Tax Strategy
Disability Defined
The tax department is slowly beginning to listen to recommended changes to the restrictive rules surrounding the disability tax credit.
FROM: SEP-OCT 2003 ISSUE | BY DAVID NOLKE
The disability tax credit has received a lot press in the last year, and not because it represents a large loophole to be taken advantage of by the taxpaying public. The interest has been fuelled by the basic question of what is the fair and compassionate way to determine what constitutes a disability. Since the Canada Customs and Revenue Agency (CCRA) must administer the Income Tax Act for all Canadians, it must clearly define any preferential treatment.
The CCRA is not generally in the business of being fair and compassionate, however; it is in the business of interpreting legislation and reviewing facts in order to administer and enforce the Income Tax Act. Obviously, some individuals who work for the CCRA are more understanding than others. However, if the facts do not support a tax credit, the CCRA will generally disallow it, while placing the onus of proof on the taxpayer.
Qualifying Challenges
In order to qualify for the disability tax credit, as described in section 118.3 of the Act, an individual must have "a severe and prolonged mental or physical impairment." According to the CCRA a prolonged impairment must last for a continuous period of at least 12 months. An individual's ability to perform a basic activity of daily living must be markedly restricted or would be markedly restricted without a certain relatively stringent level of therapy. In addition, in order to qualify, the impairment must be confirmed by an appropriate medical practitioner.
A basic activity of daily living is defined in subsection 118.4(1) to mean the following:
- perceiving, thinking, and remembering;
- feeding and dressing oneself;
- speaking so as to be understood in a quiet setting, by another person familiar with the individual;
- hearing so as to understand in a quiet setting, another person familiar with the individual;
- eliminating (bowel or bladder functions); or
- walking.
No other activity, including working, housekeeping or social or recreational activity, is a basic activity of daily living, according to the CCRA. (For a related discussion, see "Tax Forum," CGA Magazine, January-February 2003.)
According to the CCRA, a person is markedly restricted when the individual is blind or unable (or requires an inordinate amount of time) to perform one or more of the activities of daily living, all or substantially all (i.e., 90 per cent) of the time. It is not clear what an "inordinate amount of time" is. The CCRA describes it as "significantly more time" than an average person who is not afflicted with the impairment would take.
Clearly, people could have an impairment that prevented them from realizing their full earning capacity and in fact they could be disabled for insurance purposes, but they still may not be eligible for the disability tax credit. While a disability pension under the Canada Pension Plan requires that a person is regularly incapable of pursuing any substantially gainful occupation, the disability tax credit requires a far greater level of disability in order to qualify. The drafting of the disability tax credit law is clearly restrictive and provides powerful protection to the government coffers from pilfering and petty chiseling by the disabled. Unfortunately, there is no provision for the application of humane judgment in the law.
If an individual qualifies for this tax credit, the amount that he or she will qualify for is determined by multiplying the lowest personal tax rate by $6,180 (2002). For an adult making such a claim on a 2002 personal tax return, the amount was $988.80. This credit comes into play in the calculation of basic federal tax and so in most cases will also reduce provincial tax somewhat. This is not a large amount but could matter a great deal to someone whose earning capacity is restricted by their disability. Access to this credit should be easier for those whose earning potential has decreased.
Making Changes
The rules relating to a disability tax credit claim are extremely detailed yet still subject to interpretation by the courts.
In Sharon Watkin vs. the Queen [2002 DTC 2132], the taxpayer's claim for a disability tax credit was initially disallowed on the basis that she was not suffering any prolonged and severe impairment that markedly restricted her ability to perform a basic activity of daily living. The Court allowed the taxpayer's appeal stating that the Courts have often approached appeals for disability tax credits with a degree of compassion. In this particular case, although a single activity of daily living was not markedly restricted, the sum of her inabilities to perform several basic activities of daily living created an equivalent disability. The Court went on to say that, "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 provision must be given a humane and compassionate construction."
On December 11, 2002, the Standing Committee on Human Resources Development and the Status of Persons with Disabilities tabled a report in the House of Commons, citing seven recommendations:
- A full review of disability tax credit eligibility criteria should be done by the Department of Finance with representatives of disabled groups and medical practitioners before any amendments are proposed.
- Following these consultations, the Department of Finance should define the terms "markedly restricted" and "substantially all" in the context of each of the basic activities of daily living. Rigidly using the administrative rule of 90 per cent for "substantially all" is not appropriate. In addition, the description in paragraph 118.4 (1) (a) of "prolonged" as being a continuous period of 12 months is too restrictive for certain types of disabilities that are substantial and recurrent.
- The list of basic activities of daily living in paragraph 118.4(1)(c) should include "breathing." The wording in subparagraphs 118.4(1)(c)(i) and (ii) of "perceiving, thinking and remembering" and "feeding and dressing oneself" respectively should be changed to "perceiving, thinking or remembering" and "feeding or dressing oneself" respectively. In addition, the description of speech and hearing impediments described in subparagraphs 188.4(1)(c)(iii) and (iv) should be amended to more accurately reflect the everyday situations that individuals with these disabilities encounter.
- Form T2201 (Disability Tax Credit Certificate) should be redesigned to allow more scope for the medical practitioner's diagnosis. It may be necessary to have different forms for different types of disabilities.
- If an individual's claim for a disability tax credit is refused, the CCRA should provide the individual with a written explanation of the reasons for the refusal and the procedures for an appeal.
- The government should present an action plan to the committee by Sept. 1, 2003, on legislative and administrative changes affecting people with disabilities. Public discussions on such changes should include combining the disability tax credit with the medical expense tax credit.
- The government should consider making the disability tax credit refundable for families of severely disabled children.
This was the fifth time in 10 years that a House of Commons Committee or a ministerial task force had recommended changes to the policies and the administration of the rules concerning disabled persons. And some of the recommendations were heard. The 2003 federal budget proposals amend subparagraph 118.3(1)(a.2)(iii) of the Act, replacing the phrase "feeding and dressing" with "feeding or dressing." Also in the Budget is the introduction of a $1,600 child disability benefit payable to families meeting an income test and provided that the child also qualifies to claim the disability tax credit.
None of the other Standing Committee requests, however, have been addressed.
Bureaucratic Barrier
While tax credits for the disabled seem to be a difficult subject, common sense is breaking through the barrier of stifled bureaucracy. The disabled cannot easily speak up for themselves. And they generally do not have the funds to hire representation. Yet those who do seek their day in court are often rewarded.
The Minister of Finance should do what he has avoided doing up to now, that is, link the disability tax credit to an individual's condition supported by medical comment, rather than try to determine how much a person is suffering before granting tax relief.
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David Nolke, FCGA, is proprietor of Nolke & Co., Certified General Accountant, in Calgary, and president of Integrated Business Advisory Services Inc., providing tax and management counsel to industry, government and other professionals. E-mail dgn@shawbiz.ca.
"Tax Strategy" is co-ordinated by J. ThomasMcCallum, CBV, FCGA, a business valuation and income tax consultant based in Whitby, Ontario, and author of several CGA-Canada professional development courses. E-mail jtmc@jthomasmccallum.com.
The information appearing in "Tax Strategy" is provided for the interest of the readers. Neither CGA Magazine nor the column authors and co-ordinator assumes any responsibility or liability to any persons relying on the information in the article to perform tax planning and/or compliance of any kind.