One of the most valuable tax benefits for persons with disabilities is the disability tax credit (DTC), which can be worth between $1,500 to $2,700 of combined federal and provincial tax relief, depending on your province of residence. An estimated 1.8 million Canadians over the age of 15 live with a severe disability and last year, approximately 770,000 individuals claimed the DTC on their income tax returns, representing a combined tax savings exceeding $1.3 billion.
Qualification for the DTC also entitles you to become a beneficiary under a registered disability savings plan. An RDSP helps individuals with a disability (or their parent or caregiver) save for the future by putting money into a fund that grows tax-free until the beneficiary withdraws the funds. In addition, an RDSP can attract valuable government grants and bonds totaling up to $90,000, depending on family income.
Qualifying for the DTC can be challenging, depending on the type of disability. To qualify, the individual with the disability (or their legal representative) must complete Part A of Form T2201, Disability Tax Credit Certificate. Part B must then be filled out by a medical practitioner. Even with the form properly completed and certified, there’s no guarantee your application for the DTC will be accepted by the Canada Revenue Agency.
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A tax case decided last month demonstrates the uphill battle some Canadians face to qualify for the DTC. The case involved a Nova Scotia taxpayer who had been claiming the DTC for several years but, in September 2016, received a letter from the CRA denying her DTC going forward.
According to her DTC application form, her doctor certified that the taxpayer has a mental impairment. He described the taxpayer’s diagnosis as “severe depression & anxiety” and the effects of her impairment as being “acrophobia & panic attacks (and) very restricted activity.”
The CRA wrote to the doctor requesting additional information. Her doctor confirmed that while the taxpayer can perform her daily living skills independently, she “cannot initiate and respond to social interactions appropriately as she has social anxiety, in the sense that most of the time she stays at home and had to quit her work and studies.”
Furthermore, the taxpayer suffers from “severe anxiety and panic attacks” and was diagnosed in 2005 with clinical depression. She was forced into involuntary retirement as a result of her medical condition. As the doctor explained, “Many modes of treatment have all failed. She is house bound by this condition and when she must leave for appointments she must avoid contact with others. She is overwhelmed in any crowded situation (and) confined areas such as elevators and vehicles. She has other phobias as well, resulting in panic attacks. She has other medical conditions (such as) adult ADHD, osteoporosis, hearing loss and overactive bladder. Her symptoms of depression, mental anguish, difficulty sleeping and unexplained pain in hand, feet (and) lower back indicate fibromyalgia. She also has frequent headaches and becomes overwhelmed with her normal day to day routines.”
Under the Income Tax Act, for the taxpayer to qualify for the DTC, she must establish that she had a “severe and prolonged impairment in physical or mental functions, resulting in a marked or significant restriction in one or more of basic activities of daily living” as certified by a medical practitioner.
A “prolonged impairment” is one that lasts or can reasonably be expected to last for a continuous period of at least 12 months. A basic activity of daily living is “markedly restricted” when all or substantially all of the time, even with therapy, the individual is unable to perform a basic activity of daily living. A “basic activity of daily living” includes the mental functions necessary for everyday life, which includes “memory, and the three functions of problem solving, goal setting and judgment taken together, and adaptive functioning.”
The taxpayer testified that her infirmity “was more mental than physical.” The taxpayer testified that some days she could not get out of bed or leave the house. Two neighbours helped her with cooking and housework.
Prior jurisprudence has examined the legislative intent of the DTC, which is “to provide a modest relief to persons who fall within a relatively restricted category of markedly physically or mentally impaired persons. The intent is neither to give the credit to everyone who suffers from a disability nor to erect a hurdle that is impossible for virtually every disabled person to surmount. It obviously recognizes that disabled persons need such tax relief and it is intended to be of benefit to such persons…. If the object of Parliament, which is to give to disabled persons a measure of relief that will to some degree alleviate the increased difficulties under which their impairment forces them to live, is to be achieved, the provisions must be given a humane and compassionate construction.”
Unlike the CRA, the judge was sympathetic and compassionate, concluding that the taxpayer did indeed qualify for the DTC for 2016 based on the evidence, which shows that, at all relevant times, the taxpayer “has had a severe and prolonged impairment (severe depression and anxiety) causing her to largely be unable to leave her house. That is indicative of a marked restriction in mental functions necessary for everyday life, being a basic activity of daily living.”
In June 2018, the Senate Committee on Social Affairs, Science and Technology issued a report entitled “Breaking Down Barriers: A critical analysis of the Disability Tax Credit and the Registered Disability Savings Plan” after studying the issue in February. It undertook the study after learning of a sudden spike in the number of DTC applications that had been rejected by the CRA. In the 2016-17 fiscal year, 45,157 DTC applications were rejected compared to 30,235 the previous year.
The report urged the government to reform the DTC and RDSP programs, making 16 recommendations aimed at improving both programs. Recommendations include removing barriers that prevent people from taking advantage of the DTC and making enrolment in the RDSP automatic for eligible Canadians under age 60.