Canada’s Disability Tax Credit what it is and is not
Editor – we reprint the portion of the Caledon Institute Report which explains what the DTC is and is not. A Basic Income Plan for Canadians with Severe Disabilities
The Disability Tax Credit or DTC is geared to Canadians who, due to severe and prolonged impairments in physical or mental functions, are markedly restricted in their ability to perform basic activities of living.
The DYC provides income tax relief to help cushion the burden of disability costs.
The value of the DTC as a federal tax savings was $1,079 in 1979. The ‘face amount’ of the Disability Tax Credit was $7,196; however, this is misleading because the Disability Tax Credit only worth 15% of that.
The cost to the federal treasury of the Disability Tax Credit was an estimated $415 million by the Department of Finance Canada.
In 2008, 889,600 Canadians qualified for the DTC. Some 977,080 adults under 65 reported severe or very severe disabilities in 2006. So Disability Tax Credit recipients represented only around 30 to 40 percent of the potential target group.
How did the Disability Tax Credit begin
In 1986, the tax deduction for blind persons and those confined to a wheelchair was replaced by the disability tax deduction, a broader benefit for individuals with a serious mental or physical disability. In 1988, as part of income tax reform, the disability deduction (like most deductions and exemptions) was converted to a nonrefundable tax credit − the Disability Tax Credit.
Who qualifies for the Disability Tax Credit?
The Disability Tax Credit provides income tax relief to help cushion costs for Canadians who, due to severe and prolonged impairments in physical or mental functions, are markedly
restricted in their ability to perform at least one basic activity of living (as certified by a qualified health practitioner) or would be markedly restricted were it not for extensive therapy (averaging at least 14 hours a week) to sustain a vital function.
Recipients are deemed to be markedly restricted if all or substantially all of the time, even with therapy or the use of appropriate devices and medication, they are blind or unable to perform a basic activity of daily living or require an inordinate amount of time to do so.
Such basic activities include walking, feeding or dressing oneself; mental functions necessary for everyday life (such as memory; problem-solving, goal-setting and judgment; and adaptive reasoning); speaking; hearing; and eliminating bodily waste.
In accordance with one of the recommendations of the Report of the Technical Advisory Committee on Tax Measures for Persons with Disabilities [Department of Finance 2004], the 2005 federal Budget [Department of Finance Canada 2005a] extended eligibility for the Disability Tax Credit to individuals with severe and prolonged impairments in mental or physical functions who have significant restrictions in more than one basic activity of living if the cumulative effect of their restrictions is equivalent to having a single marked restriction in one basic activity of living.
Take the example of a person with multiple sclerosis who continuously suffers fatigue, depressed mood and balance problems − but each of these restrictions on its own does not markedly restrict a specific basic activity of daily living. Previously, that individual would not qualify for the Disability Tax Credit.
Now, however, that person would qualify if the cumulative effect of the restrictions is equivalent to having a single marked restriction in one basic activity of daily living.
Who is helped by the Disability Tax Credit
The Disability Tax Credit is intended to help reduce the financial burden of non-discretionary disability-related expenses that are hard to quantify. Such hidden and indirect costs of disability include, for example, higher utility costs for heat or air conditioning, additional transportation costs and higher prices for goods because of fewer shopping choices.
In the 2009 taxation year, the ‘face amount’ of the DTC (i.e., the amount listed on the income tax form) was $7,196.
Maximum value of Disability Tax Credit by Province (chart Caledon Institute)
However, this is misleading because the DTC is not actually worth $7,196. Rather, its true value is calculated as the face amount times the tax rate on the lowest income tax bracket. In 2009, the lowest tax rate was 15 percent, so the maximum value of the Disability Tax Credit in federal income tax savings was $1,079 (15 percent of $7,196). The cost to the federal treasury of the Disability Tax Credit was an estimated $415 million [Department of Finance Canada 2009].
In 2008, the most recent year for which data are available, 889,600 Canadians qualified for the Disability Tax Credit and caregiver credit [Revenue Canada 2010]. The federal Disability Tax Credit is indexed each year to the cost of living.
Taxpayers who qualify for the federal Disability Tax Credit also enjoy a reduction in their provincial or territorial income tax, the value varying from one jurisdiction to another depending on the ‘amount’ and associated tax rate (ranging from $356 in British Columbia to $1,294 in Alberta in 2009). Thus the disability tax credit paid a total federal-provincial/territorial maximum benefit in 2009 that ranged from $1,435 in British Columbia to $2,373 in Alberta, as illustrated in Figure D.
Most, but not all, provincial and territorial disability tax credits are adjusted annually to take into account the increase in the cost of living; Prince Edward Island and Manitoba did not increase their disability tax credits in 2009. (Estimates of the cost of the provincial and territorial disability tax credits, and the other tax credits discussed below, are not available.)
Disability Tax Credit is nonrefundable
The DTC is ‘nonrefundable’: It reduces income tax owing but does not pay anything to recipients with incomes so low that they do not owe income tax. However, the DTC can be transferred to a supporting spouse or relative. Thus a low-income recipient of the disability tax credit who does not pay income tax still may benefit indirectly by transferring the tax savings to a supporting spouse or relative who owes income tax and thus gets a tax break from the disability tax credit.
In addition, some Disability Tax Credit recipients with low income receive a partial Disability Tax Credit because their income tax owing is less than the maximum Disability Tax Credit benefit. For example, if their federal income tax is $500, then their maximum value of the Disability Tax Credit is $500.
As noted, a taxfiler eligible for the DTC must have taxable income before it is possible to enjoy the full value of the disability tax credit. However, the amount of taxable income needed to do so varies among provinces and territories because they have different basic personal credits (resulting from different basic personal amounts and lowest tax rates). Using Alberta as an example, and assuming only the basic personal credit and no other credits except the DTC, a Disability Tax Credit-eligible claimant needed a minimum taxable income of $15,330 in 2009 to benefit fully from the Disability Tax Credit.
Most taxpayers have additional tax credits and deductions, so the threshold taxable income needed to obtain full value of the Disability Tax Credit is consequently higher than $15,330.
If an eligible recipient does not have sufficient taxable income to benefit fully from the Disability Tax Credit, the claim can be transferred to a supporting spouse, parent or family caregiver, so some additional familial benefits may sometimes be obtained in this manner, even for claimants who do not owe sufficient tax themselves. This is useful only if there is an available transferee and that person has sufficient taxable income to realize a tax savings from the Disability Tax Credit.
Does the DTC promote Tax Fairness?
The Report of the Technical Advisory Committee on Tax Measures for Persons with Disabilities discussed the purpose and design of the Disability Tax Credit. According to the Report, the federal Department of Finance sees the purpose of the Disability Tax Credit as promoting ‘horizontal equity’ [Technical Advisory Committee on Tax Measures for Persons with Disabilities 2004].
In the tax system, ‘horizontal equity’ is usually considered to mean that taxpayers of similar ability to pay should pay similar amounts of tax. The Disability Tax Credit allows a rough average of non-itemizable disability costs to be taken into account when computing income taxes owed, so that a taxpayer with a disability ends up paying about the same tax on his or her ‘after disability costs’ disposable income as does a taxpayer without a disability, assuming no other non-deductible disability-related expenses.
From our perspective, the Finance Department view reflects only one aspect of ‘horizontal equity’ − as it is confined to the income tax system and those who pay income tax.
A broader social conception of horizontal equity argues that the added cost of disability should be recognized for everyone with a disability, so that their ‘after disability costs’ are at least roughly compensated for the additional non-itemizable expenses related to disability, whether or not they pay any income tax. In this social conception, horizontal equity requires that everyone with a disability − not just those with taxable income above a certain amount − should benefit from the Disability Tax Credit. This disability tax break should be related to the fact of having a disability, and not to the person’s income.
Most Canadians with disabilities don’t get the DTC
The existing Disability Tax Credit does not appear to reach most Canadians with severe disabilities.
In the 2007 tax year, there were 442,240 recipients of the Disability Tax Credit who obtained the full value of the Credit by virtue of having sufficient taxable income.
In addition, another 223,320 (or more) persons claimed the Credit but obtained less than the full value or no value at all, by virtue of having insufficient taxable income (for some of these it could be that maintaining Disability Tax Credit certification is a condition of access to other programs).
If we make the rough assumption that 60 percent of filers are of working age, which is roughly the PALS percent for those with serious and severe disabilities, then about 265,000 working age people got the full value of the Disability Tax Credit in 2007 and another 130,000 might have gotten some value [Data from Canada Revenue Agency web site http://www.cra-arc.gc.ca/gncy/ stts/gb07/pst/fnl/html/tbl10-eng.html Final Basic Table 10: Selected items by total income class, All Canada and correspondence].
However some 977,080 adults under 65 reported severe or very severe disabilities in 2006. So Disability Tax Credit recipients represented only around 30 to 40 percent of the potential target group at last count.
Moreover, the persons with disabilities that the Disability Tax Credit is failing to reach are exactly those who have the least income. This significant shortfall shows the extent to which the Disability Tax Credit in its present design is ineffective in assisting all persons with severe disabilities. The redesign of the Disability Tax Credit as a refundable credit is discussed in the second part of this report. In other programs such as the Canada Child Tax Benefit and GST refundable credits have proved capable of reaching almost 100 percent of eligible recipients.
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