Financial and tax supports for persons with disabilities

People with physical and mental disabilities often face serious financial challenges related to inherent earning limitations or direct out-of-pocket expenses.   

Fortunately, government support is available, but it can it can be a dizzying journey to understand the type, value and interaction of tax measures and direct financial assistance designed to assist persons with disabilities. As well, the disabled individual and their families generally need to take coordinated financial and estate planning steps to optimize those public sources.

To get started, it helps to understand what direct financial assistance and relieving tax measures are available. 

Direct financial assistance

Canada Pension Plan / Quebec Pension Plan

The CPP/QPP disability benefit is available to people who have made recent CPP/QPP premium payments while they worked.  The disability must be both: 

  • Severe, were a person is incapable of regularly pursuing any substantially gainful occupation, and
  • Prolonged – the disability will prevent a return to work at any job in the next 12 months, or is likely to result in death.

The maximum monthly disability benefit a qualifying disabled person can receive in 2008 is $1,077, plus a maximum monthly benefit of $208 for each dependant child of a disabled contributor.  These are related but separate applications that must be made using forms available through Service Canada.

Child disability benefit 

Based on family net income, the federal government will pay as much as $195 per child each month to families with children qualifying for the disability amount (see below).  Tax form T2201 must be completed and approved by CRA in order to qualify, and the payment is then delivered as part of the monthly Canada Child Tax Benefit payment. 

Provincial support programs 

Some provinces have standalone disability support programs, while others recognize disability as a special qualification within the overall social support system. Generally though, for participation or qualification, the disability must be certified by a licensed physician using provincially prescribed criteria and forms.  

Entitlement is reduced or eliminated where earnings or assets exceed regulated thresholds. In some provinces it may be possible to set up a discretionary trust (sometimes called a “Henson trust” for the Ontario case first litigated on the issue) to keep assets available for the person’s benefit but outside of this calculation. (See the link at the end of this article for more on Henson trusts.)

The composition of service offerings, cost reimbursements and direct financial assistance varies considerably from province to province. The maximum annual, direct financial assistance disabled persons receive from provinces, on average, comes in just under $10,000.

Individual income tax relief

Tax measures commonly available to assist persons with disabilities generally fall into three categories. These include:

  • Deductions: Qualifying items reduce the taxable income upon which relevant federal and provincial tax rates are applied to arrive at initial tax liability.
  • Non-refundable tax credits: Once tax liability is calculated, these credits directly reduce that liability but cannot take it below zero.  The qualifying amount is multiplied by the applicable federal or provincial rate (usually the lowest bracket rate) to arrive at the credit value.  For 2007 reporting, the federal rate is 15%.
  • Refundable tax credits: These may result in an amount payable to the individual even where tax liability has been reduced to zero.

Focusing on the 2007 tax reporting year, the following is a bit of a roadmap that identifies key items, and attempts to put them in context with one another.

Disability amount

This is a non-refundable credit, available both federally and provincially. Using tax form T2201, the disability must be certified by a qualified medical practitioner as being both severe and prolonged.

  • Severe: Blindness, conditions requiring life-sustaining therapy, a marked restriction in speaking or hearing, walking, feeding, dressing, elimination or a marked restriction in everyday mental functions.
  • Prolonged: Lasting, or expected to last, continuously for at least 12 months.

The basic federal amount is $6,890, with a supplement worth as much as $4,019 for children under age 18.  Taken together, the maximum possible federal credit is $1,636.

The maximum basic credit range at the provincial level ranges between $386 and $758.

Disability supports deduction

A disabled individual may deduct qualifying, out of pocket expenses incurred to work, go to school, or conduct grant-supported research. The individual may not deduct amounts already claimed under the medical expense credit (whether claimed by the individual personally or on his or her behalf as a dependant), or amounts already reimbursed by health insurance plans or through other non-taxable payments. 

The deduction cannot exceed the person’s earned income for the year, which generally includes:

  • Employment income and net self-employment income;
  • the taxable part of scholarships, bursaries, fellowships, and similar awards;
  • net research grants, and
  • earnings supplements and financial supports under most government sponsored employment programs.

For students at designated institutions however, the deduction may be as much as $15,000 more than their earned income.

Medical expenses

An individual may claim eligible medical expenses paid, whether incurred in Canada or elsewhere, in any 12-month period. Special rules apply to attendant care expenses, whether the care was received at-home or in an establishment. Eligible amounts can be claimed as a medical expense, or as a disability support deduction.

This is a non-refundable tax credit, equal to expenses that exceed the lesser of:

  • $1,926, or
  • 3% of the disabled individual’s net income.

This number ranges between $1,620 and $1,936 in different provincial formulas. 

As indicated above, it is not possible to claim both the supports deduction and the medical expense credit for the same cost. Accordingly, a test calculation should be run to determine which of the two yields the best net tax result.

Refundable medical expense supplement

This is a refundable credit designed to assist people with very low incomes who claim either the disability supports deduction or the medical expense credit. Subject to a clawback where family net income exceeds $22,627, this federal credit can be worth as much as $1,022.

Income tax relief for dependants

Caregiver amount

This non-refundable credit is designed for individuals providing in-home care to an immediate family member or certain close relatives.  If this credit is claimed by anyone, the infirm dependant 18 or older credit (which is of equal value) may not be claimed.  Furthermore, this credit is reduced when the eligible dependant credit is claimed for the same live-in person. The federal credit is worth $623; provincial credits range from $225 to $442.

Child care expenses    

The calculation of this credit can be complicated, even without disability issues to consider. For present purposes, be aware that there are provisions to guard against double counting where concurrent claims are made for the disability amount or the medical expense credit.

Children’s fitness tax credit

This is a new non-refundable federal credit, introduced in 2007. Children eligible for the disability amount, this credit may be doubled to be worth as much as $150. The basic fitness tax credit – 15% of $500 spent on eligible expenses – is generally worth $75 to families. For disabled children, the eligible amount parents can claim is doubled to $1,000, making the credit worth $150.

Transferred amounts

An individual may be able to claim certain amounts, notably the disability amount and the medical expense credit, transferred from a spouse, common-law partner or dependant.

GST/HST relief

Many goods and services used by persons with disabilities are not subject to goods and services tax/harmonized sales tax, whether by exemption or rebate. These include:

  • Most health care services; 
  • Personal care and supervision programs while a primary caregiver is working; 
  • Prepared meal delivery programs;
  • Public sector recreational programs designed for persons with disabilities;
  • Medical devices and supplies.

Coordinate your private planning options

In order to optimize access and use of government financial and tax supports, individuals and families must conscientiously manage their income and assets. Many times this includes family estate planning, up-to-date wills, beneficiary designations, powers of attorney and the use of different trust structures. 

What will be most interesting in the coming years will be to see how these planning activities are affected by the availability of the new registered disability savings plan.

The TFSA arrives

In the years to come, we may very well look back on the 2008 federal budget as the event that changed the way we invest.  

Starting in 2009 every person 18 or older may contribute up to $5,000 annually to a Tax-Free Savings Account, or TFSA, touted by the government as a “flexible, registered general-purpose account that will allow Canadians to earn tax-free investment income.”

As with an RRSP, a TFSA operates as a tax shelter while funds remain in the plan.  Where a TFSA differs is at contribution and withdrawal times:

  • An RRSP provides a tax deduction when you contribute, but funds are fully taxable upon withdrawal
  • A TFSA is funded with after-tax money, but all withdrawals are 100% tax-free

The $5,000 limit is indexed annually, is not affected by a person’s income (as is the case with RRSP room), and any unused room may be carried forward indefinitely.  

What’s more, those non-taxable TFSA withdrawals directly recover contribution room dollar-for-dollar.  A TFSA can therefore be accessed, replenished and re-accessed as your life circumstances change.  

There is no forced conversion into a RRIF-type depletion plan; you can keep the money invested as long as you want, and there is no tax at death.  

In terms of ultimate after-tax dollars, if a person expects to be at the same tax rate on contribution and withdrawal, an RRSP or TFSA will yield the same result.  Where there is a rate differential, however, choices may be affected: High-to-low favours the RRSP, whereas low-to-high favours the TFSA.

As well, there are some other interesting TFSA features that may influence the decision:

  • Withdrawals have no effect on income-tested tax credits such as the Canada Child Tax Benefit or the Goods and Services Tax Credit, nor will they cause a clawback of government income sources such as the Guaranteed Income Supplement or even Old Age Security benefits.
  • For wealthy couples tired of working around the spousal attribution rules affecting both open investments and spousal RRSPs, TFSA contributions are specifically exempted from those anti income-splitting rules  

While 2009 may seem a while off, strategically it may be prudent to revisit your financial plan today in order to accommodate for this new future.  “What” to invest in still comes down to sound investment choices.  “How” to invest just got a lot more interesting.

For some inheritances, timing really is everything

The adage timing is everything is a convenient phrase that is often used for emphasis in situations where it is not entirely true.  In the case of determining entitlement to an inheritance though, it could very well be right on the money. 

Back in 1991, Nora Mulligan provided in her Will both for her three (adult) children of her first marriage, and for her second husband Arthur.  The children were bequeathed such “money” that she may own at her death, and her husband was to continue as surviving joint owner of the house and beneficiary of the residual estate assets.

In May 2005, Nora’s sister died without having made a Will.  According to the rules of intestacy of the province where the sister resided, Nora and her one other sibling were the statutory beneficiaries under the intestacy.  The Public Guardian’s office in that other province initiated proceedings to administer the estate, which consisted of “money” type assets, out of which Nora was to receive about $75,000.

In November 2005, the Public Guardian’s application was granted, and the sister’s estate was ready to be administered.  Unfortunately, Nora had died some weeks earlier in October 2005 so she would not be able to enjoy that inheritance personally.

As the sole named executor under Nora’s Will, Arthur distributed all of her $115,000 “money” to her children; the $60,000 house passed to him by right of survivorship.  Perhaps not surprisingly though, a dispute arose as to whether the $75,000 forthcoming from the sister’s estate was in turn to be characterized as “money” when received in Nora’s estate.

The matter progressed to court, and after a review of relevant case authorities the judge held that Nora had “no interest in the specific assets in her sister’s estate… [and] …those assets, accordingly, cannot be the subject of a specific bequest.”

For Nora’s children to have succeeded, Nora would have had to survive not only up to the grant of administration to the Public Guardian, but further to the point where her estate entitlement was properly distributed to her while living.  Things may have been different if Nora’s sister had executed a Will that might have allowed for a quicker administration, or if Nora’s own Will had been drafted to cover such contingencies.

As it turned out for Arthur, timing really was everything, and he took that right to the bank. 

CASE REFERENCE
Mulligan v Hughes 2007 SKQB 123 (CanLII)