When DTC eligibility is in dispute

Advisor's Edge

2017-11-20



One of the planning tools available to clients who have a family member living with a disability is the RDSP, with its generous Canada Disability Savings Grants (up to $70,000 over a lifetime) and Canada Disability Savings Bonds (up to $20,000 over a lifetime).

But the key to opening up the RDSP is qualifying for the disability tax credit (DTC), a non-refundable credit that helps those with disabilities (or those who support them, such as parents) reduce their federal and provincial income tax. The purpose of the DTC is “to provide for greater tax equity by allowing some relief for disability costs, since these are unavoidable additional expenses that other taxpayers don’t have to face,” says CRA’s program description.

The total value of the combined federal and provincial DTCs varies by province, ranging from about $1,600 to $2,200 in tax relief annually.

And, each year, some people have trouble successfully claiming the DTC and even end up in court when CRA challenges the taxpayer’s claim of a qualifying disability.

A recent tax case (Mullings v The Queen, 2017 TCC 133) shows a mother’s struggles to claim the DTC for her daughter. The child was born in 2013 and diagnosed, through a newborn screening process, with phenylketonuria (PKU). PKU is a genetic disorder that eliminates or severely restricts the body’s ability to metabolize phenylalanine (Phe), an amino acid necessary for healthy growth and development. In 2015 the mother applied for the DTC for her daughter, but CRA concluded that the child didn’t fulfil the requirements. The mom took her case to Tax Court.

Under the Income Tax Act, one criteria in order to qualify for the DTC is that a person must have a “severe and prolonged impairment in physical or mental functions” that markedly restricts one or more of the person’s basic activities of daily living, or would markedly restrict an activity if it wasn’t for “life-sustaining therapy.”

The life-sustaining therapy must support a vital function, and must be administered at least three times per week for an average of at least 14 hours per week. This rule allows for DTC eligibility if someone must have therapy that requires significant time away from regular, everyday activities.

In this case, the child’s therapy consisted of strictly regulating the amount of Phe consumed. Indeed, the goal each day was to consume a specific amount—too little would impair normal growth and development; too much would result in brain damage. As the judge wrote, the taxpayer “and her child are obliged to walk a very narrow ridge with great risks if the child falls to either side.”

The issue in the case was whether or not therapy was administered for an average of “not less than 14 hours a week.” The tax rules say that in computing the 14-hour requirement, “the time spent on administering therapy […] in the case of a child who is unable to perform the activities related to the administration of the therapy as a result of the child’s age, includes the time, if any, spent by the child’s primary caregivers performing or supervising those activities for the child and […] does not include time spent on activities related to dietary or exercise restrictions or regimes.”

This exclusion proved problematic for CRA. The judge set out to determine whether time spent counting Phe should be considered time spent on dietary restrictions or regimes. As he wrote, “Typically in a dietary regime one must avoid certain foods, such as foods with gluten, for example, or one must keep track of certain types of foods and control the quantities of different types of food […]. The counting and managing of Phe consumption is much more like administering a medication than it is like managing a diet.”

In court the parents described the many hours they spent caring for their daughter. Among the list of 32 activities to treat their daughter were regular blood tests, daily preparation and administration of medical formula and low-protein foods, the logging of blood phenylalanine levels and daily phenylalanine intake, and the planning and preparation of their daughter’s meals and snacks.

The judge felt that “measuring and controlling Phe intake is properly characterized as administration of the therapy and not as control of [the daughter’s] diet with the consequence that the correct way to apply these rules is to consider that the time spent determining the amount of Phe to be consumed and actually consumed, including the time spent logging Phe intake, should be considered as part of the 14-hour-a-week average.”

Since the total time spent on the above activities was actually more than 18 hours, the judge concluded that the taxpayer’s daughter was indeed eligible for the DTC.

Especially in borderline cases such as this, reminding our clients of the DTC’s benefits may make the application process more bearable.