Editor’s note: this is an updated version of a story that first ran in 2014.
Last time, I discussed various ways to help clients who have disabilities get financial assistance and individual income tax relief
In this installment, we’ll look at more planning methods for these clients so they can maximize tax credits. Unless otherwise mentioned, all amounts apply to the 2017 tax year.
Tax relief for dependants
The 2017 Federal Budget announced a change to simplify the caregiver credit system. The Canada Caregiver credit replaces the Caregiver Credit, Infirm Dependant Credit and Family Caregiver Tax Credit, each of which had different eligibility rules.
The amount and value of the credit are determined based on the dependant the taxpayer is supporting.
- For dependent relatives with infirmities (parents, brothers and sisters, adult children, and certain specified relatives), the amount is $6,883, for a value of $1,032.
- For care of a dependent spouse/common-law partner or minor child with an infirmity, the amount is $2,150, for a value of $322.
The credit will start phasing out when the dependant’s net income exceeds $16,163.
In its 2017 budget, Ontario announced that it would parallel the federal change by introducing the Ontario Caregiver Tax Credit. The amount is to be $4,794, for a value of $242, with phase-out beginning when the dependant’s net income exceeds $16,401.
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.
A person 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 programs;
- 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 parents’ family net income if he’s under 18. As an example, if family income is less than $91,831, a $1,500 contribution in the year will attract $3,500 of government grant money.
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 eliminated marginal tax bracket treatment for most testamentary trusts, meaning they are now subject to top-bracket rate taxation on every dollar of income (just like inter vivos trusts).
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.