A list of tax deductions or credits to consider in the upcoming tax season
Each program’s terms must be examined to determine whether such a trust interest would properly be considered an asset of the individual
One common planning technique for disabled individuals involves the use of a trust under which the trustees possess ultimate discretion over any distributions to be made. In other words, the beneficiary has no enforceable right to receive any distributions from the trust unless or until the trustees exercise their discretion in the beneficiary’s favour. The intent of such a trust is that the trust assets not be considered assets of the beneficiary, such that they will not influence the beneficiary’s eligibility for various social benefits. Such a trust is commonly referred to as a “Henson trust”.
In a January 25, 2019 Supreme Court of Canada case, a disabled individual (SA) was denied rent assistance on the basis that the assets of a trust under her father’s will were considered to be assets in which she had a beneficial interest. SA had refused to provide information on the trust’s assets to the program administrator (MVHC) in conjunction with her annual application for rent assistance.
Consistent with a “Henson trust”, the trust terms appointed SA and her sister as trustees, required two trustees at all times, and provided the trustees with discretion to pay as much of the income or capital as they “decide is necessary or advisable” for SA’s maintenance or benefit. The terms also provided that any remaining assets at the time of SA’s death be distributed in accordance with her will, or intestacy law if her will did not provide direction. Finally, in the event of her sister’s inability or unwillingness to serve as trustee, SA could appoint a replacement trustee.
Individual wins
The Court held that the term “assets” as used in the program documentation did not include the discretionary trust interest, which was more akin to “a mere hope” of future distributions. It was reasonable for MVHC to require details of the trust structure, and SA had previously provided that legal documentation. As SA’s interest in the trust was not an asset, MVHC could not require disclosure of details of the trust assets as a condition of her rental assistance. MVHC was required to exclude the trust assets from the total assets considered when determining available rental assistance. MVHC was also required to compensate her for assistance denied to date.
Limitations to the ruling
The Court noted that this does not mean that the interest of a disabled person in a “Henson trust” could never be treated as an asset. This would depend on the rules and regulations governing the relevant program.
ACTION ITEM: The judges’ comments indicate that each program’s terms must be examined to determine whether such a trust interest would properly be considered an asset of the individual. Consider whether a Henson trust would benefit a disabled relative.
If the impairment(s) represents a marked restriction in the ability to perform a basic activity of daily living
In an April 3, 2019 Tax Court of Canada case, at issue was whether the impact of an individual’s mental impairment entitled her to the disability tax credit (DTC). The taxpayer suffered from social anxiety, depression and phobias.
A taxpayer may be eligible for the DTC if the impairment(s) represents a marked restriction in the ability to perform a basic activity of daily living. In particular, the impairment must affect and permeate the individual’s life to the degree that they are unable to perform the mental functions that would enable them to function independently and with reasonable competence. This is to be examined in the context of:
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memory;
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adaptive functioning; and
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problem-solving, goal-setting and judgment (taken together).
Each of the three elements are to be considered separately.
Taxpayer wins
The Court found that although the taxpayer did not have trouble with memory, she did have a marked restriction with respect to the other two elements, either of which would qualify her for the DTC.
The Court noted that adaptive functioning was described in the explanatory notes to the legislation as abilities relating to self-care, health and safety, social skills, and common simple transactions. Also, the Court referred to a provincial government publication which described it as how well a person handles common demands in life and how independent they are compared to others of similar age. While the taxpayer was able to dress, bathe, feed herself, do her own laundry, manage her medications, and live on her own, these were all primarily done in a controlled environment (her apartment). In respect of social skills and common simple transactions, the taxpayer could not work except to a limited extent in the family business, avoided social interactions with all but family and close friends, and remained in her apartment as much as possible. She was heavily reliant on her mother for almost all external daily life functions. The Court determined that she had a marked restriction in respect of adaptive functioning.
In respect of the third element (problem-solving, goal-setting and judgment), it was noted that her anxiety resulted in what might be considered poor judgment. It led to avoidance, procrastination and withdrawal which in turn lead to failing school, loss of employment, self-harm activities, reluctance to pursue therapy, and taking on too many projects. While the Court noted that there was more uncertainty as to whether there was a marked restriction in respect of this element, it noted that the taxpayer should be given the benefit of the doubt, especially since mental illness can be invisible.
Since there was a marked restriction in at least one of the three elements, the Court determined that the taxpayer was eligible for the DTC.
ACTION ITEM: To determine if eligible for the DTC due to a mental condition, form T2201 should be reviewed with, and completed by, a medical doctor or psychologist.