Sometime ago I began a very fruitful dialogue with Kenneth C. Pope, LLB, a lawyer in Ottawa, Ontario. He is one of the most experienced legal practitioners in Canada providing services to families with a family member with a disability and has focused his professional career to help them put in place Henson Trusts.
What I would like to share with you in this month's article is a recent talk I had with Kenneth Pope where we discussed Henson Trusts, ODSP and other tax credits that families and disabled individuals can benefit from but are often unaware.
Merrick: “What is ODSP?”
Pope: “ODSP stands for The Ontario Disability Support Program. The Ontario Misistry for Community and Social Services describes it as program that is designed to meet the unique needs of people with disabilities who are in financial need, or who want and are able to work and need support. Other procinces have similar disabled support programs”
Merrick: What happens if a family member with special needs is receiving Ontario disability support benefits and then he/she is left an inheritance? Will that inheritance be considered an asset and disqualify them from benefits?”
Pope: Yes, The family member if left an inheritance will be not be eligible for benefits such as the ODSP unless special arrangements are made in the parents' Will.
Merrick: “Are there any solutions for parents and guardians of persons with special needs that will allow them to leave an inheritance and not disqualify the disabled individual from receiving disability benefits from the government?”
Pope: “Yes, the only real solution to this inequity is a HENSON TRUST, created by the parents' Will. Only available since 1989, when the case after, which it is named was upheld by the Ontario Court of Appeal, it places estate assets in the care and control of a Trustee to be administered for the benefit of a beneficiary. Inheritances placed in a properly prepared Absolute Discretionary Trust are not the asset of the child and will not affect provincial benefits.
Merrick: “What are the motivations that cause parents and guardians to setting up a Henson Trust?”
Pope: “Many families have members who require assistance in handling their daily affairs, regardless of their other abilities. Special Beneficiaries often benefit from guidance in handling large sums of money or significant assets, temporarily or on an on-going basis. Some beneficiaries may be unable or unwilling to seek guidance, and may at some point be left without care unless special provisions are put into place.
To solve these problems a Henson Trust must be created during a parent's or guardian's lifetime (inter vivos) or according to the terms of parent's or guardian's Will (testamentary). These Trusts are invaluable in planning for a child's care when a parent or guardian are no longer there.
Merrick: Why do some people receiving Ontario provincial disability benefits receive $730 each month while others receive $959?
Pope: “The $730 amount is the ‘room and board' allowance. If a child lives with the parent they will automatically be slotted into this amount. The $959 amount is composed of $427 for shelter/rent and $532 for supplementary benefits for everything else.”
Merrick: “Do you recommend strategies that will allow individuals to receive the full amount?”
Pope: “A simple method to receive full benefits is by setting up a lease arrangement with the parents and having the parents charge at least the shelter allowance amount. The benefits should then be increased to the proper amount. These shelter payments by a blood relative are not to be included as “rental” income. Rental losses are not allowed if your rental operation is a cost-sharing arrangement rather than an operation to make a profit.
You can deduct your expenses only if you incur them to earn income. In certain cases, you may ask your son or daughter, or another relative living with you, to pay a small amount for the upkeep of your house or to cover the cost of groceries. You do not report this amount in your income, and you cannot claim rental expenses. This is, in fact, a cost-sharing arrangement, so you cannot claim a rental loss.
The child cannot then make use of the “tenant property tax” credit.
If the child is simply unable to shop or cook, even with supports, then the increased amount may be unavailable on the basis that the food and lodging is provided by the parents. This turns on the facts of each situation.”
Merrick: “Many people have heard about the ‘caregiver credit' used by some families to reduce taxes. When does this apply?”
Pope: “If a child is over 18 years of age, on ODSP and resides full time or substantially all of the time with the parent or other family member, then the family member qualifies as a care-giver of that child. They can then claim the ‘care-giver tax credit' and pay approximately $500 less in taxes than they would have.
This credit applies in each ongoing year in which these factors exist. The credit came into effect in 1998, and can be back filed to that year if applicable. This would return approximately $4,500 in taxes for a back filing from 2006.
This tax credit applies in the circumstances of any adult family member, not just children, for example an aged parent who survives on a small pension and who has been released from hospital after an operation.
Merrick: What is the ‘disability tax credit'? I know some parents save on taxes by using this tax credit and others have never heard of it.
Pope: This tax credit is available whenever a child of any age is markedly restricted in the activities of daily living on an on-going basis.
The restrictions can be cognitive, developmental, physical or mental, or a combination of disabilities. This tax credit must be applied for and approved, by filing a T-2201 form with Canada Revenue Agency.
Once approved, the credit is transferred from the child who qualifies to a parent or other supporting person. The tax credit is only useful to someone who pays taxes, and in many cases the person with the disability has no taxable income.
The credit was recently increased, and now returns $1,500 each year to a taxpayer who makes use of it. It can presently be back filed to 1996, back ten years on a rolling annual basis.
Note: In years prior to 2001 the tax credit only returns $1,000 per year, as that was the previous allowance. Back filing for the full period, if applicable, in 2006 would return approximately $14,000 to the taxpayer.”
The Bottom Line
Henson Trusts, ODSP, Benefits and Tax Credits are special arrangements necessary to properly ensure that loved ones of clients are given the extra care they deserve, and that inheritances will not be wasted. One can just imagine the potential liability someone who puts himself or herself out in the public domain as a client's advisor could be who ignores the options available for clients who are parents or guardians of children with special needs.
If you believe a client would benefit from adopting any of the strategies mentioned above it is important to seek specialized legal counsel and the proper financial planning professionals will assist in setting up and managing the right plan for your clients who care for children with disabilities.