By Evelyn Jacks, President and Founder, Knowledge Bureau
When a loved one is diagnosed with a disability, there are often many issues to deal with, both from a health and financial perspective. That being said, planning for financial continuity well before any health issues emerge is a prudent approach, which may also make the individual and their caregivers aware of important tax provisions they could benefit from when a health issue arise.
Being financially prepared for illness involves three strategies:
- Saving for immediate health emergencies,
- Planning for tax-smart voluntary income withdrawals from private savings plans, and
- Applying for any available assistance from government sources, such as Canada Pension Plan (CPP), disability amounts, Employment Insurance (EI), compassionate care benefits, and Workers’ Compensation.
Some things you may wish to consider include:
For emergencies, tap into the TFSA
For most people, the Tax Free Savings Account is the “safe haven”. Although tax-paid dollars are used to fund the plan (there is no tax deduction for the contribution), the withdrawal of principal and earnings to fund health-related costs is possible anytime on a completely tax-exempt basis. It is possible to replenish the withdrawals, but not before the start of the next calendar year after withdrawal.
For the short term, tap into private savings
There are five tax-efficient opportunities available to taxpayer who have planned ahead to cover short term needs brought on by a sudden and unexpected illness:
- Wage Loss Replacement Benefits: Self-funded premiums paid for wage loss replacement plans bring tax advantages when benefits are received from the plan by the sick or disabled. These will not be taxable. It is important to note that if an employer paid some or all of the premiums, the benefits received will be taxable. In that case, it is possible to deduct the premiums paid from those taxable benefits.
- Severance: When an employee must stop working entirely because of a disability, a severance package or job termination payment may be received. In these cases, a Registered Retirement Savings Plan (RRSP) deduction may help to offset the extra taxes payable. Better after-tax results can also occur if arrangements can be made to take benefits over two separate tax years; for example, from August 1 to July 31, rather than January to December.
- Critical Illness and Insurance Benefits: Premiums paid for self-funded critical illness insurance are not deductible, but benefits received are also not taxable. There is quick access to the money as well; benefits are often paid within a month after the critical illness diagnosis. Most importantly, the money can be used for virtually any purpose.
Life insurance policies may also provide for a lump sum payment as an advance on the death benefit. This can be very important, in cases where policyholders are diagnosed with less than one (or sometimes two) years to live. This tax-free benefit can help pay for the costs of end-of-life care.
- Deposits in Non-Registered Accounts: You may consider creating income from corporate class funds that have a Return of Capital feature, to increase cash flow with no immediate tax consequences. This is especially effective if a chronic illness emerges. If other securities must be sold to fund health care costs, it is possible to offset taxable capital gains with unclaimed capital losses from prior years to achieve a better after-tax result.
Help for the longer term - government sources
Many government safety net programs, set up to assist the newly disabled, feature mandatory contributions while healthy, and long waiting periods when illness strikes. Despite these issues, once you receive these benefits, they can be an important part of financial continuity planning for longer term illnesses.
- CPP Disability Benefits: The CPP disability payments are made for conditions that are “severe and prolonged,” and the benefits are taxable. They are considered to be earned income for RRSP purposes, meaning an RRSP contribution can provide tax savings in future years.
A Children’s Benefit is also payable to minor children (natural, adopted, or in the care and custody of the disabled person or spouse). Children between 18 and 25 and attending a recognized school or university full-time can also qualify to receive these benefits. This also creates a tax bonus, because the amounts received are taxable in the hands of those children, but often because of little or no income, there is no tax payable. In addition, because this is considered to be “own-source” income, the benefits can be re-invested in an account in that child’s name, with resulting investment earnings taxed in the hands of the child.
- EI Compassionate Care Benefits: These benefits are taxable; however, when EI is received in conjunction with other income, EI payments are reduced. Caregivers can make a claim for compassionate care benefits (for a six month maximum period) if they must miss work on a temporary basis to provide care or support to a family member who is gravely ill, with a significant risk of death.
- Workers’ Compensation: These benefits are not taxable but must be reported on the tax return for the purposes of increasing an individual’s net income. This will in turn reduce tax benefits like the Canada Child Benefit, as well as refundable and non-refundable tax credits.
Benefits at tax season
There are various tax credits taxpayers may claim on their tax returns:
- Disability Amount: Taxpayers with “a severe and prolonged impairment in mental or physical functions” may claim this. Complete Part A of Form T2201 Disability Tax Credit Certificate and have a medical practitioner complete Part B. The basic Disability Amount for 2018 is $8,235. If you are supporting a disabled minor, you can claim a supplementary amount of $4,804, for a total claim of $13,039. If you also claim child care expenses, this supplement may be reduced.
- Medical Expenses: Disabled individuals often incur medical expenses that cannot be reimbursed because they do not have taxable income. If this is the case, a supporting person may use these expenses to make a claim, provided the disabled person is dependent on that person. Also note that fees paid for the completion of the Disability Tax Credit Certificate (Form T2201), are considered claimable.
- Attendant Care Costs: Please note that medical expense costs over $10,000 may affect your claim for the disability amount.
- Refundable Medical Expense Supplement: Individuals who have at least $3,566 in earned income in 2018 may recover some medical expense costs with this claim, which amounts to 25% of the medical expenses claimed to an annual maximum ($1,222).
- Canada Caregiver Credit (CCC): This complicated provision combines several claims for dependants— your spouse, your minor child and an infirm adult dependant — into one. People who qualify for the Disability Amount will also be considered to be infirm for the purposes of the Canada Caregiver Amount.
Clever financial moves
One in five Canadians aged 45 or more provides care to seniors living with long-term health problems. Because family members must fill extensive roles, the physical and psychological toll on caregivers is huge: up to 75% will develop psychological illnesses, including 15 to 32% suffering from depression. For these reasons alone, planning for financial continuity with an eye on being tax-savvy, can help both the disabled person and their caregiver - and relieve some of the financial pressures brought on by disability.
1 Canadian Study of Health and Aging (CSHA), 1991, 1996, 2001
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