Key tax considerations for clients with disabilities

“The advisor is not going to be filing the tax return,” says Kinnear, “but [he or she] can certainly give [clients] some pointers and have some basic familiarity with it.”

One of the first things advisors should ask clients is whether or not their child qualifies for the disability tax credit (DTC), a non-refundable personal tax credit of approximately $1,700. For a child under 18 there is also a disability supplement credit of roughly $1,000 for childcare and attendant care expenses.

“With respect to the disability tax credit,” says Peter Weissman, partner, taxation, Cadesky and Associates LLP in Toronto, “it’s really the building block or the foundation for tax measures for people [with disabilities] in Canada.” Qualifying for the DTC means that the disabled person is eligible for many programs and benefits, such as the recently created registered disability savings plan (RDSP).

To be eligible for the DTC, the person must have severe and prolonged impairment in physical or mental function which have a “marked restriction” on the ability to perform a basic activity of daily living (such as speaking, hearing, walking, feeding and dressing). To receive the DTC, clients may need a signed form from a health practitioner.

For children who qualify for the DTC, the tax benefits are very similar for children without disabilities, except a little more generous. “There are [many] other incentives that may be heightened or increased or lengthened as a result of having a disability,” says John Waters, vice-president and head of technical expertise, wealth group, BMO Nesbitt Burns Inc. in Toronto. For example, a child with special needs is eligible for longer contribution periods for a registered education savings plan (RESP).

Although the RDSP is relatively new, it is quickly becoming an important part of planning for those with disabilities. The program has been sweetened by the addition of government grants and bonds.

Although the holder (a parent or grandparent, for example) does not receive a tax deduction for contributions, investments held in the plan grow on a tax-free basis, says Waters. Any funds that are not principle (such as investments that have grown or government grants and bonds) are taxable in the hands of the disabled when they are withdrawn. (For more information on RDSPs, see part 3 of this web series, Staying in Control with RDSPs.)

In addition, parents of a child with disabilities have more options when it comes to rolling-over funds from a registered account on a tax-deferred basis.

Generally, a parent can only roll over funds from a registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) to a child when he or she is under 18, says Waters, and the parent is required to buy an annuity with the money. However, parents of a child with special needs can roll over the funds at any time, regardless of the child’s age.

As well, since 2010, parents and grandparents of a child with disabilities have the ability to roll over funds from an RRSP or RRIF to an RDSP, which may be a better investment vehicle for the child depending on his or her mental capacity and dependence on provincial benefits.

Although RDSPs are a relatively new vehicle for disability planning, trusts are more commonly used and present their own unique tax features. A trust is considered a separate taxpayer, says Waters, and therefore offers an opportunity for income splitting. (Find out more by reading Embracing trusts, part two of this web series).

This is the last article in a four-part series on disability planning.