Maximizing the opportunities
By Tina Tehranchian
A disabled person may qualify for the Disability Tax Credit. If you have never applied for this benefit before and you happen to qualify for it, you can request that Canada Revenue Agency (CRA) adjust your previous years’ tax returns and you may go back quite a few years and receive a retroactive adjustment.
Budget 2021 proposed to update the list of mental functions of everyday life that is used for assessment for the DTC. Under current rules, mental functions necessary for everyday life include: memory, problem-solving, goal-setting and judgement (taken together), and adaptive functioning. Budget 2021 proposed to expand this list to include attention, concentration, memory, judgement, perception of reality, problem-solving, goal setting, regulation of behaviour and emotions, verbal and non-verbal comprehension and adaptive functioning. In addition, Budget 2021 proposed to recognize more activities in determining time spent on life-sustaining therapy, and to reduce the minimum required frequency of therapy to qualify for the DTC.
Ontario Disability Support Program (ODSP)
Funded by the Ontario Ministry of Community and Social Services, ODSP provides financial assistance to people with low incomes who have disabilities. The program also offers additional assistance for those with special dietary requirements. (Other provinces have similar programs with varying guidelines.)
The allowable level of income and assets to qualify for ODSP is limited according to current policy. It is important to know that one car, a person’s home (provided the person lives in it), personal effects and clothing do not count as assets. An individual qualifies for disability payments if he/she: has a substantial mental or physical impairment that is continuous or recurrent and is expected to last one year or more and the impairment directly results in a substantial restriction in the person’s ability to work, care for oneself, or take part in community life and the impairment, its duration and restrictions have been verified by an approved health care professional.
There are asset limits for qualifying for ODSP. However, the following assets are “exempt” and will not affect a person’s eligibility for income support:
• the home you own and live in
• your primary vehicle (the one you use the most, if you have more than one)
• trust funds derived from an inheritance or life insurance policy, up to allowable limits
• the cash surrender value of life insurance policies, up to allowable limits
• pre-paid funerals
• Registered Education Savings Plans (RESP)
• Registered Disability Savings Plans (RDSP)
• necessary household and personal items, such as furniture and clothing
A person must meet certain financial criteria with regards to the amount of non-exempt assets that a person owns to qualify for ODSP income assistance as well. The non-exempt asset limit for a single person is $40,000 and for couples is $50,000.
There are also income limits that one must meet to qualify for ODSP. Some types of income are “exempt”—this means they do not affect a person’s eligibility or the amount of money a person gets for Income Support. Here are some examples of exempt income:
• certain federal tax benefits, like the Canada Child Tax Benefit
• certain provincial tax benefits, like the Ontario Child Benefit
• payments from a Registered Disability Savings Plan (RDSP)
• Ontario Student Assistance Program loans for education costs
• child support
These are only a few examples. There are many rules about the treatment of other income while you are receiving Income Support.
Life insurance policies
Under the Ontario Disability Support Program, life insurance includes:
• deferred annuities and
• segregated funds.
Up to $100,000 of the cash surrender value of a life insurance policy is exempt as an asset under the Ontario Disability Support Program. This means it does not affect a person’s eligibility for Income Support. If the disabled person or a family member has a trust and a life insurance policy, up to $100,000 of the combined value of the trust and the cash surrender value may be exempt as an asset. Up to $100,000 of a trust may be exempt as an asset if the money to set up the trust came from:
• an inheritance, or
• the proceeds of a life insurance policy.
If the disabled person or a family member has a trust and a life insurance policy, up to $100,000 of the combined value of the trust and the cash surrender value of the life insurance policy may be exempt as an asset.
Compensation awards and structured settlements
ODSP recipients may retain capital of up to $100,000 resulting from compensation awards and structured settlements. Any interest earned on the capital is chargeable.
If a disabled person inherits some money and places it in a trust within six months of receiving it, up to $100,000 of the assets in the trust may be exempt as an asset. The disabled person can use the inheritance money towards assets that do not affect that person’s eligibility for Income Support, such as:
• investing in a Registered Education Savings Plan (RESP)
• investing in a Registered Disability Savings Plan (RDSP),
• using it to buy a disability-related item that has been approved in advance, or
• buying a home to live in.
Up to $10,000 of the total value of all gifts, voluntary payments and payments from a life insurance policy or trust you receive in a 12-month period, is exempt as income.
Investment choices that maximize entitlement to ODSP
Universal Life insurance policies
Under ODSP regulations an exemption has been introduced on the cash surrender value of a life insurance policy.
If the person with a disability qualifies for life insurance, excess cash values can be invested in a universal life policy to grow on a tax-sheltered basis. The amount of annual investment is limited to the maximum deposits allowable under the terms of the policy. Of course, to be able to invest in a universal life policy, the disabled person must first be able to qualify for the life insurance. The downside of this strategy is that the investment choices available inside a universal life policy are limited, the management expense ratios of most of the investment choices are higher than regular mutual funds and surrender charges may apply during the first 10 years of the policy.
The advantages of universal life policies are that investments inside the policy grow on a tax deferred basis; the plan may be made creditor proof; it can build cash values for retirement; and it eliminates the need to spend time and money to establish a formal trust.
Segregated funds (deferred annuities)
Segregated funds are deferred annuities and are life insurance policies. The disadvantages of segregated funds are that the growth of the cash values is not tax sheltered in the policy. There may also be acquisition fees at the time of purchase or redemption fees at the time of sale. Plus, the investment income is taxed in the hands of the owner of the annuity.
The advantages of segregated funds are that to set them up there are no legal fees or disbursement fees involved and no legal trust agreement is required. The policy may also be made creditor proof. In addition, the segregated fund qualifies as an exempt vehicle and deposits are flexible. This means that unlimited deposits are possible up to the ODSP maximum of $100,000. Another advantage of segregated funds is that no evidence of insurability is required, and a variety of investments are available within the policy. The surrender charges are less than those charged on universal life policies and partial withdrawals are allowed.
Inheritances and other assets and monetary gifts may be directed into the account to qualify for the exemption and the annuity can be set up to pay out up to the ODSP allowable income limit each year for other expenditures.
Annuities are also treated as life insurance policies under the Insurance Act. Income from an annuity may be invested in the annuity for future growth potential and provided the income is reinvested in the policy it will remain exempt. The reinvested income will not be paid out, but it will be attributed to the owner of the annuity through a T3A slip. The ODSP have previously stated that this type of income, will not be included in the disabled person’s income by ODSP.
Regulations do state that “as long as the cash value remains in the life insurance policy the cash value will be exempt”. Also, “partial withdrawals of up to the allowable income limit under ODSP in each year are permitted provided the expenditures are reported”. In addition, investment income that remains in the annuity is exempt.
Ask for help
Program rules are often complicated. Make sure you work with a financial advisor who is familiar with these rules and strategies for maximizing wealth and minimizing taxes for families who are caregivers of disabled individuals.
Create a list with each province and Revenue Canada
To find out the telephone number of the ODSP office in your area of Ontario, you can call 1-888-789-4199. The number for Revenue Canada Agency is 1-800-959-8281.
Tina Tehranchian, MA, CFP®, CLU®, CHFC®, MFA-PTM (Philanthropy) is a FP CanadaTM Fellow and a Senior Wealth Advisor at Assante Capital Management Ltd.