19 Sep 2005
Disability Tax Credit - Gold Mine or Mine Field
Eileen Reppenhagen, QuickBooks ProAdvisor
Do you take any time to investigate whether your clients qualify for the disability tax credit? How about the infirmity credit or the caregiver credit?
Do you know if your clients or their family members support dependent relatives who might qualify for the personal tax credits such as infirmity, disability or caregiver credits? They could be entitled to a significant reduction (potentially thousands of dollars) in personal taxes payable.
If your client can't use their tax credits, do you enquire as to who supports them that might be eligible to claim a transfer of credits upon proof of support?
The Minister of Finance reports that an estimated 100,000 Canadians have not claimed the Disability Tax Credit even though they might be entitled www.fin.gc.ca/toce/2004/taxexp04_e.html to make a claim.
Statistics Canada reports that there are 3.1 Million Canadians with some form of infirmity. That's about 12% of Canadians, quite possibly one per family. Background material from Statistics Canada can be found at www.disabilitytax.ca.
Families with children who have a disability are significantly impacted in both income earning capacity and quality of life. See the July 29, 2003 report from Statistics Canada.
In their final report to the Minister of Finance in December 2004, the Technical Advisory Committee stated that significant numbers of persons who are on CPP Disability Income have not applied for or been able to qualify for the Disability Tax Creditwww.disabilitytax.ca.
Review your client list to ensure that clients are claiming all of the credits that they are entitled to:
- Interview multiple family members
- Prepare a family tree
You will find that this is actually a very interesting exercise
- People know totally different things about their family members
- Clients do not always share this information with their spouse or partner. Alternatively the spouse or partner has never had a reason to be interested in the health of extended family as there was no motivation in the form of transferable credits to reduce tax payable.
The easiest tools to use are the most current tax forms created by CRA. I use these forms to explain what the credits are and what their limits, minimums and maximums are:
- Schedule 1 lines 300 to 350
- TD1 (federal and provincial) and their worksheets
Remind your clients that proving the right kind of support with adequate documentation is essential if they support a dependent relative.
There is a trap for the unwary. If the client has not reported all of their income or made claims for expenses that they are not able to document, they won't want to open those years up to audit. Your client will need to avail themselves of the voluntary disclosures program to assist with disclosure while minimizing penalties. See IC00-1R- Voluntary Disclosures Program
and review the Voluntary Disclosures page at http://www.cra-arc.gc.ca/gncy/nvstgtns/vdp-eng.html
In 1999 the DTC was $4233. In 2000 and subsequent years, the federal credit increased as follows:
- 2000 $4,293
- 2001 $6,000
- 2002 $6,180
- 2003 $6,279
- 2004 $6,486
- 2005 $6,596
In 2000 a disability tax credit supplement for children under 18 was added. This credit is adjusted for childcare or attendant care claims paid by any person for that child. Here are the federal credits for each year:
- 2000 $2,941
- 2001 $3,500
- 2002 $3,605
- 2003 $3,663
- 2004 $3,784
- 2005 $3,848
In addition, the Child Tax Credit has a supplement called the Child Disability Benefit which is a tax free payment and it is income dependent. Commencing in 2004 payments were made from July 2003 and continue monthly for an annual total of:
- 2003 $1,600
- 2004 $1,653
- 2005 $2,000
- Complete page 2 of a new (2004) 8 page "Disability Tax Credit Form 2201" at http://www.cra-arc.gc.ca/E/pbg/tf/t2201/README.html.
- Visit the appropriate doctor. This can be a huge challenge for several reasons. The doctor may not be willing to sign the form or may not have enough knowledge of the patient's eligibility; thus, you should know:
- There is a list of appropriately qualified doctors on Form 2201
- The doctor certifies that the person has a severe, prolonged disability that meets the criteria for a claim
- The doctor completes the box with the effective year the disability became severe and prolonged
- You should advise the doctor that there are new criteria which allow for multiple conditions, none of which meets the criteria, but combined would meet the severe and prolonged criteria
- A new form is in the works at CRA and should be released in the fall of 2005
- Once the form is completed, assist the client with adjustments to their tax return. Do not just assume everything will be fine and file an adjustment. This is very dangerous. There might be unintended consequences, some good, some very bad that the client will want to know about before actually claiming the credit for previous years. For example:
- Tax credit claims can be reduced by claims for expenses like childcare, moving, attendant care, disability supports (new in 2004) or certain medical expenses
- Tax credits might be available for transfer to other family members and their risk of additional exposure should be assessed before requesting a transfer
- Tax credits of multiple family members could be affected. You are entitled to arrange your claims in the most beneficial way
- The client may have filed a return with incomplete or faulty information which may require correction
- Check the re-assessments carefully to ensure adjustments were interpreted correctly as this is not always the case. For years prior to 1997 adjustments are prepared manually. It has been my recent experience that not all adjustment calculations like losses carried forward or back are completed as requested without dogged determination and follow up with senior staff.
- You will require all copies of old tax returns for the past 10 years and all investment account statements and RSP's for all years for all family affected by the claim. Copies of the summaries can be obtained for 1994 and subsequent years from CRA upon request in writing or the client can visit CRA to ask for printouts and a summary of amounts carried forward for some items, but not all.
- Obtain permission in writing in your engagement letter to share tax and accounting information with other family members
- Key the old tax returns in to your tax software, account for their investment portfolio in Quicken and check that these items, to name a few that I keep finding were not claimed in the past:
- Medical expenses
- Union dues
- Donations (carried forward are not reported by CRA)
- Home office costs (carried forward are not reported by CRA)
- Margin interest on portfolio investments
- RRSP contributions for Jan/Feb each year
- Capital gains and losses
- Submit a T2201 separately from the tax return for the current year to obtain permission to claim the DTC
- Submit a T1Adj with appropriate documentation to your Tax Centre with request for each year you wish to make an adjustment
- Clients can ask for their own adjustments on the CRA website in My Account.
- Contact Voluntary Disclosures section, have client's permission in writing and consider having client present when you make the call. Explain that filing an incorrect tax return is a criminal offence and that penalties will be waived if they meet the criteria.
When you find a missing credit make a claim
- File a T1Adjustment for any of the previous 10 years
- Refunds for past years DTC's seem to range from $10,000 to $20,000 unless the client has unreported income or expenses that are not documented, in which case, you have a whole different problem on your hands (hence the mine field).
- Usually by the time someone with a disability is ready to be labelled as disabled, it's been a few years, very seldom is someone labelled as disabled right away.
- Keep in mind that it is not always about disability tax credits. It might be infirmity or caregiver credits or child tax benefits and GST credits not claimed by single mothers who have not filed tax returns since their separation (hence the gold mine).
- Fear that they might owe tax keeps many recently separated single mothers from filing returns. In my experience, when they find out that the benefits of filing outweigh the tax owed, they don't always believe it because it seems too good to be true.
Absolutely. Clients do not complain at paying for your time when the benefits outweigh the costs. Who wouldn't pay a couple thousand dollars to get over $10,000 in refunds? In fact, most are ecstatic to find an accountant who cares enough to ask the right questions. My problem is that since I started writing about this topic, I get emails from all across Canada asking me to help them find someone locally who can assist them with their claim for the DTC.
Start discussions about value added benefits of seeing you on an annual basis and they will be back next year because you cared enough to ask the right questions.
- Money management
- Tracking net worth to watch it grow
- Debt reduction strategies
- Estate planning
- Tax consequences of disposition of assets
- Planning to put the kids through university or pay for weddings
There are 19 personal tax credits in S. 118.
There are over 60 medical expenses in S. 118 and Regulation 5700 of the Income Tax Act and some of these are duplicated as Disability Supports in S. 64.
It is important to know if your clients or their family members, support dependent relatives who might qualify for these personal tax credits, as they could be entitled to a significant reduction in personal taxes payable.