Disability disputes come with major tax consequences
Canada’s personal tax system offers a variety of tax credits to help various individuals. For persons with disabilities, the seminal credit is the disability tax credit (DTC), a non-refundable credit that helps those individuals (or their supporting persons, such as a parent) reduce the amount of federal and provincial income tax they have to pay. The stated purpose of the DTC is “to provide for greater tax equity by allowing some relief for disability costs, since these are unavoidable additional expenses that other taxpayers don’t have to face.”
The total value of the combined federal and provincial DTCs varies by province, but ranges from about $1,500 to $2,200 in tax relief annually.
In addition, being eligible for the DTC may also make you eligible for other federal or provincial programs such as the registered disability savings plan (RDSP), with its generous Canada Disability Savings Grants (up to $70,000) and Canada Disability Savings Bonds (up to $20,000), the working income tax benefit, and the child disability benefit.
Yet, each year, some individuals have trouble successfully claiming the DTC and even end up in court when the Canada Revenue Agency challenges the taxpayer’s claim of a qualifying disability.
Former Chief Justice Donald Bowman summed it up this DTC decision between the taxpayer and the CRA best in a case just over two decades ago. He wrote, “The legislative intent ( of the DTC) appears to be 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.”
A recent tax case, decided over the summer, shows the struggles one mother had to go through in order to claim the DTC for her daughter. The child was born in 2013 and was diagnosed, through a newborn screening process, with phenylketonuria. PKU is a genetic disorder that eliminates or severely restricts the body’s ability to metabolize phenylalanine (“Phe”), an amino acid necessary for healthy growth and development. In 2015, the child’s mom applied for the DTC for her daughter but the CRA concluded that the child did not fulfil the requirements and thus the mom took her case to tax court.
Under the Tax Act, to qualify for the DTC, an individual must have a “severe and prolonged impairment in physical or mental functions” which markedly restricts one or more of the individual’s basic activities of daily living or would markedly restrict an activity if it wasn’t for “life sustaining therapy.”
The tax code further defines lifesustaining therapy as therapy that an individual requires to support a vital function and is administered at least three times per week for an average of at least 14 hours per week. The purpose of this rule is to allow individuals to be eligible for the DTC if they must have life-sustaining therapy that requires them to dedicate a significant amount of time away from their normal, everyday activities to receive the therapy.
The child’s therapy consisted of strictly regulating the amount of Phe consumed. The goal each day was to consume a very specific amount of Phe — if too little was consumed, normal growth and development could be impaired, but if too much was consumed, it would result in brain damage. As the judge wrote, the taxpayer “and her child are obliged to walk a very narrow ridge with great risks if the child falls to either side.”
The issue was whether or not therapy was administered for an average of “not less than 14 hours a week.” The tax rules provide that in computing the 14-hour a week requirement, “the time spent on administering therapy … in the case of a child who is unable to perform the activities related to the administration of the therapy as a result of the child’s age, includes the time, if any, spent by the child’s primary caregivers performing or supervising those activities for the child and does not include time spent on activities related to dietary or exercise restrictions or regimes.”
It was this exclusion which proved problematic for the CRA as the tax rules specifically exclude from the 14- hour average any time spent on dietary restrictions or regimes. The judge set out to determine whether time spent counting Phe should be considered time spent on dietary restrictions or regimes, and noted that “managing of Phe consumption is much more like administering a medication than it is like managing a diet.”
In court, the parents described the many hours they spent caring for their daughter. Among the list of 32 activities they did to treat their daughter were regular blood tests and the daily preparation and administering of medical formula and low protein foods.
The judge felt that “(m) easuring and controlling Phe intake is properly characterized as administration of the therapy and not as control of (the daughter’s) diet with the consequence that the correct way to apply these rules is to consider that the time spent determining the amount of Phe to be consumed and actually consumed, including the time spent logging Phe intake, should be considered as part of the 14-hour a week average.”
Since the total time spent on the above activities was actually over 18 hours, the judge concluded that the taxpayer’s daughter was indeed eligible for the DTC.
FOR PERSONS WITH DISABILITIES, THE SEMINAL CREDIT IS THE DISABILITY TAX CREDIT.