Disability – Page 3 – Doug Carroll

Claiming medical expense tax credit on hot tubs, pools and warm weather

At issue

The medical expense tax credit (METC) may be a bit of a mystery for the average taxpayer. Likely this is because it is intended to capture large outlays (individually or in aggregate), leaving smaller amounts in each taxpayer’s hands. To the point, the credit is only available on expenses in a year that exceed the lesser of $2,000 and 3% of net income.

But for those with a standing medical condition, the METC addresses a fundamental financial need. It is also a substantial government spend — and unfortunately is open to abuse, particularly where an element of leisure attaches to large ticket items. On closer examination though, what is a luxury to some may be a necessity to others, irrespective of tax considerations.

Hot tubs and hardwood

In the early 2000’s there were a number of court cases and Canada Revenue Agency (CRA) letters dealing with hot tubs and hardwood floors. Generally a medical practitioner had recommended the former for alleviating mobility problems, and the latter for asthma sufferers.

CRA letters usually opined in the case of hot tubs that at best the installation costs may be allowed. The court dispositions were not always consistent. Here’s a selection:

Gibson v. Canada, [2000] T.C.J. No. 753 – Costs of renovation for installing hot tub could be claimed, but not hot tub itself. (Fybromyalgia with severe neck pain)
Donahue v. The Queen, 2003 TCC 888 – Cost of hot tub is an allowed medical expense. (Severe chronic back pain)
Canada v. Klywak, 2005 FCA 354 – Cost of hot tub allowed as a device that is designed to assist an individual in walking. (Fybromyalgia impairing walking and other mobility)

These and other cases conducted under the informal procedure relax the rules of evidence and are not binding on other courts. Adding to uncertainty, more than one judge had allowed the hot tub cost in one case while denying in another. Outcomes were fact-dependent.

2005 Federal Budget and after

The 2005 Budget amended the criteria for claiming medical expenses. The supporting notes to the Budget explicitly referred to Department of Finance concerns with hot tubs and hardwood floors.

Income Tax Regulation 5700(i) was amended to limit mobility claims to devices “exclusively” designed to assist “walking”, effectively over-ruling future claims akin to Klywak. And an over-riding test was added at Income Tax Act s.118.2(2)( l.2), requiring that any alterations or additions:

could not increase the value of a dwelling, and
could not be a cost that someone without mobility challenges would typically spend.

Pools and warm weather

The new provisions shifted judicial analysis toward these legal tests, leaving less latitude for discretionary fact-driven outcomes.

Barnes v The Queen 2009 TCC 429 – A regular swimming pool used for rehabilitative physiotherapy does not meet the second part of the new test as it is something that a person with normal mobility might install. (Cerebral palsy and Special Olympics training)
Johnston v The Queen 2012 TCC 177 – Hot tub solely used for subject person shown to assist wheelchair mobility throughout home, but still fails the second part of the new test. (Cerebral palsy, related quadriplegia, and contractures of limbs)
Sotski v The Queen 2013 TCC 286 – Replacing relatively new carpet with inexpensive laminate flooring satisfies all requirements. (Parkinson’s condition with serious trip/fall concern)
Tallon v. The Queen, 2015 FCA 156 – And as to that warm weather? A taxpayer initially succeeded on claiming costs of being in a warm southern climate to alleviate chronic joint pain experienced during the cold Canadian winter, but was later reversed on appeal.

Practice points

The selection of cases here is not comprehensive, but rather shows the range of outcomes, and that each situation is unique.
Even so, the rules are much tighter since 2005. As more than one judge has stated: “The bar has been clearly set high by Parliament.”
As Sotski shows, it may still be possible to succeed on a claim under the new rules, less likely though that may be for hot tubs and pools.

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 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 related family members often 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. Unless noted otherwise, all figures expressed are for the year 2014. [Dollar figures that may change on an annual or periodic basis are underlined.]

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, where a person is incapable of regularly pursuing any substantially gainful occupation, and
Prolonged – the disability is long-term and of indefinite duration or is likely to result in death.

The maximum monthly disability benefit a qualifying person can receive is $1,236, plus a maximum monthly benefit of $231 for each dependent 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 $221 per child each month to families with children qualifying for the disability credit (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, 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, though some provinces will disregard assets held in a discretionary trust for the disabled person. (See discussion of discretionary or ‘Henson’ trusts below.)

Provincial approaches vary in terms of service offerings, cost reimbursements, rates for family size and composition, and of course direct financial assistance. On a single person basis, maximum annual direct support ranges from under $10,000 to just under $20,000.

Individual income tax relief

Tax measures commonly available to assist persons with disabilities 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. The federal rate is 15%.
Refundable tax credits: These may result in an amount payable to the individual even when tax liability has been reduced to zero.

The following is an outline of the key items and their potential dollar values (often income-dependent), though it does not cover all possibilities. For a comprehensive view, including detailed qualification criteria, consult Guide RC4064 “Medical and Disability-Related Information”, available through the Canada Revenue Agency website.

Disability credit

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 $7,766. A supplement worth as much as $4,530 may be available for children under age 18, though the value is reduced if certain child and attendant care expenses are claimed for the child. Taken together, the maximum possible federal credit is $1,844.

The maximum basic credit at the provincial level ranges between $375 and $1,372.

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.

Generally the deduction cannot exceed the person’s earned income for the year, calculated using CRA Form T929.

Medical expense credit

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 a care facility.

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

$2,171, (indexed annually) or
3% of the disabled individual’s net income.

This number ranges between $1,637 and $2,298 in different provincial formulas.

Eligible expenditures can be claimed either under this medical expense credit calculation or as a disability support deduction, but not both. 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 $25,506, this federal credit can be worth as much as $1,152.

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 reference amount is $4,530, allowing for a credit of up to $680; provincial credits range in value from $210 to $1,130, though they vary significantly in criteria and interaction with other credits.

Family caregiver credit

This non-refundable federal credit may be claimed as an enhancement to certain dependency-related credits, where the dependency is due to mental or physical infirmity:

Spouse or common-law partner credit
Child credit
Eligible dependant credit
Caregiver credit

The credit is based on a reference amount of $2,058, for a potential value of $309.

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 and Children’s arts credit

These non-refundable federal credits each allow for a credit claim of $500 spent on eligible expenses for a child. For disabled children, the eligible amount parents can claim is doubled to $1,000 for each of these credits, making the credits worth as much as $300 taken together.

Transferred amounts

An individual may be able to claim certain amounts, notably the disability credit 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, supplies and specially-equipped vehicles

Coordinate 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. This includes family estate planning, up-to-date wills, informed beneficiary designations, executing powers of attorney and the considering establishing appropriate trusts.

Registered Disability Savings Plan (RDSP)

An RDSP may be established for a person under 59 who qualifies for the disability tax credit. The maximum lifetime contribution amount is $200,000, complemented by government support of up to $20,000 in free bond money and up to $70,000 in matching grant money. The government support is subject to the person’s net family income, or family net income when the person is under 18.

Contributions may be made directly from after-tax funds, as an RESP transfer, or by beneficiary designation from a parent’s RRSP/RRIF. All contributed amounts grow tax-free, and are eventually paid out to or for the disabled beneficiary. Taxable amounts are reported by the beneficiary, which generally will mean very little tax is paid. All provinces disregard RDSP withdrawals when calculating provincial support entitlement.

Discretionary or ‘Henson’ trusts

A fully discretionary trust allows a trustee alone to decide the amount and timing of payments to a disabled beneficiary. As the beneficiary has no legal right to compel distributions, most provinces will disregard such trust property when determining provincial support entitlement. This is often known as a “Henson trust” for the Ontario case first litigated on the issue.

If the intended beneficiary does not qualify for provincial support, such a power may be unnecessary, and may in fact be a hindrance. A qualified trust lawyer familiar with disability issues can advise on whether and how to use trusts, taking a view of the totality of circumstances.

Testamentary trusts

The 2014 Federal Budget followed through on the elimination of marginal tax bracket treatment for testamentary trusts. Comparatively, inter vivos trusts (those created during lifetime) are subject to top bracket rate taxation on every dollar of income.

The original scope of the changes was modified somewhat based on consultations conducted after the initial proposal in the 2013 Budget. In particular, marginal tax bracket treatment will continue for trusts for a beneficiary entitled to claim the disability tax credit. An up-to-date Form T2201 will be necessary to prove such qualification.

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

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

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

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

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.