Understanding the underutilized disability tax credit
This is important! This article could put $90,000 into the hands of someone you know! And I am not exaggerating. Please send this article to anyone and everyone you know who is disabled (however mild) or who has a disabled individual in their life. You might be responsible for changing their life.
It seems that I write about this every other year, and I continue to be amazed that so few take advantage of this offer of free money: up to $90,000 from the government, however with a minimal initial deposit by the donor. This year though, with many being offered the cash flow to make it happen through the new Canada Disability Benefit, it will be even more of a shame if those eligible don’t take the advantage. What am I talking about? The disability tax credit (DTC), the Registered Disability Savings Plan (RDSP) and the new Canada Disability Benefit (CDB).
It all starts with the DTC. And the latest statistics indicate that although 96.6% of completed applications are approved, only one-quarter of people with a disability who are likely eligible submitted a completed DTC application.If you even think there is the tiniest chance that you might be eligible then start by filing your tax return (even if you didn’t earn anything) and then go here and fill out the DTC application. In and of itself the DTC is only worth about $1,300 in annual tax savings. And while not what I would call life changing, if approved then it opens the door to apply for the CDB and the RDSP which can be. Plus let’s not look a gift horse in the mouth. $1,300 is $1,300 after all.
The new Canada Disability Benefit (CDB) will provide up to $200 per month to eligible individuals – also, not life changing. But by taking $125 of that monthly amount and depositing it into their RDSP, eligible individuals will multiply their dollars. See more details below but believe it or not, that small $125 each month will result in the government providing up to $90,000 to their RDSP, and that can have an astonishingly positive impact on their later years.
I’ve written about RDSPs in the past, https://lightmagazine.ca/free-money-i-just-had-to-share/ so I won’t go into a lot of detail here, but here’s a quick summary. Eligible individuals (or friends and family) may put up to $200,000 into an RDSP account, which is intended to be treated like an RRSP – meant for later years. I won’t go into the restrictions (there are many), but I would break the benefits down into two major categories: free money and preferred treatment.
Free money – up to $90,000 in government additions to the plan
The first set of major benefits come in the form of government bonds and grants: bonds up to $1,000 annually (with a lifetime maximum of $20,000) based on income, and grants up to $3,500 annually (with a lifetime maximum of $70,000) based on annual contributions into the plan with the government matching 1:1, 2:1, or 3:1 (depending on the amount contributed and on income). It’s all very complicated but trust me – it’s awesome, almost to the point of being too good to be true.
Preferential treatment – tax deferral and minimal or no counting towards income for means tested programs
The other major benefit that is often overlooked is that while the grant and bonds and growth are taxable when withdrawn, the income from them is not counted against any means tested programs – at least not here in BC where I am. This varies a bit province by province, but all provinces (and territories) treat the income preferentially.
Maximizing these benefits often requires planning. In my opinion, RDSPs are not a great place to try to “do it yourself”. I strongly urge you to seek professional help when setting the plans up.
At the end of the day – take the free lunch. If you’ve been denied your DTC application in the past, it is now time to reapply. Or if you know someone who has a disability, ask them if they are able to take advantage of an RDSP. If they stare back at you with a blank expression, if they look like you’ve just told them unicorns are for real, then encourage them to talk to someone to see if they might be able to set one up. You may be effectively putting $90,000 of free money in their pocket.
More than any other article, please, please, please pass this one on to friends, family and acquaintances who may be eligible. You might change their lives.
“Lazy hands make for poverty,
but diligent hands bring wealth.”
- Proverbs 10:4 (NIV)
Arnold Machel lives, works, and worships in the White Rock/South Surrey area. In 1995, he founded Visionvest Financial Planning & Services with the dual goals of “effecting positive financial change” and assisting clients to “Invest with Vision”. Since that time Visionvest has received numerous recognitions, including being voted in the top three in the Best Investment/Financial Advisor category by Peace Arch News readers for the past four years in a row.
Arnold has held the Certified Financial Planner® designation since 1998 and has served on many boards, currently sitting on the board of Abundance Canada (formerly the Mennonite Foundation of Canada), a national charity focused on helping Canadians give generously. He is currently a co-host with his son, Ben, on the popular monthly Retire In BC podcast.
Questions and comments can be directed to him at dr.rrsp@visionvest.ca. Please note that all comments are of a general nature and should not be relied upon as individual advice. While every attempt is made to ensure accuracy, facts and figures are not guaranteed.
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