March 23, 2020
Disability Tax Credit – Navigating the Rules
CRA interprets and applies Income Tax rules related to the medical expense tax credit and the disability tax credit based on different levels of care that an elderly or disabled taxpayer may require. These rules can be quite complex and overlap each other. Often, there are multiple options that a taxpayer may choose, depending on their unique situation. This article provides some general guidance on how to navigate these rules based on 3 different scenarios that are most commonly encountered by the taxpayers.
Full-time care in a nursing home
The CRA usually considers a nursing home to be a facility that provides full-time care, including 24-hour nursing care, to patients who are unable to care for themselves. Any facility could be considered a nursing home if it has the same features and characteristics as a nursing home.
What certification is required?
A medical practitioner must certify in writing that the patient lacks “normal mental capacity” and consequently be dependent now and in the foreseeable future on others for personal needs and care.
What expenses can be claimed?
All regular fees can be eligible as medical expenses, including fees for food, accommodation, nursing care, administration fees, maintenance fees and social programming and activities fees. However, extra personal expenses, e.g., hairdresser fees, are not eligible.
Generally, the taxpayer does not fit into this category and cannot claim the entire amount paid for a retirement home or a home for seniors unless there is 24-hour nursing care provided for the patient. However, the taxpayer can claim salaries and wages for attendant care in such facilities. We will expand on this later in this article.
In cases where the taxpayer is entitled to a disability tax credit (i.e., Form T2201), the taxpayer can choose to claim either a disability tax credit or the cost of nursing home fees as a medical expense. Depending on the amount of the fees, one option can be more beneficial than the other. Careful analysis should be made in order to maximize the tax savings for the taxpayer.
Who can claim these expenses?
Medical expenses or a disability tax credit can be claimed by the patient, the spouse or common-law partner or a person on whom the patient is dependent on.
Full-time attendant care at home
Another commonly encountered situation is where full-time attendant care is provided at the patient’s home, which can be a house, an apartment or other similar place of residence in which the patient eats and sleeps.
What certification is required?
A medical practitioner must certify in writing that by reason of mental or physical infirmity, the patient is and will likely be, for a long-continued period of indefinite duration, dependent on others for the patient’s personal needs and care and, as a result, requires a full-time attendant.
What expenses can be claimed?
Salaries and wages paid to a full-time attendant should be eligible as a medical expense. Please be aware that the full-time attendant cannot be the spouse or common-law partner of the payer.
In cases where the taxpayer is entitled to a disability tax credit (i.e. Form T2201), the taxpayer can choose to claim either a disability tax credit or the actual amount of salaries and wages paid for attendant care as a medical expense. Depending on the amount of salaries paid, one option can be more beneficial than the other. Careful analysis should be made in order to maximize tax savings for the taxpayer.
Who can claim these expenses?
Medical expenses or a disability tax credit can be claimed by the patient, the spouse or common-law partner, or a person on whom the patient is dependent on.
Full-time care at a retirement home
As mentioned in a previous scenario, not all fees paid for a retirement home or a home for seniors will qualify as medical expenses. The following discussion applies to fees paid to a retirement home or a home for seniors where the patient does not need 24-hour nursing care.
What certification is required?
Unlike the previous two scenarios, Form T2201 must be signed by a medical practitioner, certifying that the patient has a severe and prolonged (last at least 12 months) mental or physical impairment, which generally means that the patient qualifies for a disability tax credit.
What expenses can be claimed?
Even though not all fees for a retirement home or a home for seniors are eligible, the cost of full-time care that relates to salaries and wages paid to employees engaged in providing attendant care services can be claimed as medical expenses.
However, under this scenario, a different analysis is required in order to optimize the taxpayer’s tax savings:
One option is to treat all salaries and wages paid for attendant care services as medical expenses.
The other option is to claim a disability tax credit, plus attendant care cost up to $10,000 as a medical expense ($20,000 in the year of death).
Who can claim these expenses?
Medical expenses or a disability tax credit can be claimed by the patient, the spouse or common-law partner, or a person on whom the patient is dependent on.
Concluding remarks
It is imperative for the nursing home, a retirement home or a home for seniors to provide details and the breakdown of the services the taxpayer receives (i.e., 24 hours care, attendant costs), in order to assist in correctly reporting such costs on the taxpayer’s returns and to maximize tax savings. Claims are frequently denied by CRA if such information cannot be provided.
Often taxpayers submit the Form T2201 after they filed their T1 returns for the years they were eligible for a disability tax credit. Taxpayers can indicate on the Form T2201 that they would like CRA to automatically amend their past returns and apply for the disability tax credit. However, CRA will not consider the best utilization and interplay of this credit with other tax attributes a taxpayer might have (i.e., transfer unused credit to a spouse, claim medical expenses instead). Depending on the unique circumstance of each taxpayer, claiming a disability tax credit might not represent the most beneficial use of related tax credits within a family unit. We recommend you consult one of our Tax Team members to discuss these issues and to ensure the most tax-efficient use of the credits and deductions.
The above content is believed to be accurate as of the date of posting. Canadian tax laws are complex and are subject to frequent changes. Professional tax advice should be sought before implementing any tax planning. Manning Elliott LLP cannot accept any liability for the tax consequences that may result from acting based on the information contained herein.