The Disability Tax Credit Promoters Restrictions Act is making waves in the financial services industry.
That act received royal assent in 2014, but it, along with the associated Disability Tax Credit Promoters Restrictions Regulations, is not expected to come into force until 2020.
The proposed regulations would cap the fees that tax promoters can charge for helping with both DTC eligibility and disability-related tax refund requests at $100 per request in each taxation year. The fee would be applied to both federal and provincial DTC requests (except in Quebec, where rules differ). The act defines a “promoter” as a person who directly or indirectly collects a fee related to DTC requests. (The list of examples includes professionals who offer tax help, including financial services providers.)
Analysis of the impact of the act, published in June 2019 in the Canada Gazette, states that DTC applications are “relatively straightforward” and take no more than an hour for promoters to complete because doctors do most of the work. (The comment period ended in July.) Therefore, the goal of implementing a low flat fee for promoters is to ensure that income tax refunds generated by disability credits aren’t eaten up by “excessive” fees, the analysis states. Refunds should “remain at the disposal of those who are entitled to them, and who need them most,” it adds.
The impact analysis includes the views of the federal Disability Advisory Committee (DAC) – a group that was reinstated in 2017 following controversy over the Canada Revenue Agency’s (CRA) rejection of DTC applications made by Canadians with Type 1 diabetes. Several fee structures were presented to the DAC by the CRA in 2018, and the committee selected a fixed dollar amount for simplicity. However, the committee voiced concerns over whether it’s possible for a fixed rate to simultaneously be affordable for vulnerable populations and high enough to compensate legitimate professionals adequately.
Some applications that promoters deal with “might require additional work,” the DAC’s analysis states.
Peter Weissman, partner at Cadesky and Associates LLP in Toronto, says claiming the DTC can be “pretty simple for [those with] a visible disability” for which the severe and prolonged physical impact of their condition is clear. But, “it’s been hard to access the DTC for people with mental infirmities of some sort.”
Weissman doesn’t provide DTC consulting to clients, but knows people who do. He says, “[There are] people who are not being approved [by the CRA] or who are having difficulty with their claims; that’s where consultants provide value.” These experts offer services that one hour and $100 won’t cover, he adds. In his view, the proposed act is the result of just a few companies “charging a lot of money, and they sort of ruined it for everyone.”
A DTC consultant in British Columbia who asked not to be named says part of his process includes educating clients and their doctors about DTC eligibility. Rather than just filling out forms and passing them along to doctors, he adds, “we make people aware of everything they’re looking at. When we have a new client, we complete a full 10-year assessment of their taxes” and, if needed, of relevant family members’ taxes. Furthermore, “we go back to doctors for corrections on forms multiple times, if necessary,” he says.
The impact analysis for the regulations states that doctors are responsible for the majority of DTC applications – and that their fees are set by medical associations – but the anonymous consultant’s experience differs: “Doctors are experts in medicine, but that doesn’t mean they’re experts on the Income Tax Act. They can have a poor understanding of what the requirements are and, on a daily basis, we find doctors are providing incorrect advice.”
This anonymous consultant charges a contingency fee of 20% of a client’s DTC refund. However, “a lot of the work that we do is also pro bono [to] help clients get through so that they can claim the registered disability savings plan (RDSP),” he says.
Says David Truong, senior consultant, financial planning and advisory services, with National Bank Private Banking 1859 in Montreal: “The RDSP is the keystone for everything.” If people become ineligible for that plan due to either poor guidance or restrictive rules that hamper the DTC advice market, “then you lose all the benefits that go toward long-term planning.”
The current version of the proposed promoter regulations would cap the annual revenue per client of affected professionals at $1,100 for all DTC request work in one year, effectively allowing one eligibility determination, one claim and nine retroactive claims per year, each at $100. Both tax experts and the CRA acknowledge that the fee cap would mean a dramatic drop in promoter compensation.
According to the analysis of the proposed regulations published in June, promoters typically charge 15%-40% of a disabled client’s income tax refund on a contingency basis; 30% is the most typical fee. If, for example, a disabled adult client is entitled to a federal/provincial refund of $1,658 for claiming the DTC amount in 2018, a 15% fee for that claim would be more than $200, a 40% fee would be more than $600 and a typical fee would be around $500. If claims are made for up to 10 years for individuals or minors, clients often owe several thousand dollars in fees, the analysis states.
Of course, if a taxpayer is not entitled to a refund, promoters with contingency fees don’t get paid.
Under the new rules, the impact analysis states, promoters would collectively earn about $4.8 million a year instead of $9.5 million-$25.4 million. Some promoters may go out of business and some people with disabilities may struggle to find help, the document states. However, remaining promoters could pick up the slack and gain market share, and more money may be collected by disabled Canadians.
Weissman isn’t as optimistic: “I know a number of very good and reputable consultants who won’t be involved with claims. They don’t believe in and don’t charge outrageous fees, [but] if it’s going to be a fixed fee of $100, they can’t pay themselves or their staff.”
Says the anonymous consultant: “It would definitely change our business and affect it. To what extent? It all depends on what [the government] comes up with.”
If promoters go out of business, both the anonymous consultant and Truong say, the CRA would then be responsible for enhancing its services. The anonymous consultant says clients of his who have called the CRA have, at times, been connected with agents who “couldn’t even describe what the requirements were for the credit” or who have been told that the agency “can’t help with anything.”
“If there’s back and forth [among] the government, the person with a disability [and the doctor], it can get a little hectic,” Truong says. “So, yes, [promoters] can charge $100, but [that means] more government resources and the need to train people [at the CRA].”
In an email to Investment Executive, the CRA states that along with shortening the DTC form to six pages from 12, it has invested in community outreach and made information about the credit available in large print and braille. The email adds that the agency surveyed DTC applicants in July and plans to do so again this month, with the intention to use the feedback to “make the DTC process easier to understand and complete.”
Even so, an online Q&A document published by the CRA highlights another potential issue with the act and proposed regulations: the agency states it has come up with sanction guidelines for overcharging by promoters, but that the act will not cap the cost of appeals to the CRA when a person’s eligibility is denied or include restrictions on charging contingency fees.
As a result, loopholes exist for any unscrupulous promoters who are out there. Weissman provides an example: “If a promoter makes an application and [it] is disallowed, there’s no limit on the fees for appealing that decision. A nefarious consultant could file a lousy claim, charge $100 up front, and then charge whatever fees [he or she] wants to dispute the decision when the claim is disallowed. It’s a gaping hole.”
Both Weissman and the anonymous consultant stress that the Taxpayer Bill of Rights states Canadians have a right to be represented by whom they choose. If promoters are forced to close en masse, “you’re breaching that right,” the anonymous consultant says.
A subsequent version of the CRA’s regulations and accompanying analysis are expected in early 2020. The CRA’s email states the agency is “reviewing the responses received” following the consultation period that ended in July.
Disability tax credit, defined
The disability tax credit, simply put, is a non-refundable credit designed for people with prolonged disabilities and/or for those who support them. The intention is to help affected taxpayers cover the extra costs associated with living with a disability by reducing the amount of income taxes they pay each year. For the 2018 tax year, the maximum disability amount was $8,235 and the maximum amount that could be claimed for people under age 18 was $4,804 (not including provincial and territorial benefits). Tax savings could reach $2,600 in a single year. Taxpayers (or their representatives) and their doctors must fill out Form T2201: Disability Tax Credit Certificate; deductions are claimed or transferred using the disabled individual’s T1 income tax form.
Financial implications of proposed changes governing the DTC
A regulatory impact analysis of the proposed Disability Tax Credit (DTC) Promoters Restrictions Regulations estimates 36,000 DTC requests for 12,000 people were handled by promoters (e.g., tax consultants) for the 2018 taxation year. These promoters collectively collected an estimated $9.5 million-$25.4 million in fees. To put that into perspective, slightly fewer than 800,000 people had claimed the DTC as of Dec. 31, 2017, with total relief estimated at more than $1 billion. For 2018, that amount is expected to rise to $1.4 billion.