You may have clients who are resident in Canada and the U.S. at different times in the same taxation year. This creates complex filing issues.
Clients with tax residency in both countries who have physical and/or mental disabilities face additional complexities: they must determine not only which disability tax credits, benefits and deductions are available in each country, but when these tax breaks can be claimed.
Disability Tax Credit (DTC)
If your client was a Canadian resident taxpayer for any portion of the 2014 tax year, he or she may be eligible for this important federal tax credit. Eligibility is determined by submitting the Disability Tax Credit Certificate (Form T2201) to CRA either prior to or when filing the federal income tax return.
The DTC allows persons with “severe and prolonged” mental or physical impairments to reduce their income tax. “Severe and prolonged” impairments “markedly restrict” taxpayers from performing the basic functions of daily living. Such impairments must also have been endured by a taxpayer for a minimum of 12 consecutive months prior to applying for the DTC; or, if he or she is recently impaired, the disability must be projected to last for at least 12 consecutive months.
The taxpayer can transfer the unused portion of his or her DTC to a spouse or common-law partner. CRA will reassess previous tax returns up to a maximum of 10 calendar years prior to the date of the reassessment request if your client was previously eligible for the DTC, but did not claim the credit.
Children and other dependants may also be eligible for the DTC; a Canadian taxpayer can claim credits on behalf of disabled dependants.
Additional tax breaks available to those who qualify for the DTC (and/or their family members) include the:
- Child Disability Benefit, a tax-free benefit for family member caregivers of those under 18;
- Working Income Tax Benefit, a tax credit for income earned by DTC-eligible taxpayers; and the
- Registered Disability Savings Plan (RDSP), which gives supporting family members of those aged 59 and under who qualify for the DTC the opportunity to save money for the DTC-eligible beneficiary’s future. When the beneficiary withdraws from the RDSP, he or she does not generally have to include the withdrawals as income. Contributions made to the RDSP are not tax-deductible.
Disability Supports Deduction (DSD)
Disabled Canadian-resident taxpayers may be able to claim certain expenses as eligible for the DSD. Eligible expenses include items or services that allow a disabled taxpayer to go to work or school, or to complete research for which he or she received a grant. Applications for eligibility are made on Form T929.
The CRA may provide the DSD for expenses claimed by Canadian-resident taxpayers who paid non-residents for services provided abroad during the taxation year (e.g., while working or attending school in the U.S.).
However, if an expense is covered by another program, the covered amount must be deducted from the amount of the claim requested on Form T929. Approved DSD expenses are claimed on Line 215 of the federal income tax return.
Non-U.S. citizens are either non-resident aliens (NRAs) or resident aliens (RAs) for U.S. income tax purposes. It is possible to be both an NRA and RA during a taxation year. Such dual-status aliens can claim tax credits in the same manner as RAs, with some restrictions.
The IRS offers tax breaks, credits and deductions to eligible taxpayers with disabilities, as well as their family members. Some of these are outlined below; note that there are many restrictions regarding eligibility, particularly for NRAs.
Achieving a Better Life Experience (ABLE) Account
The ABLE account is similar to the RDSP. The ABLE program is administered by individual states and is available to residents who became disabled before 26 years of age. Distributions are tax-free when used for certain “qualified expenses,” such as assistive technology and personal support services. Since state residency is determined on a case-by-case basis, the ABLE program may not be available to Canadian clients who only live in a state temporarily during a taxation year.
The IRS deems certain disability retirement benefits to be earned income eligible for the Earned Income Tax Credit (EITC). However, the EITC is generally not available to those who are NRAs for any portion of the income tax year.
Taxpayers who work in the U.S. may be able to claim a credit to ease the financial burden of hiring caregivers to care for Qualifying Persons (QPs). A spouse or dependant (such as a child) who is physically or mentally disabled and unable to care for herself meets the definition of a QP.
An NRA can be a QP, but the U.S. taxpayer claiming the benefit must have earned income during the taxation year, and not all income earned is eligible. Notably, income earned by an NRA that is not effectively connected with a U.S. trade or business is ineligible for this credit.
Deductions for medical expenses, and other expenses used to assist disabled taxpayers with work-related impairment aids, may be available for RAs. Claims can be made on Schedule A of the U.S. federal income tax return, Form 1040.
As tax season approaches, it is important to determine every client’s tax residency status, particularly clients with disabilities. Determining which disability tax credits are available on each side of the border is a significant value-add that will save these clients money.
David A. Altro is a Florida attorney, Canadian legal advisor and the managing partner at Altro Levy. He can be reached at 416-477-8155 or firstname.lastname@example.org.