Mental Illness and the Disability Tax Credit

A recent case involving mental illness may have positive ramifications for future taxpayers claiming the Disability Tax Credit, in cases where those taxpayers have a mental impairment.

A taxpayer had been diagnosed by a psychiatrist as having severe social anxiety disorder, severe panic disorder with agoraphobia, and chronic and moderate to severe generalized anxiety disorder. A second psychiatrist had also diagnosed her with persistent depressive disorder.

She could perform many of her regular daily duties of care, such as meal preparation, bathing, and dressing, and she was able to maintain her own accommodations.

However, she was unable to sustain employment because her symptoms made it difficult for her to perform the necessary duties of any job she applied for.

In addition, her mother had to be involved in many of her other day to day duties, such as going to the bank and making medical and other appointments.

The taxpayer also had extreme difficulty participating in social and recreational activities.

The Canada Revenue Agency (CRA) had originally denied the Disability Tax Credit, arguing that the taxpayer did not qualify because she did not meet all three requirements necessary for claiming the credit.

They agreed that the taxpayer met the first two conditions, in that the impairment was expected to last for at least 12 months, and that it was present at least 90% of the time.

However, they argued that she did not meet the third requirement for claiming the credit, which states that “the effects of the impairment must markedly restrict the individual’s ability to perform a basic activity of daily living, all or substantially all of the time”. The Income Tax act specifically states that working, housekeeping, and social or recreational issues are not considered to be basic activities of daily living.

The taxpayer appealed her case to the Tax Court of Canada. The court stated that in order to determine whether a person’s mental impairment markedly restricts their ability to perform a basic activity, there are three issues that should be considered; the person’s memory, their adaptive functioning, and their problem solving, goal setting, and judgement when considered as a combined function.

The Court found that although the taxpayer’s memory was fine, her adaptive functioning was not, and therefore, she qualified for the tax credit.

The Court also commented that the taxpayer would have also qualified under the third issue as well.

This is a positive result for the taxpayer, and it will be interesting to see if this case will form a precedent for
other similar cases in the future.

Tax Changes to Come From Election

Now that a federal Liberal minority government has been elected, we can review some of the policies that the Liberals campaigned on to predict tax changes that may be coming in the next few years.

Currently all taxpayers in Canada pay no federal tax on their first $12,069 of income.

The Liberal government has pledged to increase this to $15,000, for those taxpayers with net income of less than $147,000. This would be phased in gradually until the year 2023.

The Liberals have also stated that they will make maternity and parental leave benefits tax free. Along those lines, they have indicated that they will increase the Canada Child Benefit by 15% for children under one year old.

Although making leave benefits tax free is potentially more beneficial to individuals with higher levels of income, the increase to the Canada Child Benefit will provide more of an advantage to low income families.

The Liberals have also pledged to establish a vacant homes tax similar to what is already in place in British Columbia. This will apply to non-residents who do not live in Canada.

They have also promised to introduce a tax of 10% on luxury vehicle purchases of over $100,000. This tax would also apply to boats and personal aircraft.

As it is likely that the Liberals will have to rely on the NDP for support to stay in power, there are certain promises in the NDP platform that the Liberals may have to incorporate into their own changes.

The NDP has indicated that they want to raise the general corporate tax rate by 3%.

When combined with the provincial rate, this would bring the general corporate tax rate in BC to 30%. They have also stated that they would increase taxes
on capital gains. Currently, only one half of a capital gain is included in taxable income. They would increase this inclusion rate to 75%.

They have also promised that they would raise the federal tax rate to 35% on income in the highest personal tax bracket.

When combined with the provincial rate, this would increase the personal tax rate on the highest level of income in BC to 51.8%.

DID YOU KNOW…

Starting in 2020, eligible seniors will automatically be enrolled
in the Canada Pension Plan (CPP) when they turn 70. This will
also include people who are over 70 but not registered to receive
CPP. It is estimated that currently 40,000 seniors over 70 are
eligible for CPP but have not registered. The average payout for
these individuals is estimated to be $302 per month.

New Type of Retirement Investment Introduced

Another significant item in the federal budget was the introduction of the Advanced Life Deferred Annuity (ALDA).

An ALDA will allow a taxpayer to allocate up to 25% of the qualified retirement investment plan to an annuity.

The payments from the annuity do not have to begin until the person has reached the age of 85. Such a transfer would allow seniors to reduce the annual amount that they have to withdraw from a Registered Retirement Income Fund (RRIF), providing an additional deferral of taxes on the transferred amount.

This will also allow the taxpayer to save money for later in retirement when their medical expenses could be significantly higher.

The lifetime maximum on these allocations will be $150,000 in the first year. The maximum will be indexed to inflation annually, and rounded to the nearest $10,000.

2020 will be the first year that a taxpayer will be eligible to purchase an ALDA.

If a taxpayer over-contributes to an ALDA, they will be assessed a penalty of 1% per month on the value of the excess portion of the investment.

However, if the value exceeds the 25% limit in a year because the total assets have declined in value, the taxpayer will not be assessed a penalty.

Changes to Guaranteed Income Supplement

Starting in July 2020, there will be changes to the income that can be earned by seniors without affecting the amount of the Guaranteed Income Supplement (GIS) that they receive.

Previously, the first $3,500 of employment income earned by seniors was excluded from the calculation of the taxpayer’s income for the purposes of GIS.

This has been expanded to exclude an additional $1,500 of employment income. As well, one half of the next $10,000 of income earned will also be excluded.

The type of income has been expanded to also exclude self employment income from the calculation.

These changes can have a significant affect on the amount of GIS that a person can receive.

GIS is reduced annually by 50% of whatever income is not excluded. Under these changes, a senior earning $15,000 of wages in a year could have an additional $6,500 of income excluded from their income calculation, resulting in a potential annual increase of $3,250.

These calculations are based on the prior year’s net income, meaning that the July 2020 changes will be based on the taxpayer’s 2019 income.

If a taxpayer files their tax return on time, they do not need to apply for GIS.