Disability Tax Credit

Introduction

The purpose of this backgrounder is to provide information for consultations to develop revised proposals to clarify eligibility criteria under the Income Tax Act for the disability tax credit (DTC). In addition, the backgrounder describes other recent developments relating to the DTC within the context of overall federal support for persons with disabilities.

Federal Assistance for Persons With Disabilities – Background

The Government provides substantial assistance each year to persons with disabilities to help them participate fully in Canadian society. It does so through both direct spending programs and tax measures (see Annex 1 for details).

Human Resources Development Canada, the lead federal department on disability issues, delivers approximately $3 billion annually through the Canada Pension Plan and key departmental programs for persons with disabilities. Veterans Affairs Canada also provides direct funding in the form of non-taxable disability pensions for veterans totalling over $1 billion per year.

Since 1996 federal tax assistance to persons with disabilities and those who care for them has increased to about $1.1 billion per year from $600 million – an increase of more than 80 per cent (see Annex 2 for details on recent enhancements to tax assistance measures for persons with disabilities).

One of the main tax measures is the DTC, which has been broadened and enriched, providing a federal income tax credit of up to $989 (for 2002). This measure recognizes the effect of supplementary costs incurred due to the effects of a severe and prolonged mental or physical impairment on an individual’s ability to pay tax. The DTC currently provides $400 million per year to about 450,000 eligible Canadians suffering from a severe and prolonged mental or physical impairment, the effects of which markedly restrict their ability to perform a basic activity of daily living.

Recent DTC-Related Developments

Five different developments relating to the DTC have recently been the subject of public discussion. They are:

1. Proposals intended to clarify the eligibility criteria for the DTC in response to a recent Federal Court of Appeal decision.
2. The March 2002 report by the Standing Committee on Human Resources Development and the Status of Persons with Disabilities, Getting it Right for Canadians: The Disability Tax Credit.
3. The Government’s August 21, 2002 response to the Standing Committee’s March 2002 report.
4. Recent Canada Customs and Revenue Agency (CCRA) draft revisions to the DTC application form.
5. The recent CCRA review of DTC claims confirming continuing credit eligibility of claims accepted prior to 1996.

The policy intent of the DTC is to provide tax assistance to individuals with a severe and prolonged mental or physical impairment, the effects of which markedly restrict his or her ability to perform a basic activity of daily living^[1] or require him or her to receive extensive therapy in order to sustain a vital function.

In March 2002 the Federal Court of Appeal rendered a decision that would expand eligibility for the DTC far beyond this policy intent^[2] by allowing for eligibility of individuals who, because of food allergies or other similar medical conditions, must spend an inordinate amount of time to find, procure and prepare suitable food. Such an expansion of eligibility would result in fewer resources being available to individuals with a severe and prolonged mental or physical impairment.

Inevitably, targeting eligibility of the DTC involves the difficult task of identifying those most in need. Therefore, it is important to ensure that support continues to be provided in accordance with the policy intent of the DTC, which is to provide assistance to those individuals who suffer from a severe and prolonged mental or physical impairment, the effects of which markedly restrict their ability to perform a basic activity of daily living. Draft amendments to clarify DTC eligibility criteria were released on August 30, 2002. The Government has received comments from members of Parliament and other interested parties on these amendments. In this context, the Department of Finance will consult further to develop revised proposals that will be considered for inclusion in the next budget. The objective of this process is not to reduce the Government’s support for persons with disabilities, but rather to deal with the issues arising from the court decision without unintended consequences, while achieving the policy intent of the DTC.

On November 6, 2001, the Chair of the Sub-Committee on the Status of Persons with Disabilities announced that the Sub-Committee would conduct an examination of the CCRA’s fall 2001 administrative review of DTC claims including eligibility for the DTC.

The Sub-Committee began a consultation process in November 2001 with organizations representing persons with disabilities, individuals and medical associations. Department of Finance and CCRA officials appeared before the Sub-Committee.

Following these hearings the Standing Committee on Human Resources Development and the Status of Persons with Disabilities released on March 21, 2002, the report Getting it Right for Canadians: The Disability Tax Credit. This report included 16 legislative, policy and administrative recommendations.

The Government’s response to the report of the Standing Committee was tabled in the House of Commons on August 21, 2002, and is available on the Department of Finance Canada Web site (http://www.fin.gc.ca/toce/2002/gcresp_e.html).

As indicated in its official response, the Government is taking action on a number of recommendations made in the report. In particular, in response to Recommendation 15, the Department of Finance will initiate an evaluation of the DTC when key data become available early next year.

In addition, in response to Recommendation 7, the CCRA is in the process of establishing a new permanent Administrative Advisory Committee on Disability to ensure ongoing consultation on administrative issues affecting individual eligibility for the DTC.

With regard to the Standing Committee’s recommendations on DTC eligibility criteria, the Government noted in its response that, in considering any changes to eligibility, it will do so only in a manner that is consistent with the policy intent of the DTC. This policy intent is to provide tax assistance for those who have a severe and prolonged mental or physical impairment, the effects of which markedly restrict their ability to perform a basic activity of daily living.

Under governing legislation, an individual must have a qualified person, such as his or her doctor, complete Form T2201, the Disability Tax Credit Certificate, in order to claim the credit. Based on the information provided on Form T2201, the CCRA determines whether an individual meets the credit’s eligibility requirements. In cases where the information provided is not sufficient to make a clear determination of eligibility, the CCRA contacts the qualified person, asking for further medical clarification.

Form T2201 has been reviewed and revised several times over the years to ensure that it is consistent with the eligibility criteria as set out in the governing legislation. These revisions have been made in consultation with organizations representing health professionals and persons with disabilities, where possible.

More recently, during its hearings, the Sub-Committee on the Status of Persons with Disabilities heard a number of concerns related to Form T2201. In particular, the Sub-Committee was told that the form was confusing and did not give medical practitioners an opportunity to describe the degree of their patient’s disability. In its report, the Sub-Committee recommended that the CCRA consult with medical practitioners and organizations representing persons with disabilities in order to address concerns raised during the hearings and improve the form.

In response, the CCRA began a series of meetings with interested parties and, over the past several months, has met with numerous groups representing persons with disabilities and health professionals to discuss ways to improve Form T2201 (see Annex 3 for details). In particular, improvements to the form allowing for a better assessment of mental impairment, a key concern of the Sub-Committee, were discussed.

With the input of these groups, a revised Form T2201 was drafted and distributed to interested parties on August 28, 2002 for comment. The CCRA received many suggestions on the revised form and thus continues to work with stakeholders to improve the form to better meet the needs of both medical practitioners and persons with disabilities.

A number of concerns have also been raised about the CCRA’s recent review of DTC eligibility claims. An important aspect of tax fairness is ensuring that those who benefit from tax measures are entitled to receive them in accordance with their policy intent. The review of DTC claims undertaken by the CCRA is in accordance with this objective.

Prior to 1996 all applications for the DTC were accepted upon assessment. Since 1996, following recommendations by the 1996 parliamentary task force chaired by Andy Scott, the CCRA has been verifying all new DTC claims before granting the credit.

In 2000, the CCRA conducted a pilot project to review the eligibility of a sample of individuals who had applied for the credit between 1985 and 1996. The pilot project found that a significant number of individuals should not have qualified for the credit, should have been approved only on a temporary basis, or did not have sufficient information in their file to determine if they were eligible. This information indicated that a full review of claims made between 1985 and 1996 was warranted.

Of the approximately 200,000 active files for DTC claims made between 1985 and 1996, 135,000 claims were reviewed in the fall of 2001. Tax filers whose claims were supported by sufficient information, as well as those over age 75, were excluded from the review, leaving approximately 106,000 claimants who were asked to submit a new Form T2201 in order to continue to claim the credit. No claims were immediately disallowed; all individuals contacted in the review were given the opportunity to substantiate their eligibility under the DTC for the 2001 tax year.

The purpose of the current review is to ensure that all claimants who applied for the credit are treated fairly and consistently, and that the DTC is administered in accordance with its requirements. Of the approximately 106,000 individuals who were asked to re-certify their DTC eligibility for 2001 and subsequent years, about 90,000 have responded to date. Of those, about 60,000 have been determined to continue to qualify for the credit.

It is important to note that this review ensures all claims for the DTC prior to and after 1996 receive the same level of eligibility scrutiny and that the governing criteria are applied to all claims in a consistent manner.

The Minister of National Revenue is committed to adequate and ongoing consultation on administrative issues and has instructed CCRA officials not to proceed with any new administrative review projects until further consultations have taken place and the necessary changes have been completed.

Next Steps

The Government is committed to consulting with organizations representing persons with disabilities and medical practitioners on an ongoing basis. It is important that the Government hear their views to help ensure that federal tax assistance for persons with disabilities is fair and effective.

As indicated above, the CCRA is establishing a new permanent Administrative Advisory Committee on Disability to ensure ongoing consultations on administrative issues. The Administrative Advisory Committee membership will include organizations representing persons with disabilities and medical practitioners.

In addition, in order to develop appropriate revised amendments in light of the March 2002 Federal Court of Appeal decision referred to above, Department of Finance officials will meet with organizations representing persons with disabilities. In particular, invitations will be sent to those organizations that appeared before the Sub-Committee on the Status of Persons with Disabilities during its hearings on the disability tax credit. Written submissions will be accepted until January 17, 2003. Additional details on submitting comments and the Government’s consultation process can be found on the Department of Finance Web site at www.fin.gc.ca.

Finally, as committed to in the Government’s response to the Standing Committee on Human Resources Development and the Status of Persons with Disabilities, in 2003 the Department of Finance will initiate an evaluation of the DTC to ensure that it achieves its policy intent of providing tax assistance to persons with a severe and prolonged mental or physical impairment, the effects of which markedly restrict the ability to perform a basic activity of daily living.

In all of its activities on matters affecting persons with disabilities, the Government continues to be guided by compassion and inclusion, ensuring a society in which spending programs and tax initiatives respond to the needs of persons with disabilities and those who care for them.

Annex 1

The Government of Canada provides substantial support to persons with disabilities through a number of tax measures and direct spending programs.

Tax Assistance

Tax assistance provided to persons with disabilities amounts to approximately $1.1 billion annually. This tax-based assistance is set out in the table below.

Direct Spending Programs

Human Resources Development Canada, the lead federal department for disability issues, delivers approximately $3 billion annually through the Canada Pension Plan and key departmental programs for persons with disabilities. The table below shows the estimates for these programs.

Veterans Affairs Canada also provides substantial support in the form of disability pensions for veterans totalling over $1 billion annually.

Annex 2

Enhancements and Improvements to Tax Assistance for Persons with Disabilities and Those Who Care for Them

• Increased the infirm dependant tax credit amount from $1,583 to $2,353.

• Expanded zero-rating of orthopaedic and orthotic devices under the goods and services tax.

• Removed the limit on the amount of attendant care expenses that could be deducted by individuals in order to earn income.

• Introduced a refundable medical expense supplement to lower the "welfare wall" created by the potential loss of medical benefits and disability support under provincial social assistance programs.

• Expanded the list of occupations that could certify individuals for the disability tax credit (DTC) to include audiologists.

• Broadened the definition of preferred beneficiary for trusts benefiting people with disabilities to include adults who are dependent on others by reason of mental or physical infirmity.

• Expanded the list of eligible expenses under the medical expense tax credit to include:

• 50 per cent of the cost, up to $1,000, of an air conditioner necessary to help an individual cope with a severe chronic ailment, disease or disorder.
• 20 per cent of the cost, up to $5,000, of a van that is adapted or will be adapted for the transportation of an individual using a wheelchair.
• Sign language interpreter fees.
• Expenses incurred for moving to accessible housing.
• Reasonable expenses relating to alterations to the driveway of an individual’s place of residence where the individual has a severe and prolonged mobility impairment and the alterations are made to facilitate the individual’s access to a bus.
• An increase in the part-time attendant care limit from $5,000 to $10,000.

• Introduced a new tax credit for caregivers who provide in-home care for related seniors and persons with mental or physical impairments.

• Added occupational therapists and psychologists to the list of occupations that could certify individuals for the DTC.

• Broadened the Home Buyers’ Plan so that persons with disabilities or their relatives may buy a home that is more accessible for, or better suited for the care of, the disabled individual, even if the purchaser is not a first-time home buyer.

• Exempted respite care services from the goods and services tax/harmonized sales tax.

• Added training expenses for caregivers to the list of expenses eligible for the medical expense tax credit.

• Increased the limit on the child care expense deduction in respect of children under 7 years of age and children eligible for the DTC from $5,000 to $7,000.

• Expanded the list of eligible expenses under the medical expense tax credit to include:

• The care and supervision of persons with severe and prolonged impairments living in a group home.
• Therapy for persons with severe and prolonged impairments where prescribed by a medical doctor, psychologist, or occupational therapist, but not administered by a qualified therapist or medical practitioner.
• Tutoring for persons with learning disabilities (or other mental impairments).

• Restored full indexation to the personal income tax system. This preserves the real value of tax benefits such as the DTC, the caregiver credit, the infirm dependant credit and the refundable medical expense supplement.

• Broadened the eligibility criteria for the DTC to include individuals with severe and prolonged impairments who require extensive therapy essential to sustain their vital functions.

• Expanded the list of relatives to whom the DTC can be transferred.

• Introduced a supplement to the DTC for families caring for children with severe and prolonged impairments.

• Increased the limit on the child care expense deduction in respect of children eligible for the DTC from $7,000 to $10,000.

• Added reasonable expenses relating to the cost of adapting a new home to the needs of a person who lacks normal physical development or has a severe and prolonged mobility impairment to the list of expenses eligible for the medical expense tax credit.

• Expanded the attendant care deduction to include the cost of an attendant required by a person with a severe and prolonged disability in order to attend school.

• Increased the exemption for scholarship, fellowship or bursary income from $500 to $3,000, which benefits disabled students in receipt of Canada Study Grants.

• Increased the DTC amount from $4,293 to $6,000 effective January 1, 2001.

• Increased the caregiver tax credit amount from $2,386 to $3,500 effective January 1, 2001.

• Increased the infirm dependant tax credit amount from $2,386 to $3,500 effective January 1, 2001.

• Increased the amount for the supplement to the DTC for children with severe and prolonged impairments from $2,941 to $3,500 effective January 1, 2001.

• Added speech-language pathologists to the list of occupations that can certify individuals for the DTC.

Annex 3

Over the spring and summer of 2002, the CCRA held multi-group consultations, in addition to their regular stakeholder consultations, with associations representing persons with disabilities and the medical profession. These sessions focused on administrative issues surrounding the DTC and improvements to form T2201, the Disability Tax Credit Certificate. The CCRA plans to continue consultations.