Disabled Children
Having a child with a disability can be worrisome and stressful. You want to ensure that your child is able to enjoy a full and happy life regardless of the physical or mental challenges a disability presents. There are many steps you can take now to provide immediate support for a disabled child and support into the future through estate plans. Here are a number of issues to consider.
Financial Assistance
Taking care of a disabled child may require some financial sacrifice. There are certainly tax breaks available as discussed below and many of these will apply to adult children as well as minors. Depending on your specific circumstances and your province of residence there may also be government financial support available. Each province is different. For example, in Ontario the Ontario Disability Support Program provides financial and employment support for eligible disabled persons over the age of 18. Eligibility is income tested and determined on a case-by-case basis.
Local Assistance
Depending on where you live, there may be local programs directed at disabled children such as sports or social activities. For example, the Mississauga Synchronized Swimming Association has a program for special needs athletes.
Tax Issues
Various tax deductions and credits may be claimed by the disabled child or their legal guardian. The rules relating to these benefits can be rather complex and they are interrelated. Your advisor can provide you with some additional information but you should consult a qualified tax professional when planning to make claims to ensure you are receiving the maximum tax advantage.
The Attendant Care Deduction
If your child meets the definition of disabled and requires the services of an attendant you may be able to claim some or all of the costs of the attendant. The attendant must be at least 18 and not a spouse. The deduction cannot be claimed where the expenses were claimed for the Medical Expense Tax Credit (explained below).
Child Disability Benefit
This benefit is available to families that are supporting a disabled child in their home. The child must be under age 18. The benefit in 2010 is $2,470 per child. This benefit is income tested and will be phased out at 2% of family income in excess of the National Child Benefit limit of $40,970 in 2010. The benefit is fully phased out when family net income exceeds $164,470. The benefit can be transferred to a parent if the child cannot use it.
Disability Tax Credit
This credit is available for disabled persons and is 15% of $7,239 or $1,086 for 2010. This can be claimed by the child if possible or transferred to a supporting person such as a parent. Provincial credits are also available.
Disability Tax Credit Supplement
This credit is available to caregivers of disabled children under 18 and who require full time care in the home. In 2010 the maximum credit is $633 (15% x $4,223). The credit is reduced dollar for dollar where attendant care and child care expenses claimed for the child exceed $2,473.
Medical Expense Tax Credit
A credit for medical expenses not covered by other sources is available. The amount of the credit is for expenses in excess of the lesser of $2,024 or 3% of the person’s net income in 2010. The expenses can be claimed by a supporting person such as a parent. Provincial credits are also available.
Infirm Dependent Credit
Where your child is over 18 and dependent on you due to physical or mental infirmity you may be able to claim this credit. The amount of the credit depends on your child’s net income and is $633 in 2010 (15% x $4,223). Provincial credits are also available.
Eligible Dependent Tax Credit
This credit is available where you are supporting a child in your home who is either under 18 or disabled and you are single and not receiving spousal support payments. The maximum credit in 2010 is based on a maximum amount of $10,382 yielding a credit of $1,557, but that amount is reduced by your child’s net income.
Registered Disability Savings Plans (RDSPs)
If a person meets the definition of disability pursuant to the Income Tax Act requirements then an RDSP may be established. The RDSP is a tax efficient mechanism for setting aside funds for a disabled person to use in the future to meet their income needs. The plan must be established by the disabled person or by a parent in the case of a minor or by a legal guardian if the person is not legally capable. The contributions made into the plan are not tax deductible like a Registered Retirement Savings Plan (RRSP) but the growth on the capital is tax-free in the plan until withdrawn. As well, the federal government will contribute grants to the plan in the form of Canada Disability Savings Grants (CDSGs). Lower income families may be eligible to receive additional government assistance through Canada Disability Savings Bonds (CDSBs). The maximum that can be contributed to a RDSP for a particular beneficiary is $200,000. We can provide you with more details on this plan.
The Home Buyers’ Plan (HBP) and Disabled Dependents
The Home Buyers’ Plan allows the owner of Registered Retirement Savings Plans (RRSPs) to withdraw funds to purchase a home from an RRSP with no immediate tax implications. Under the ordinary rules, the home must be a ‘first home’, generally defined as a residence of a person (and/or their spouse) who has not owned a home in the last five years. However, where a dependent child meets the definition of being disabled the rules are relaxed. If you have a child that is dependent on you due to a disability the HBP program can be used whether it is a first home or not. In other words, at any time, you can withdraw money from your RRSP for a new home provided the home will be used to improve the lifestyle of the disabled person. The rules regarding amounts that can be withdrawn and repayment are the same and you should contact us or another tax professional for further information.
Estate Planning
Trusts
A properly structured trust is the most flexible and effective means of insuring that a disabled child will be taken care of throughout their life. There are three parties to a trust – the settlor or the person who sets up and contributes to the trust, the beneficiary for whom the trust is established, and the trustee who manages the trust.
As a general rule, any one person can play any two of the three roles. However, if you are concerned about the ongoing welfare of your disabled child you will likely be considering the support of your child after you are gone. Therefore, although you will be the settlor and perhaps the trustee while you are alive you will want to name a trustee when you are deceased.
Inter Vivos Trusts
These are trusts that are established while the settlor is alive. As mentioned above, this would be an option while you are alive but plans would have to be made for the ongoing welfare of your child.
Testamentary Trusts
These are trusts that will come into existence upon your death. If you are concerned about the welfare of your child after your death you will need to make arrangements to ensure a testamentary trust comes into existence upon your death.
Henson Trust
Establishing a legal trust is a very effective way of looking after a disabled child after the parents have passed away. As explained above, the trust is provided with funds from the parent (or settlor in legal terms) and the trustee is required to use those funds in the best interests of the child on an ongoing basis subject to the specific instructions of the settlor through the trust indenture.
An ordinary trust will certainly meet those objectives but a further consideration is governmental support for the disabled person.
There are various sources of provincial support for disabled persons but in many cases they are income tested. An example is the Ontario Disability Support Program (ODSP) which provides financial support for disabled persons. The Program is income and asset tested whereby eligibility for benefits is related to the income and assets of the disabled person.
Ordinarily inheritances and or insurance proceeds over $100,000 received by a disabled person would directly affect the Ontario Disability Support Program Act (ODSPA) benefits.
Competent legal counsel should be sought to ensure that the trust is legally structured in a way that achieves your goals.
However, if a ‘Henson Trust’ is established any additional income received by the disabled person will not affect the ODSPA benefits. Currently Henson Trusts can be established in Ontario, British Columbia, Saskatchewan, Manitoba, New Brunswick, Nova Scotia and PEI.
As mentioned above, trusts can be a very flexible and efficient way to provide for a disabled child but you need competent legal counsel to ensure that the trust is legally structured in a way that achieves your goals.
Transfer of RRSP/RRIF assets to a disabled child on death
If you are anticipating having RRSP/RRIF assets when you die and would like these funds to be transferred to a disabled dependent there are tax rules that will minimize the tax effect. Ordinarily, RRSP/RRIF assets will be included in your estate’s taxable income on death unless the assets are rolled over to a spouse. However, this money can also be ‘rolled over’ tax free to an RRSP of a minor dependent child or to a child who is financially dependent on you due to a disability. To make the tax-free rollover the proper tax form must be filed. We can provide more information on how to tax efficiently transfer assets to your disabled child.
Please contact us to find out more!
Barbara Reid's Wealth Management Team
Your personal Wealth Advisor in Hamilton, Ontario
