The Income Tax Act includes a number of financial planning tools for disabled individuals. While most of them require beneficiaries to be eligible for the Disability Tax Credit (DTC), there are also measures that don’t depend on DTC eligibility (for more on DTC basics, read this article).
Here’s an overview of the various measures you could recommend for disabled individuals, and what’s required to access those measures.
Tax measures requiring the DTC
Registered Disability Savings Plan (RDSP): Disabled people eligible for the DTC can use this accumulation plan, which allows capital to grow tax-free while also accumulating Canada Disability Savings Grants (CDSGs). Such grants can match contributions by up to 300%, depending on the amount contributed and the beneficiary’s family income. The maximum grant amount is $3,500 per year and the lifetime maximum is $70,000.
Moreover, RDSPs feature Canada Disability Savings Bonds (CDSBs) for low-income beneficiaries that can be up to $1,000 per year regardless of contributions. The lifetime bond maximum is $20,000.
Qualified Disability Trust (QDT): In 2014, the federal finance minister announced testamentary trusts would be taxed at the maximum marginal rate, with the exception of QDTs. As a result, QDTs can access graduated income tax rates every year in which all beneficiaries qualify for the DTC. Trustees and beneficiaries must elect via Form T3QDT when preparing annual income tax returns to have the trust considered a QDT.
Home Buyer’s Plan (HBP): A person eligible for the DTC, or anyone related to the person who is DTC-eligible, can withdraw up to $25,000 from their RRSP under the HBP to buy a home – those relatives must be connected by blood relationship, marriage or common-law partnership or adoption. One specific feature of the HBP is that it’s not necessary for the new property to be the disabled person’s first home, but rather a home that is more accessible or in an environment better suited to his personal needs. Therefore, a DTC-eligible person or the related person can have been a homeowner within the past five years and still take advantage of the HBP, although the disabled person must occupy the home purchased within the following year.
Registered Education Savings Plan (RESP): When an RESP beneficiary is eligible for the DTC, the maximum lifespan of the RESP is extended from 35 to 40 years, and the maximum contribution period is extended from 31 years to 35 years. However, these measures only apply to RESPs that have a single beneficiary. Moreover, in order to provide greater leeway to beneficiaries with a disability, it’s possible to transfer investment income from an RESP to an RDSP free of income tax, provided certain conditions are met.
Tax measures that don’t require the DTC–
Preferred beneficiary election: Income accumulated in an inter vivos trust must either be taxed at the highest marginal rate during the year, or in the hands of the beneficiaries if income is distributed to them. But if trustees make the preferred beneficiary election, income accumulated in the trust may be attributed to an eligible beneficiary without distributing the funds. These funds therefore become capital in the trust and will not be taxed in the hands of any other beneficiaries.
A preferred beneficiary does not have to be eligible for the DTC; rather, he or she must be at least 18 years old and a dependent due to a mental or physical impairment. Further, the preferred beneficiary’s income cannot exceed a regulatory threshold ($11,635 in 2017). The preferred beneficiary election must be made in writing within 90 days of the end of the trust’s fiscal year.
Lifetime Benefit Trust (LBT): The LBT is a testamentary trust that will acquire a qualifying trust annuity in order to defer taxation of a registered plan. The annuity income is taxed in the beneficiary’s hands. The beneficiary of the LBT need not be eligible for the DTC, but must suffer from a mental impairment and be the spouse or common-law spouse, dependent child or grandchild of the deceased. The terms of the trust must stipulate that during the beneficiary’s lifetime, only he or she may receive income or capital from the trust or otherwise obtain the use of it. Trustees are empowered to pay amounts but have absolute discretion over whether to do so. They are, however, required to consider the needs of the disabled person.
Henson Trust: When properly structured, Henson trusts are a discretionary trust in favour of a disabled child in which the invested capital does not reduce income-tested financial assistance benefits (e.g., Ontario Disability Support Program assistance). The beneficiary does not need to qualify for the DTC, but the trustee must have absolute discretion to make payments to a disabled beneficiary. As the beneficiary has no right to the funds, the assets held in the trust are not considered as belonging to the beneficiary.