The Disability Tax Credit (DTC) is a federal tax credit available to eligible individuals with disabilities. In this post, we explain how the DTC works, who is eligible, and the benefits of the Registered Disability Savings Plan (RDSP) that is triggered by DTC eligibility.
How the Disability Tax Credit Works
The Disability Tax Credit is a non-refundable tax credit that reduces the amount of income tax that a person with a disability or their supporting family member must pay. It is designed to help offset the extra costs associated with having a disability. The DTC is calculated based on the amount of impairment a person has in the following areas:
- Walking
- Feeding
- Dressing
- Speaking
- Hearing
- Seeing
- Eliminating (bowel or bladder functions)
- Mental functions necessary for everyday life (such as problem-solving, memory, or adaptive functioning)
To be eligible for the DTC, a person must have a severe and prolonged impairment in at least one of these areas. This means that the impairment must have lasted or be expected to last for at least 12 months.
Who is Eligible for the Disability Tax Credit?
Any Canadian resident who has a severe and prolonged impairment in one or more of the above areas may be eligible for the DTC. This includes individuals of all ages, from children to seniors. To apply for the DTC, the individual or their authorized representative must complete and submit Form T2201 – Disability Tax Credit Certificate to the Canada Revenue Agency (CRA). The form must be signed by a qualified medical practitioner who can verify the person’s impairment.
The Benefits of the Registered Disability Savings Plan (RDSP)
Eligibility for the Disability Tax Credit can also trigger eligibility for the Registered Disability Savings Plan (RDSP). The RDSP is a long-term savings plan designed to help individuals with disabilities and their families save for the future. The RDSP is administered by the Government of Canada and is available to anyone who is eligible for the DTC.
The RDSP offers several benefits, including:
Matching Contributions – The federal government provides matching contributions of up to $3,500 per year to eligible RDSP accounts. The amount of matching contributions depends on the family income and the amount of personal contributions made to the account.
RDSP
Tax-Sheltered Growth – Any income earned on investments held within the RDSP is tax-sheltered until withdrawn from the plan. This means that the investments can grow tax-free, allowing for greater long-term savings potential.
Flexibility – RDSP account holders can choose how to invest their savings, with a range of investment options available, including mutual funds and GICs. In addition, there are no annual contribution limits, allowing for maximum flexibility in savings.
Lifetime Disability Assistance Payments (LDAPs) – Once the account holder reaches age 60, they can start receiving LDAPs from their RDSP. LDAPs are regular, tax-free payments that can be received for the rest of the account holder’s life, helping to provide ongoing financial security.
How to Apply for the RDSP
To apply for the RDSP, the individual or their authorized representative must first apply for the Disability Tax Credit. Once the individual has been approved for the DTC, they or their authorized representative can open an RDSP account with a participating financial institution. They will need to provide proof of DTC eligibility to the financial institution to open the account.
In conclusion, the Disability Tax Credit and the Registered Disability Savings Plan offer valuable benefits to individuals with disabilities and their families. The DTC can help reduce the amount of income tax paid, while the RDSP can provide long-term savings and financial security.
RDSP – Real Life Example
The power of the RDSP can create significant returns with relatively modest contributions. In the below example, $20,000 invested over 20 years creates a tax-free nest egg of $173,198.18. The following assumptions were used:
- The individual (the RDSP “holder”) invests $1,000 per year into the RDSP;
- Those investments continue for 20 years;
- The holder is eligible for a CDSG Contribution of $3,500 per year (the maximum); and
- Investment growth is 7% per year.
| Year | Opening Balance | Annual Contribution | CDSG Contribution | Growth at 7% | Closing Balance |
| 1 | $1,000.00 | $1,000.00 | $3,500.00 | $70.00 | $5,570.00 |
| 2 | $5,570.00 | $1,000.00 | $3,500.00 | $490.90 | $10,560.90 |
| 3 | $10,560.90 | $1,000.00 | $3,500.00 | $877.27 | $16,938.17 |
| 4 | $16,938.17 | $1,000.00 | $3,500.00 | $1,262.67 | $22,700.84 |
| 5 | $22,700.84 | $1,000.00 | $3,500.00 | $1,649.06 | $28,849.90 |
| 6 | $28,849.90 | $1,000.00 | $3,500.00 | $2,039.49 | $35,389.39 |
| 7 | $35,389.39 | $1,000.00 | $3,500.00 | $2,435.25 | $42,324.64 |
| 8 | $42,324.64 | $1,000.00 | $3,500.00 | $2,837.65 | $49,662.29 |
| 9 | $49,662.29 | $1,000.00 | $3,500.00 | $3,247.13 | $57,409.43 |
| 10 | $57,409.43 | $1,000.00 | $3,500.00 | $3,664.12 | $65,573.55 |
| 11 | $65,573.55 | $1,000.00 | $3,500.00 | $4,089.12 | $74,162.66 |
| 12 | $74,162.66 | $1,000.00 | $3,500.00 | $4,522.64 | $83,185.30 |
| 13 | $83,185.30 | $1,000.00 | $3,500.00 | $4,965.20 | $92,650.50 |
| 14 | $92,650.50 | $1,000.00 | $3,500.00 | $5,417.35 | $102,567.85 |
| 15 | $102,567.85 | $1,000.00 | $3,500.00 | $5,879.68 | $112,947.52 |
| 16 | $112,947.52 | $1,000.00 | $3,500.00 | $6,352.33 | $124,799.85 |
| 17 | $124,799.85 | $1,000.00 | $3,500.00 | $6,837.99 | $136,137.84 |
| 18 | $136,137.84 | $1,000.00 | $3,500.00 | $7,336.65 | $147,974.50 |
| 19 | $147,974.50 | $1,000.00 | $3,500.00 | $7,848.78 | $160,323.28 |
| 20 | $160,323.28 | $1,000.00 | $3,500.00 | $8,374.91 | $173,198.18 |
Note: This example is illustrative only.
Gavin Cosgrove
Gavin Cosgrove is a graduate of Holy Cross Catholic Secondary School in Kingston. Upon graduation, he attended Manhattan College (New York, NY) on an athletic scholarship where he competed in track and field. Gavin completed his legal studies at the University of New Brunswick.
Gavin joined Bergeron Clifford in the summer of 2009 and is now a partner with our firm.
Gavin is a proud member of the Ontario Trial Lawyers Association, the Frontenac Law Association, the County of Carleton Law Association, The Advocates’ Society, and the County of Lanark Law Association. He represents innocent victims of negligence in auto cases, medical malpractice and negligence cases.
