How disability tax credit can help clients

Maximizing underused tool can save on taxes, boost retirement planning

How disability tax credit can help clients

While the world is turned toward the European crisis, many Canadians are preparing for tax time.

One of the things advisors can help their clients with is checking out what the disability tax credit – and Registered Disability Savings Plan (RDSP) – can provide for them or their family member since it is an underused tool that many more people could benefit from.

“The disability tax credit is a credit that helps people with disabilities, or their supporting persons, to reduce the income tax they have to pay,” Josee Cabral, Senior Tax Specialist at H&R Block in Montreal, told Wealth Professional.

Those who want to apply for a disability tax credit must fill out the T2201 Disability Tax Credit Certificate form, updated on October 4 last year. It’s now 16 pages long and requires several steps.

The first is that a medical practitioner – a doctor – must certify that the person for whom the client is requesting the credit has a severe and prolonged impairment.

“The eligibility is not necessarily based on the medical condition, but rather on the effects of the condition, such as you’re not capable of living alone and taking care of yourself. So, it has to be at a certain severity,” said Cabral, noting that’s why the doctor who knows about the person’s condition needs to certify it and state when it began and how long it’s expected to continue. That could be for a short time or the remainder of a lifetime.

Clients should then photocopy the form and submit the original to the Canada Revenue Agency (CRA), which will assess the request and respond. The CRA can either approve or deny it. If the CRA approves it, it will state the period for which the person is eligible for it. That may mean it can be applied to previous years’ taxes. But, it may also mean there’s an end date, when the credit no longer applies. in which case the person needs to have the doctor fill out a new form and then send it to the CRA to review again, if it’s still need.  

If denied, clients can appeal the CRA decision, as long as it’s within 90 days of receiving their notice.

Once the disability tax credit is approved, an advisor’s clients can then claim the disability deduction for themselves, dependent, or spouse or common-law partner if the latter two don’t need the full credit themselves. It is $18,662 for adults with an extra $5,053 for dependent children.

Once the person has the disability tax credit, he or she can also set up an RDSP, if they are under 60. With the person’s written permission, others can also be allowed to contribute to the fund, too. 

“It’s very similar to an RSP. It’s a long-term savings plan that helps Canadians with disability and their families basically save for the future and their retirement,” said Cabral, noting it has a lifetime contribution limit of $200,000, which can provide a significant benefit.