Federal Budget 2021 proposed expanding eligibility for the disability tax credit (DTC) in the areas of mental functions and life-sustaining therapy. This is welcome news for thousands of Canadians who didn’t previously qualify. Not only does DTC eligibility offer immediate tax savings, but it opens the door to other tax benefits and programs to assist eligible Canadians with disabilities.
What is the disability tax credit?
The DTC is a non-refundable tax credit intended to reduce income tax payable for people with a disability and/or those who support them. It consists of the disability amount (base amount) for eligible individuals of any age and the supplement for children with disabilities who are under 18 at the end of the tax year (supplemental amount).
Both amounts are indexed annually and have a provincial counterpart to the federal amount. The federal portion is the same for every eligible Canadian, while the provincial/territorial amounts vary by jurisdiction.
The DTC can be claimed by the eligible individual, those supporting them or both.
Where someone qualifies for the DTC for a particular year, those claiming the credit can request their income tax returns be adjusted as far back as 10 years to claim the DTC.
How do you apply for the DTC?
The Canada Revenue Agency (CRA) Form T2201 Disability Tax Credit Certificate must be completed by a medical practitioner to certify that the individual has a severe and prolonged impairment. The medical practitioner should be asked to indicate on the form the earliest start of the condition, so that the DTC may be claimed for prior years where applicable.
The completed T2201 is then submitted to the CRA, which will assess qualification for the DTC based on the form. Read CRA’s Eligibility for the Disability Tax Credit for more details about eligibility and how to complete Form T2201.
How is the DTC calculated?
Each government allows taxpayers to reduce their taxes payable by a percentage of their non-refundable tax credits. The federal government rate is 15%, and the federal DTC is calculated by multiplying the base amount by 15%.
In certain situations where total child care and attendant care expenses claimed for the child exceed certain thresholds, the supplemental amount may be reduced. Where there is no reduction to the supplemental amount for the tax year, the maximum tax credit available in respect of the supplemental amount is also 15%.
For more information on how the DTC is calculated, read the CRA Disability Tax Credit Folio.
For 2021 the federal base tax credit is $1,299, and the maximum federal supplement credit is $758, for a total federal tax savings of $2,057.
The provincial and territorial amounts are in addition to the federal credit. They are calculated in the same manner as the federal credit, but the credit amounts and applicable tax rates vary by jurisdiction.
For example, the table below shows that Alberta’s provincial base credit offers an additional $1,494 in tax savings plus $1,121 where the maximum supplement is available. For 2021, this means that for a family in Alberta with a child under age 18 who qualifies for the DTC, the combined federal and provincial tax savings from the disability tax credit and supplements can be as high as $4,672.
|Table: Select provincial disability amounts and supplement for children with disabilities (2021)|
|Jurisdiction||Maximum base disability amount||Maximum base tax credit||Maximum supplemental amount||Maximum supplemental tax credit|
Other benefits and planning tools
Qualification for the DTC is a gateway to accessing other tax benefits, credits, deductions and planning tools, including the following:
Child disability benefit (CDB) — A tax-free monthly payment for parents of a child under 18 who qualifies for the DTC and who also qualifies for the Canada child benefit. The CDB is calculated annually based on prior year adjusted family net income and begins to reduce when that income exceeds $68,708.1 Where the child qualifies for the DTC, the parent will automatically receive the CDB based on the prior year adjusted family net income.
Claims for certain medical expenses — Claims for attendant care or care in a nursing home require that the individual who requires care qualifies for the DTC.
Canada caregiver credit — A non-refundable tax credit available to Canadians who support a spouse or common-law partner, or other dependent with a physical or mental impairment. Where the dependent qualifies for the DTC, a letter from a medical practitioner isn’t required.
Disability supports deduction — A deduction from income for eligible expenses paid to work, carry on a business or go to school. Unlike the disability tax credit and the medical expense tax credit where certain support people may claim the tax credit, the disability supports deduction may be claimed only by the eligible individual.
Registered disability savings plan (RDSP) — A tax-deferred savings plan designed to help families save for a beneficiary who is eligible for the DTC. RDSP contributions2 are not tax deductible and can be made until the end of the year in which the beneficiary turns 59. Contributions that are withdrawn aren’t included as income to the beneficiary when they are paid out of an RDSP. However, Canada Disability Savings Grants and Bonds, RDSP income, and gains and rollover proceeds are included in the beneficiary’s income for tax purposes when paid out of the plan.
Qualified disability trust (QDT) — Created in 2016 as part of the changes to taxation for testamentary trusts (trusts set up by a will). The qualifying beneficiary must be eligible for the DTC. The QDT is an exception to new rules that all testamentary trusts are taxed at top marginal rates. A QDT has access to the graduated tax rates that previously applied to all testamentary trusts.
Preferred beneficiary election (PBE) — Available to certain trusts with one or more qualifying beneficiaries who are eligible for the DTC. Where a PBE is jointly made by the trustee and beneficiary, trust income may be taxed in the hands of the preferred beneficiary but may continue to accumulate inside the trust.
DTC qualification is a critical tax-saving opportunity for recipients and their families. Further, the suite of planning tools that become available where someone qualifies for the DTC is an opportunity for advisors to discuss with their clients what may be suitable for their circumstances.
A note of caution: Requesting that tax returns for prior years be adjusted to claim the DTC and associated tax credits and deductions — in particular, requesting adjustments outside the normal three-year re-assessment period — exposes those tax years to possible audit. The client should ensure they’re very comfortable with their filing position on all matters in respect of impacted prior tax years.
Rebecca Hett, CPA, CGA, TEP, is vice-president, Tax, Retirement and Estate Planning at CI Investments.
1 For the payment period July 2020 to June 2021, the maximum CDB is $240.50 per month.
2 The lifetime maximum contribution amount to an RDSP for a particular beneficiary is $200,000.