Theresa Tosh is a Vice-President and Certified Financial Planner at TD Wealth. John Osborne is a Chartered Investment Manager and Certified International Wealth Manager with Wise Advisory Group in Oakville.
The Disability Tax Credit
Theresa’s #1 piece of advice: Apply for the Disability Tax Credit (DTC) as soon as possible.
The DTC reduces your income tax. It can be worth as much as $4,000 a year, depending on your province.
If you are eligible for the DTC but cannot claim all or part of it because you have low taxable income, the rest of the credit is transferrable to your spouse, common-law partner, or any other support person. The DTC can also apply to dependents: children or teens, a disabled brother or sister, or aging parents.
Theresa describes the detailed paperwork required to apply for the credit in one word: “Onerous”.
To be eligible for the DTC, there are three conditions.
- Severe physical and/or mental impairment,
- This impairment must persist continuously for at least one year, and
- A physician or other qualified medical practitioner needs to certify that this impairment is severe and prolonged, recording the nature of the impairment and when it started.
(While someone with two broken legs may be severely impaired, for example, this may be only for six months, so he would not qualify for the credit.)
The medical practitioner has to issue a Disability Tax Credit Certificate, which should detail the effects of the impairment on the disabled person’s basic daily living activities. This certificate goes to the Canada Revenue Agency, which issues a ruling on the case. The CRA can request additional medical information from the physician to support your eligibility.
For a dependent under 18, the medical letter should indicate that the child is likely to be dependent on others for assistance in attending to personal needs and care, and will need significantly more care when compared to children of the same age, and for a long and uncertain time into the future.
Depending on the disability, you might have to re-apply for the Disability Tax Credit every few years. The age of the disabled person (such as a teen becoming an adult, or an adult turning 65) can also be a factor in your status.
The Disability Tax Credit is not a simple process, and can get complex and confusing. It’s best to get input from a tax adviser.
Your settlement: Lump sum or Structured?
Theresa says, “If you had money problems before the accident, a Structured Settlementcould be a good idea. If you don’t understand investing or tax law, a lump sum could be a bad thing.” She likes structured settlements because the funds stay in professional hands, distributed only to the injury victim when required. She has seen several cases of families taking advantage of a relative’s settlement, treating the funds more “like winning a lottery” than being for the future care of their injured relative.
But as John notes, “A lump sum can make sense in some cases. For example, if you took on debt while you waited for your settlement, you can pay off that debt quickly with a lump sum.”
And you can split a settlement between a lump sum and a structured settlement. So what’s best for you?
Lump Sum
With the lump sum, the proceeds are usually tax-free. In some cases, the lump sum can pay down debt. A good example: Someone is injured and cannot work, so they have to get a loan to meet living expenses while they’re recovering and awaiting settlement. The lump sum can eliminate all debt or at least return the debt load to its original level. The benefit here is that the individual no longer has the debt, nor the interest costs associated with servicing that debt.
Example: Client has $500,000 mortgage with 3% interest on it. If they pay it off, they are not only debt-free, but their interest payments of $15,000/year are eliminated too, which helps their cash flow.
The downside to lump sums relates to bad decisions or poor advice.
- Theresa knows of a woman who got a lump sum settlement from a motor vehicle accident. Then her father got cancer and needed $10,000 for a ramp at his house, which she bought. When he died, her mother-in-law (who had a condo in Florida) started asking for money too. “You’ll start hearing from needy relatives that you never knew you had.”
- John cites a $100,000 lump sum that an advisor said to invest in the stock market, and to secure a $75,000 leveraged loan against that, totaling $175,000 to invest. The 2008 crash reduced the stocks’ value by about $70,000, so now they had only $105,000 in stocks, less the loan, for a “net” investment value of only $30,000. “It was terrible to see”, says John.
In John’s opinion, the lump sum works well when it’s used to pay down expenses you’ve incurred, or to reduce large debts when you can both eliminate the debt and reduce interest costs. “There can be an argument for investing lump sum proceeds”, he says, but you need a very careful process and you should never use leverage.
Structured Settlement
As far as structured settlements go, John points out that the nice thing here is that the payments are:
- Tax free;
- Often guaranteed by an insurance company; and
- Can be indexed to inflation so that you enjoy rising income.
Sometimes these settlements are structured to be paid over a fixed number of years, but in other cases, they are structured to be paid until death, much like a pension would be. “There is something to be said for the comfort of guarantees here,” John notes.
As well, depending on how the structured settlement is set up, it may offer the opportunity for creditor protection.
Structured settlements are increasingly popular among insurance companies, plaintiffs, and defendants. About half of all the significant cases in Canada are settled this way.
About Nudorra Capital:
Nudorra Capital is a litigation and pre-settlement loan company. During litigation, clients may find themselves facing financial difficulties. At Nudorra Capital, we recognize the sensitivity of the situation and provide loans professionally, timely (usually within a 24 to 48 hour period) and at the most competitive rates in the industry.
Our loans do not require interim payments and are only paid back when the case is settled.
We believe as a company, that your client’s priorities should go towards healing themselves first, not worrying about whom to pay. To find out more about how we can help, please call us at (416) 342-9590 or email our President Jeffrey Gottheil at jgottheil@nudorra.com
