“In order for the election to be valid each electing beneficiary must be eligible for the DTC.”
In Tax Tip 12-23 we discussed some of the tax benefits that stem from the Credit for Mental or Physical Impairment, usually called the disability tax credit, (“DTC”) The process for applying for the DTC is not particularly onerous and can provide much more tax relief than just a modest non-refundable tax credit. Eligibility for the DTC provides tax relief to the affected person and their family in the form of benefits such as:
- An increased spectrum of eligible medical expenses;
- Additional employment related deductions;
- Increased child care expense limits for a longer period of time;
- Possible increased child benefit payments;
- Rollovers of RRIF or RRSP funds on death, to an eligible child;
- Potential access to a parent’s locked in RRIF or RRSP funds;
- Eligibility for the benefits of a Registered Disability Savings Plan.
- Enhanced RESP rules;
- Additional fitness and arts credits
While this is not an exhaustive list, we can now add a significant new benefit to it.
After December 31, 2015 most trusts and estates will be subject to tax at the top marginal tax rate, with the exception of a “graduated rate estate” (“GRE”) or a “qualified disability trust” (“QDT”). The new rules were addressed in Tax Tips 14-22 and 14-23. and are relevant for both new and existing estate plans. .
Much has been written about the GRE exception so this tax tip will address some issues regarding the QDT exception. A QDT can be created in a person’s Will if the executors or trustees jointly elect with one or more beneficiaries (“electing beneficiary or beneficiaries”) under the trust to be a QDT. In order for the election to be valid each electing beneficiary must be eligible for the DTC (and the election must be made in the T3 return for the trust’s tax year). No beneficiary who makes this election can elect with any other trust to be a QDT, and the trust must be factually resident in Canada. Qualification as a QDT will be determined annually.
The main benefit of QDT status is access to graduated tax rates inside the trust instead of all the trust’s income being taxed at top rates. The QDT exception was created in order to allow funds to be managed by trustees as opposed to a person suffering from a severe mental or physical infirmity (or their representative). If the exception was not created, the only way to access graduated tax rates for such a beneficiary would be to use the preferred beneficiary election and treat some or all of the trust’s income to be that of the eligible beneficiary. There are non tax complications that could stem from the preferred beneficiary election so the QDT exception is a welcome relief. However, the QDT benefits are only intended for the eligible beneficiaries. If low rate income is paid to a non-eligible beneficiary a “recovery tax” will be imposed on the trust as it will no longer be a QDT.
Identifying eligibility for the DTC at any time can result in thousands of dollars in tax refunds from retroactive claims and allow for entitlement to other incentives such as those noted above. With the new QDT exception from top marginal tax rates for testamentary trusts we further encourage you to consider a beneficiary’s possible eligibility for the DTC.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.