Last month, I discussed various ways to help clients who have disabilities get financial assistance and individual income tax relief (see “Tax support for clients with disabilities,” AER Mid-October 2014).
In this installment, we’ll look at more planning methods for these clients so they can maximize tax credits.
Tax relief for dependants
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 credit for an infirm dependant 18 or older (which is of equal value) may not be claimed. Further, 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
- spouse or common-law partner credit,
- child credit,
- eligible dependant credit, or
- caregiver credit.
It’s 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 concurrent claims that are made for the disability amount, or the medical expense credit.
Children’s fitness, art tax credits
These non-refundable federal credits each allow for a claim of $500 that can be spent on eligible expenses for a child. For disabled children, the amount parents can claim is doubled to $1,000 for each of these credits, making them worth as much as $300 combined.
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.
Many goods and services used by persons with disabilities are not subject to GST or HST, whether by exemption or rebate. Here’s a list of what’s included:
- most health care services;
- personal care and supervision programs while a primary caregiver is working;
- prepared meal delivery
- public sector recreational programs designed for persons with disabilities; and
- medical devices, supplies and specially-equipped vehicles.
Coordinate private planning options
To optimize access and use of government financial and tax supports, individuals and families must manage their income and assets. This includes: family estate planning, up-to-date wills, informed beneficiary designations, executing powers of attorney, and 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 is $200,000, complemented by government support of up to $20,000 in free bond money and $70,000 in matching grant money. The government support is subject to the person’s net family income, or his parent’s family net income if he’s under 18.
Contributions may be made directly from after-tax funds, an RESP transfer, or through a 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 means very little tax is paid. All provinces disregard RDSP withdrawals when calculating provincial support entitlement.
Discretionary or Henson trusts
This option allows a trustee to decide the amount and timing of payments for a disabled beneficiary. As the beneficiary has no legal right to compel distributions, most provinces will disregard trust property when determining provincial support entitlement. This is often known as a Henson trust, thanks to 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. So check with a qualified trust lawyer who is familiar with disability issues.
The 2014 federal budget followed through on the elimination of marginal tax bracket treatment for testamentary trusts.
Comparatively, inter vivos trusts (those created during someone’s 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 qualification.
Originally published in Advisor's Edge Report
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