Supporting a child with special needs

Raising a child who has a disability requires a great deal of extra time to provide and arrange care. In addition, wealth planning issues are involved, but you can get help with financial matters.

You want to take advantage of any available tax relief now and ensure your child is properly cared for after your passing. With our assistance, input from a medical practitioner, and guidance from a lawyer and a tax advisor, the process will go more smoothly.

A valuable tax credit and a gateway

If your child has a significant physical or mental impairment, you can apply for the federal disability tax credit. The credit provides substantial tax relief that can be transferred to a parent.

A child may qualify for the credit if they have a severe and prolonged impairment that restricts their ability to perform one of the basic activities of daily living, including walking, dressing, feeding, eliminating, hearing, speaking, vision or mental functioning. An individual may also qualify if their impairment is not severe, but they are significantly limited in performing two or more of these activities.

To apply, you must submit the Disability Tax Credit Certificate (form T2201), which includes a section for a qualified medical practitioner to complete. The practitioner must be acceptable for the specific diagnosis, such as autism, cerebral palsy, Down syndrome, severe arthritis, cystic fibrosis or an intellectual disability. Note that the Canada Revenue Agency (CRA) makes a decision based on how the impairment affects daily living, not solely on the diagnosis.

Saving for the child’s future

Approval for the disability tax credit opens the door to other opportunities, as it is required for the Registered Disability Savings Plan (RDSP) and the child disability benefit. An RDSP helps families provide for the long-term financial security of a family member with a disability. Contributions grow tax-deferred, and the plan may be eligible for government grants.

If you choose an RDSP, we’ll ensure your investments align with your objective, time horizon and risk tolerance. We’ll work with you to develop an investment strategy that takes into account the long-term benefits of making significant early contributions and leveraging grant money for annual contributions.

Establishing a trust

If you plan to leave an inheritance to a child with a disability, a common approach is to set up a Henson trust.¹ This trust allows a beneficiary to receive trust funds without losing their government assistance benefits. A trust may be funded with cash, investments, property or life insurance.

You must give careful thought when choosing the trustee. Beyond understanding your child’s financial needs, the trustee is responsible for managing the trust assets and filing trust tax returns. Some parents name co-trustees and may choose a professional trustee.

Many parents use both an RDSP and a Henson trust to support their child, while others choose one of these methods, and some may use a different strategy altogether. It’s important to work with us, your lawyer and tax advisor, to develop a plan that suits your particular situation.

Using the RDSP

An individual approved for the disability tax credit is eligible to be the beneficiary of a Registered Disability Savings Plan (RDSP).

Opening an RDSP. A parent or legal representative of a child with a disability can open an RDSP and be the plan holder when the beneficiary is under the age of majority. A beneficiary who has reached the age of majority can be the plan holder if they have the capacity to manage their finances. Otherwise, their legal representative would be the plan holder.

Contributions. A plan holder can contribute any amount—there’s no annual maximum. Other individuals may contribute with the plan holder’s written consent. The lifetime contribution limit is $200,000.

Investments. An RDSP can hold the same investments as a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA), and those investments grow tax-deferred.

Withdrawals. RDSP withdrawals are called disability assistance payments. Contribution amounts are not taxable, but grant money and investment income are taxable to the beneficiary.

Grant assistance. When you contribute to an RDSP, the Canada Disability Savings Grant matches part of your contribution. Depending on the beneficiary’s family income, the maximum grant is either $3,500 or $1,000 per year, with a lifetime maximum of $70,000.

¹ A Henson trust can hold an unlimited amount of assets, but note that in Newfoundland and Labrador, a trust exceeding $100,000 makes the beneficiary ineligible for government support.