As we start to gather up our slips and documentation for our income tax returns, areas that can be a mystery for some people is the deductibility of medical expenses, the inclusion of expenses paid to retirement facilities and nursing homes, and the transfer of their deductions between family members. Added to this is the availability (or not) of the Disability Tax Credit and the new Registered Disability Savings Plan and the mystery intensifies.
In this article I intend to discuss the more common areas of medical expense deductibility and leave you with some resources for a more in-depth investigation, if necessary. As with any discussion involving income tax, I caution the reader that the information in this article is general in nature. As each person’s situation is unique, you should seek your own accounting and professional advice when completing your income tax returns.
How Does It Work?
Conceptually, the Income Tax Act (the “Act”) allows Allowable Medical Expenses to be used to calculate a non-refundable tax credit that is deducted from income taxes otherwise payable. After the lesser of $1,962 or three per cent of the taxpayer’s taxable income for the taxation year is deducted from the total of the taxpayer’s Allowable Medical Expenses for any 12 consecutive month period ending in the taxation year, the resulting number is added to the other applicable deductions on Schedule 1 of the income tax return. This calculates the total federal non-refundable tax credit available for the taxpayer for that taxation year.
Allowable Medical Expenses
What is an Allowable Medical Expense? For many, it will be nothing more than the cost that an individual will pay for health insurance premiums paid to a private insurer, prescription drugs/appliances, eye glasses, and medical and dental expenses not reimbursed by a health insurance plan. For some, however, medical expenses are more extensive and more costly. Moreover, these expenses may also be for an individual, his/her spouse and his/her dependants. In these cases, what exactly do Allowable Medical Expenses include?
Generally speaking, an Allowable Medical Expense is a payment made to a person who is licensed in the taxpayer’s jurisdiction to carry on the practice of medicine, dentistry, osteopathy, chiropody, chiropractic, naturopathy, optometry, psychoanalysis and audiology. These would also include payments made for prescription drugs and devices, private health premiums, nursing services/care/assistance, public or licensed private hospital charges and diagnostic services and procedures.
After payments made by a public or private health insurer are deducted from medical expenses incurred, any positive difference also becomes an Allowable Medical Expense. Allowable Medical Expenses also include the cost of acquiring, as well as caring and feeding an animal specifically trained to assist a person who is blind, deaf or severely impaired in the use of arms or legs or have severe autism or severe epilepsy.
For those who wish to have a greater understanding of what is and is not considered by the Canada Revenue Agency (CRA) as an Allowable Medical Expense, I refer you to the CRA Guide Information Concerning People with
For many allowable medical expenses, a Disability Certificate as prescribed by the Act is not necessary but for those claiming an expense for attendant care, retirement facility or nursing home expenses, the higher rate of childcare expense, among others, the Disability Certificate is essential.
A Disability Certificate (Form T2201) is a certificate confirming that an individual has a severe or prolonged mental or physical impairment. The pre-qualifications for such a Disability Certificate are set out in the application form T2201 itself. The impairment or condition must have lasted at least 12 months and it must markedly restrict an individual’s ability to perform a basic activity of daily living. A marked restriction is blindness or the inability to perform one of feeding or dressing, speaking, hearing, bowel/bladder function, walking or mental functions.
The thresholds for these restrictions are set out in the application form. A medical practitioner can sign the Disability Certificate for any and all of the above noted restrictions and specific professionals (optometrist-sight, audiologist-hearing, occupational therapist-walking, feeding, psychologist-mental impairment, speech language pathologist-speech, and physiotherapist-walking), can sign for the specific impairments within their areas of qualification. However, the professional signing the Disability Certificate must be licensed for that area of expertise in the jurisdiction where the patient/taxpayer normally resides. Further, the Disability Certificate must be accepted by CRA before it can be used.
Weaving your way through the rules surrounding the inclusion of attendant care costs as an Allowable Medical Expense is very difficult.
The cost of up to an equivalent of a full-time attendant for an individual or their spouse within their own home is an Allowable Medical Expense provided that the individual has been certified by a medical practitioner as having a physical or mental infirmity (not defined and perhaps not as onerous a test as for the Disability Certificate) of an indefinite duration. In claiming this cost of a full-time attendant, receipts from the attendant and the attendant’s social insurance number must accompany the individual’s income tax return. CRA has also indicated that there may be more than one attendant as long as the total of all the attendant hours would not be more than those of one full-time attendant.
The cost of up to $10,000 for less than a fulltime attendant for an individual can also be an Allowable Medical Expense provided that the individual has a Disability Certificate but has not claimed the cost of a nursing home as part of their Allowable Medical Expenses for that taxation year. In a recent tax opinion, however, CRA allowed a son who paid for a part-time attendant for his mother (who was in a nursing home) to deduct the cost of the attendant to the extent of $10,000 - even though his mother was claiming her nursing home costs as part of her Allowable Medical Expenses.
In each of these situations, the attendant may not be the spouse of the person claiming the attendant care.
Nursing Home Expenses
Provided that a Disability Certificate has been issued, an individual can claim the expense paid for full-time care in a nursing home as an Allowable Medical Expense.
Care Facility Expenses
Payments made to a facility for the care or care and training of an individual would also qualify as Allowable Medical Expenses provided that there is a written certificate (not necessarily a Disability Certificate) signed by a qualified person (normally a medical doctor) indicating that the individual needs the care and/or training due to a physical or mental handicap. It is noteworthy that in a 2005 case, CRA approved the deduction of specific expenses paid to a retirement home which provided a high degree of assisted living to an individual who had such a certification signed by a medical doctor.
For anyone filling out an income tax return and for whom a Disability Certificate (T2201) has been issued, a special disability credit of $7,021 (for 2008) is available in calculating the nonrefundable tax credit for the individual. This Disability Credit is not available if a claim has been made for nursing home expenses or full time attendant care for that individual’s Allowable Medical Expenses. Interestingly, the Disability Credit is available if a claim is made for part-time attendant care to a maximum of $10,000.
Transfer of Credits
Allowable Medical Expenses can be claimed by either or shared with both spouses including common law and same sex spouses. Either parent may also claim allowable Medical Expenses incurred for dependent children under 18. Allowable Medical Expenses paid for other dependents, including children over 18 years can only be claimed for that portion of the dependent’s Allowable Medical Expenses that exceed the dependent’s $1,962 or three per cent calculation threshold.
The Disability Credit ($7,021) must first be used to reduce the disabled individual’s income to zero. Any portion of the Disability Credit that is left over may then be transferred to the spouse (including a common law and same sex spouse) of the individual or failing the spouse, to anyone who claims the individual as a dependent (e.g., a parent can claim the unused portion of the Disability Credit for an adult disabled child).
There are extending rules to allow others for whom the individual could be considered to be dependent to claim the unused portion of the individual’s Disability Credit.
Registered Disability Savings Plan
No discussion about Allowable Medical Expense deductions and Disability Credits should end without a short note about the registered disability savings plan (RDSP) announced in the March 2007 federal budget, but which was difficult to locate at the retail level until the later half of 2008. It works similarly to the federal government’s registered education savings plan, which has been in place for some time. The RDSP must be established by the disabled person unless either a minor or not capable. The disabled person must be 59 years or younger and have been issued a Disability Certificate. A RDSP allows the plan holder to save up to $200,000 in a tax-deferred account.
Similar to a registered education savings plan, the contributions made to the RDSP are not deductible but the income earned in the RDSP is not taxable until withdrawn by or for the disabled beneficiary. Anyone can make contributions to the RDSP. For many families, additional benefits come in the form of a Canada Disability Savings Grant (CDSG) and a Canada Disability Savings Bond (CDSB), which are available from the federal government but on a family income tested basis.
The maximum family income to qualify for the full CDSG is $75,769. This can either be the family income for those families with a disabled child under 18 or if the beneficiary is over 18, the beneficiary’s own family income. The Canada Disability Savings Grant is equal to 300 per cent of the first $500 of contributions made to the RDSP and 200 per cent on the next $1,000 of contribution. This means that a contribution of $1,500 into a RDSP will trigger a total CDSG of $2,000, boosting the RDSP contribution to $3,500. For family income over $75,769, the CDSG is only 100 per cent of the first $1,000 of contributions.
The savings bond is issued by the federal government and available for those with family incomes below $37,885. This is phased down to a family income of $21,283 when the full bond of $1,000 per year is available.
The maximum amount of grants paid by the federal government during the life of the RDSP is $70,000 and the maximum amount of bonds is $20,000.
Normally, payments will be made out of the plan commencing no later than the year that the beneficiary reaches 60. There can be payments made out of the plan prior to then but there are holdback amounts associated with the RDSP below which the grants and bonds are paid back to the federal government if the RDSP is liquidated before the beneficiary reaches a prescribed age.
A note of caution for those in Ontario: Unless the Province changes its rules, establishment of a RDSP for a disabled beneficiary who is also receiving ODSP payments will affect those payments as soon as the beneficiary is deemed to become entitled to the RDSP benefits. Care should be exercised in establishing a RDSP to ensure, if possible, that the ODSP rules as well as the RDSP rules can both be met.
Don’t overlook the Allowable Medical Expense calculation in preparing your income tax return. This is even more important if you have a spouse or a family member who may require nursing home, extra care or a part-time or fulltime attendant. Equally important is to ensure that anyone who might be eligible should apply for the Medical Disability Certificate (T2201). Finally, in certain circumstances, a Disability Tax Credit is available.
The rules can be complex, but as health care costs rise for everyone it pays to spend some time researching what medical credits - or even a RDSP - might be available to you or your family.
John Peart is a partner with the Ottawa law firm of Nelligan O’Brien Payne LLP and a member of its Estate Planning Group. John is Certified by the Law Society of Upper Canada as a Specialist in Estates and Trust Law and is a member of the International Society of Trust and Estates Practitioners.
In the article entitled, “Health Claims”, (November/December, 2009) we stated that unless the Province (of Ontario) changes its rules, establishment of a RDSP for a disabled beneficiary who is also receiving ODSP payments will affect those payments as soon as the beneficiary is deemed to become entitled to the RDSP benefits. We have received feedback from some readers who have pointed out that, in fact, the Province of Ontario issued a notice on November 30, 2008 stating that the province was amending its social assistance rules to allow recipients of IDSP payments to also receive RDSP benefits without any reduction in their ODSP payments. The rules have been amended as indicated in the press release.
[This article was originally published in the December 2009 issue of Fifty-Five Plus Magazine.]