As the population ages, more elderly individuals are being diagnosed with physical or mental disabilities. With greater awareness, children are now being diagnosed at an earlier age. While there has been a substantial rise in the number of Canadians living with a disability,1 many are not aware that loved ones may qualify for the Disability Tax Credit (DTC). Consider these situations where individuals may qualify:
• A child suffering from ADHD;
• A senior whose daily living is impaired by cancer or Alzheimer’s;
• An individual with Type-1 diabetes.
Eligibility for the DTC is dependent on how the disabling condition affects day-to-day living, not the diagnosis itself. In general, this includes those who suffer from a prolonged and present physical or mental impairment at least 90 percent of the time, for a continuous period of at least 12 months and are unable to perform certain functions necessary for everyday life (or it takes three times longer than if not impaired). The individual must be certified by a medical practitioner and an application must be approved by the Canada Revenue Agency (CRA).*
Why is the DTC a valuable wealth management tool?
1. Offers substantial tax benefits. This is a non-refundable tax credit that can be claimed on an income tax return. The federal disability amount for the 2023 tax year is $9,428 for those 18 years and older, with an additional $5,500 supplement for those under age 18.
2. Potentially retroactive. If you were eligible for the DTC in past years but did not claim it, you may be able to claim it going back 10 years. A credit retroactively applied may result in a refund on previous tax returns.
3. Beneficial, even if the individual has no taxable income. Any unused amounts may be transferred to an eligible supporting family member for that tax year, helping to offset their taxable income.
4. A gateway to other benefits. The DTC can help access other important benefits, notably the Registered Disability Savings Plan (RDSP), which allows up to $200,000 of after-tax funds to grow on a tax-sheltered basis, subject to conditions. The RDSP offers the opportunity for $3,500 in federal matching grants annually, to a lifetime maximum of $70,000, depending on the beneficiary’s family income and amount contributed. The DTC may help to access other federal and provincial/territorial benefits and programs. It can also support the creation of a qualified disability trust, a valuable estate planning tool, to permit income to be taxed at graduated rates.
A Case Study: Planning a Child’s Future
A mother has a six-year-old daughter who has been diagnosed with ADHD and developmental coordination disorder. After the father passed away, they were encouraged to apply for the DTC to help set up a qualified disability trust — a Henson trust — so that income used to support her will be taxed at marginal tax rates, instead of at the highest tax rates applicable to most trusts. She was recently approved by the CRA, including retroactive disability tax credits for the past six years that resulted in a tax refund totaling over $11,000. We will use these funds to contribute to the RDSP as we plan financially to support her future.
1. https://www150.statcan.gc.ca/n1/en/daily-quotidien/231201/dq231201b-eng.pdf; *See: https://www.canada.ca/en/revenue-agency/services/tax/individuals/segments/tax-credits-deductions-persons-disabilities/disability-tax-credit.html
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