the documentation is filed, it usually takes about four months for the CRA to process the application. The CRA will often send the physician an additional questionnaire – seeking further information. For a physician who hates filling out forms, the procedure can be a major irritant – but the additional details are crucial in the qualification process for the DTC. It is important to keep in mind that the CRA is a lot more nitpicky on applications where the person has a mental or psychological condition than a physical disability. Hence, accuracy and preciseness are crucial.

Once the DTC is issued, you (or your supporting family member) are permitted to collect up to 10 years of missed tax credits from the past. Depending on the applicant’s income level, this can result in significant tax refunds. There are many companies that advertise as having “expertise” in helping people get the DTC. While they do it for a hefty fee – usually a percentage of the tax refund – given the number of companies cashing in on providing this service, it suggests that the refunds can be substantial.

In my law practice, one issue that regularly comes up for people receiving provincial disability benefits is remaining eligible after receiving the refund. As an individual on benefits can only have $3000 in liquid assets, and the refund is often substantially more than that, they are cut off the moment they receive the refund. My favorite technique for resolving this issue is to roll the refund into a non-discretionary trust (so the person is immediately reinstated on their benefits). Then each year, contribute $1500 from the trust to a Registered Disability Savings Plan. If the entire refund is placed in an RDSP, government grants and bonds are only received for the one year. If the contributions are spread over a number of years, it allows for maximizing the available grants and bonds.
For example, if a person on low income receives a refund of $17,000, and places it directly into an RDSP, they will receive up to $3500 in government grants and bonds. Alternatively, if the $17,000 refund is rolled into a non-discretionary trust, and then each year, $1500 goes from the trust to the RDSP, there will be up to $38,500 in grants and bonds contributed to the RDSP. This amounts to $55,500 in free government money, received for simply having a disability and obtaining a DTC!

The Disability Tax Credit is a great tax deal for persons with a disability and their families. If you combine it with a Registered Disability Savings Plan, and leverage it with a trust, it can be quite amazing how much “free” money is available!

For more information on Estate Planning for Your Relative with a Disability, please email visit PLAN Institute to sign up for a workshop.

Please note that this article is provided for general information only. As specific facts affect how the law is applied to your circumstances, it is always wise to get the advice of competent legal counsel.