Hidden Savings

Archie and Marie Roberts were amazed when they received a $27,000 cheque from the CRA. Never in a million years did they expect the money they’d been forking out for special tutoring, counselling and other expenses for their son, would be partially reimbursed by the tax credit system.

Although the couple had been filing taxes for years with a professional tax preparer, the topic of their son’s challenges had never come up. It wasn’t the tax preparer’s fault. They hadn’t considered their son’s learning issues to be a disability and their preparer never asked about family issues.

But the significance of their son’s expenses did come up during the preparation of an updated financial plan. Their planner asked about the nature and history of the expenses and the challenges their son faced. Past tax returns indicated they’d never claimed the Disability Tax Credit—Archie and Marie had heard of the credit, but it never occurred to them their son Jake, who struggled with dyslexia, might qualify. And, although they weren’t comfortable with the “disabled” label, they were willing to set that aside if it meant some tax relief, and perhaps even some benefits from an expanded list of eligible medical expenses.

To qualify for the non-refundable Disability Tax Credit (DTC), individuals must have an impairment that’s considered severe and prolonged, affects vision or hearing markedly, or otherwise restricts the basic activities of daily living. This includes mental functions necessary for everyday life, including adaptive functioning, memory, problemsolving, goal-setting and judgement. The person must be either unable to perform these activities or require a significantly longer amount of time to perform them than an average person of the same age.

The tax credit covers a wide array of medical conditions, many of which result in medically necessary expenses specific to their conditions, and which are covered in CRA Bulletin IT-519R. It may also cover attendant care in special homes or schools.

If you aren’t sure whether a client might qualify, the required T2201 Disability Tax Credit Certificate includes a self-assessment questionnaire. The CRA requires the form be submitted and approved prior to claiming the credit, so if the client qualifies you’ll have to be proactive and encourage him to complete the form and also have his physicians complete the medical information in a timely manner. Some DTCs are granted temporarily or need to be reapplied for every few years. However, those for chronic issues, such as deafness, blindness, MS, and Down’s syndrome, are not frequently re-evaluated.

Families with children under age 18 who qualify for the DTC may also qualify for the tax-free Child Disability Benefit (CDB) and additional payments for children with disabilities that piggyback on the Canada Child Tax Benefit (CCTB) program.

In addition to parents of younger kids, advisors should review the expenses of older clients. For example, 82-year-old Sally Bissett is legally blind and requires hearing aids. With little besides her small CPP and OAS pensions, she now lives in her younger sister Ruth’s home. She contributes financially each month to help cover the cost of utilities, groceries, house maintenance and taxes.

Much like the Roberts family, no one had asked about Sally’s disabilities or about how she and her sister file their taxes. In this case, as the disability amount is transferable under certain provisions, Ruth is able to use the credit transferred from her sister to lower her own income taxes by $1,700 per year. Ruth must be able to prove she’s actively involved in supporting Sally; providing basic necessities, such as food, shelter, and clothing.

In the case of the Roberts family, a psychiatrist was able to demonstrate Jake had a significant learning disability from birth, and the CRA was willing to adjust returns back for nine years. The tax returns were amended and re- filed and the credit was granted for each of those years. As it is a non-refundable tax credit, the client has to have paid tax in order to get money back.

Also, the government doesn’t automatically transfer the credit or the unused portion of it to a supporting person—so non-working parents or supporting adult children who may be eligible for a transferred credit from a child, spouse or parent may have to re- file other returns to get a full refund.

Having qualified for the DTC, the Robertses can now start to build up taxsheltered savings for Jake’s future support. Access to the new Registered Disability Savings Plan (RDSP) can only be granted to taxpayers who qualify for the DTC, ensuring that the new tax-sheltered savings plan is used only for those who truly need it.

The RDSP is a tax-sheltered savings plan that can attract matching grants and bonds from the government. Contributions to RDSPs are not tax-deductible and withdrawals of contributions are not taxable; however, the grants and any investment income earned in the plan will be included in the beneficiary’s income for tax purposes when paid out.

As the Robertses’ 2008 family income is less than $75,769, their $1,500 contribution to an RDSP for their son will be matched with the maximum Canada Disability Savings Grant of $3,500. For families with income in excess of $75,769, the matching grant falls to a maximum of $1,000. The Robertses can make contributions up to $200,000 until age 59, but these will only be matched with grants until the year Jake turns 49. An additional Canada Disability Savings Bond is available to families with incomes below $37,885. The only restriction is these grants or bonds must remain invested for at least 10 years to avoid penalties.

Most provinces have announced income and assets of the RDSP will be fully exempted for purposes of determining eligibility for provincial financial assistance programs. A few provinces provide partial exemptions—Quebec, New Brunswick and Prince Edward Island— and the exemption is pending in Nunavut. Currently, RDSPs can only be established at the Bank of Montreal or the Royal Bank, but others are considering them.

The advent of the RDSP and matching grants makes it all the more important for families to work together on their financial planning, especially when one of them faces a challenge. Credits may be transferable to taxpaying members of the family, so who earns what becomes very important to help advisors deploy taxreduction strategies.

Advisors must understand that knowing who pays for what, and who deducts what, can lead to tax savings that can improve the quality of life for a disabled person. A goal once thought unattainable, like attendance at an independent school catering to dyslexic kids, can fall within reach if there are tax savings of $1,700 for the DTC and medical expense credits on the tuition costs are factored in.

Whether you prepare tax returns or not, the practice of reviewing a client’s tax return can provide insights they might not otherwise tell you about. There may be significant tax savings for your client hiding between the pages of those returns. It’s worth a look.