By Mike Campagne, Disability Tax Services Ltd.
This article is not to be construed as financial advice, but rather as general information. Always consult a tax professional in determining the optimal way for you to file your medical expenses or any other relevant tax credits and deductions.
As a general rule, if you have a child with a cognitive challenge that requires special schooling – like the Arrowsmith program – it is important to get advice from a tax professional with an in-depth understanding of related disability credits and deductions. Those sections of taxation are administered differently than other areas of personal taxation.
In the recent years, numerous tax-based credit and benefit programs have been introduced to assist families, but many are misunderstood or overlooked.
For this reason, I wanted to write about a topic that is relevant to all families with children attending Eaton Arrowsmith: claiming tuition as a medical expense.
However, while claiming special schooling costs for a child with a learning disability or mental impairment yields valuable tax savings, it’s barely the tip of the iceberg of what may be available.
There are a range of potentially applicable programs that include: the disability tax credit, related child disability benefit supplements to the child tax benefit, family caregiver amount credits, travel expenses (in limited circumstances), and the registered disability savings plan (RDSP). Arts and fitness credits have been eliminated for tax year 2018.
Not every child with a learning disability or impairment in mental functions will qualify for tax credits and benefits, but many do. These programs are complex and pre-assessed with a rigorous CRA testing system that often leads to erroneous denial of tax credits and benefits to Canadian families.
Recently CRA has been challenged on assessment procedures and a parliamentary advisory committee has been appointed to investigate concerns. That committee asked for my participation and my take home message is that many families with children with cognitive challenges have been denied a fair hearing for a range of tax and benefit programs. This may have happened to you and your child, and improperly denied benefits can run into the thousands of dollars. If you are unsure if you are receiving all eligible tax and benefit supports we provide a free initial analysis via a phone consultation. This can be scheduled with a call to our office at 604-415-5311 or you can email me directly at email@example.com .
2018 Rules on medical expenses:
Line 330 – Medical expenses for self, spouse or common-law partner, and your dependent children born in 2001 or later:
You can claim on line 330 the total eligible medical expenses you or your spouse or common-law partner paid for:
You can claim eligible medical expenses paid in any 12-month period ending in 2018 and not claimed for 2017. Generally, you can claim all amounts paid, even if they were not paid in Canada.
Your total expenses have to be more than 3% of your net income (line 236) or $2,302, whichever is less, to yield federal tax savings.
Reimbursement of an eligible expense – You can claim only the part of an expense for which you have not been or will not be reimbursed.
The medical expense is claimable by the date paid, rather than the date invoiced.
Medical expenses for other dependants must be claimed on line 331. (The most common example of this is a child over 18 living at home). Line 331 – You can claim the total of the eligible expenses minus either $2,302 or 3% of your dependant’s net income (line 236 of the income tax and benefit return), whichever is less, to yield tax savings.
The corresponding provincial lines for the medical expense claims are 5868 for a child under 18 and 5872 for a child over 18.
School for persons with an impairment in physical or mental functions – a medical practitioner must certify in writing that the equipment, facilities, or personnel specially provided by that school are required because of the person’s physical or mental impairment.
A question I have often been asked is, “Why do I need this certified by a medical practitioner?” The simplest way to explain this is to think of it as if your child has been prescribed special schooling due to a learning disability or impairment in mental functions.
Adapted schooling for a child who has no impairment, is generally not claimable. However, I would note that in my experience the description of what qualifies as an impairment in mental functions is relatively broad. With the admission entry process at Arrowsmith, I would expect all students attending the Arrowsmith program could meet this standard.
Which parent should make the claim?
Normally it is most advantageous for one parent to claim the entirety of the family’s medical expenses.
As only the combined medical expenses over $2,302 or 3% of net income result in a tax reduction, in a two parent family the lower income earner will often have the greatest tax reduction.
The corresponding provincial lines for the medical expense claims are for self, spouse and a child under 18 (line 5868) and for a child over 18 (line 5872). The threshold for provincial useable medical expenses differs slightly by province. For BC residents, the 2018 provincial tax year threshold is $2,165 or 3% of net income, whichever is less.
For example, with special schooling expenses of $30,000 and spouses with net incomes of $100,000 and $40,000, and no other claimable medical expenses:
The higher income spouse would see useable medical expenses of $27,698 ($30,000-$2,302) versus useable medical expenses of $28,800 ($30,000-$1,200) for the lower income spouse. By useable medical expenses, I am referring to that portion which leads to a tax reduction.
For a BC resident, the provincial useable medical expenses would be $27,835 ($30,000-$2,165) for the higher income spouse and the same $28,800 for the lower income spouse.
If you already have medical expenses over $2,302 or 3% of net income, whichever is less, the entire special schooling expense yields claimable tax credits.
Ensure to compare the amount you can claim with the amount your spouse or common-law partner would be allowed to claim. Either parent can make the claim, just choose that claim which leads to the largest tax reduction – run the numbers for both scenarios before filing you 2018 taxes. Most tax programs will ask you, when you enter medical expenses, whether they are to be “optimized”. Selecting yes normally leads to the tax software working out which spouse should claim the medical expenses, but I recommend doing the calculations for each parent to be sure.
And remember: medical expense claims create non-refundable credits, meaning they are valuable only in reducing taxes paid or owing. So, while the lower income parent might have more useable medical expense credits, if that person doesn’t owe enough tax to utilize them, it could be that less useable credits for the higher income spouse yield a larger tax saving.
So let me emphasize: run different scenarios, including a splitting of the medical expense claim, to find the best tax reduction outcome. A good tax preparer will do this and even consider within that calculation how other tax credits which are claimable by either spouse are allocated, as that can also impact the value of the medical expense claim. Taxes can be complicated. I recommend getting professional tax preparation assistance.
In the rare case where neither spouse does pay tax (such as a quite low family income or a high level of other deductions), there are no tax savings as the credits are non-refundable. In cases where a family is extremely low income, there may be a medical expense refund claimed, but in my experience families with such low incomes can rarely afford special schooling, so I will not address that issue here.
Tax planning opportunities can center around timing of claims in light of overall medical expenses.
Example (regarding the federal medical expense credits threshold): Sue is a single Mom who makes $100,000 net income. She plans on having her son Joe, who has a learning disability, have intense special schooling from September to March, cost $15,000 in 2017 and $15,000 in 2018. Sue has no other medical expenses. If she claims the expenses by calendar year, she has a useable medical expense amount of only $12,698 in each of 2017 and 2018, for a total of useable medical expense above the threshold of $25,396. This is due to the threshold being applied twice. But if she chooses to claim the period of September 2017 to August 2018 on her 2018 tax filing, her useable medical expense amount increases to $27,698 as the threshold is applied only once. As well, if she paid the entire special schooling amount in 2017 (a prepayment of the January to March special schooling), Sue would have the $27,732 useable amount for her 2017 filing.
How to meet the CRA requirement of “certified by a medical practitioner”?
Here is a typical letter (optimally on stationary identifying the doctor or registered psychologist) certifying the special schooling is required due to a learning disability or impairment in mental functions:
Joe Sample is my patient and a student diagnosed with a learning disability. Joe requires an adapted special schooling program that addresses this impairment. Joe is undergoing therapy/treatment for his learning disability at Eaton Arrowsmith School.
(Signed Dr.) W. Smith
While a doctor or registered psychologist is usually the best choice, I have seen the CRA accept medical practitioners with fewer qualifications as long as their field is relevant to learning impairments.
Will I be audited?
CRA has in some past years set a threshold on medical expense claims for automatic computer generated review (audit is way too strong a term here). These “audits” are usually easily addressed by mailing to the CRA your Arrowsmith receipt and a basic letter like the example above. Most regular Canadians can handle this on their own, but if you run into any issues with the CRA here, give me a call.
Over the years, there have been occasions when families with a student at Eaton Arrowsmith have had their tuition medical expense claims rejected, but that was just the result of poor or inadequate communication in responding to the CRA query. In every instance I have been involved with where an Eaton Arrowsmith family encountered such a denial, I was able to intervene and see the CRA denial reversed and the medical expense claim validated.
How much tax savings does the claim yield?
For BC residents, this normally works out to 20.06% of the useable medical expense for middle or high-income earners (though the amount of tax reduction can be less in certain circumstances). The maximum tax relief, for a person with substantial other medical expenses above the 3% of net income or $2,302 threshold, on $30,000 of qualifying tuition expenses, works out to $6,018.00 for BC residents.
For business owners with a Health and Welfare Trust or Private Health Services Plan, the tax savings can potentially nearly double, but such plans have expenses and requirements, and I know of only a few clients over the years utilizing such a plan – they’re complicated. As a discussion of this component is rarely applicable, I won’t bother to cover the details here. If you are a person owning his or her own business, you may want to review these options online via a Google search, as there are companies in Vancouver who can explain and administer such plans.
There are also potentially claimable medical expense travel expenses if the commute to Arrowsmith is over 40 kilometres (each way), but there are complex requirements and provisions for such claims so you should consult with a tax professional on the viability of claiming travel expenses.
If you would like a free initial phone consultation regarding tax saving opportunities that may be applicable to your unique circumstances, please email me directly at firstname.lastname@example.org or call my office at 604-415-5311. Mike Campagne CFP, BA
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