Disability Planning with Guy Anderson | E010

Full Transcript:

Jason Pereira: Hello, and thank you for joining me for The Wisdom Of Wealth, a show where we help educate Canadians about fundamental financial literacy topics, to help you make better and more informed decisions. And to know when and where to reach out for help. I'm your host, Jason Pereira. Today, The Wisdom Of Wealth, we're going to talk about planning for people with disabilities.

Jason Pereira: No one ever sees themselves becoming disabled, but the truth is disabilities happen to many Canadians. In fact, according to Statistics Canada, 22% of all Canadians over 15, have some form of disability. These may be minor or severe. According to the Canadian Institute of Actuaries, the odds of becoming disabled for a period, at some point in your life, is somewhere between one in three or one in four, if you're in a white collar job. Most people typically think of physical impairments when they think of disability, but mental nervous disorders actually account for over one third of all the disabilities. So it really can happen to anyone. And it's important to plan to protect yourself, if you become disabled, know exactly what you're entitled to.

Jason Pereira: If you're working and contributing to the Canada Pension Plan, then you're protected by the CPP disability benefit. This benefit will pay you up to $1,387 per month, as of 2020. This will increase every year with inflation, but it will stop at age 65, at which point you'll receive whatever the normal CPP benefit you've accrued is. So yes, $1,387 per month, isn't very much. And no one should plan on solely relying on this benefit should they become disabled. And to make matters worse, CPPs definition of disability is, severe and prolonged. Meaning that you have to basically be disabled to the point where you're never going to work again. And it provides you nothing for short term disabilities.

Jason Pereira: The second form of coverage that many Canadians have is that of a mandatory workplace insurance program. These have different names from province to province. In Ontario, this coverage is provided through the Workplace Safety and Insurance board, or WSIB for short. This coverage is mandatory for certain occupations and employers that are obligated to pay the premiums. But not available to everyone, if you're not required to be a part of this program. This program is required by law for those that are. WSIB will provide disabled workers with up to 85% of their pre-tax wage, up to a maximum of $6,396, for 2020. It also comes with additional benefits, including worker retraining. One thing to be aware of, of this form of coverage, is that it only covers you while you're at work. Disabilities that are due to events that happen outside of your work hours are not covered. Leaving the average full-time Canadian worker covered by these programs, only covered for 40 hours per week.

Jason Pereira: Disability insurance is a type of coverage offered by most insurance companies. While most Canadians obtained this form of coverage through work, this type of coverage can be obtained individually for self-employed individuals or people who don't have this workplace coverage. Disability insurance will pay you an amount based on a percentage of your income, up to a maximum, depending on the policy terms. And the benefit will pay over a set number of years or up to age 65, in most cases. This form of coverage does protect you at all times, including those times outside of work. So let me stop here and say this to the viewers, if you do not have this type of coverage, go out and get it immediately. A disability is the most financially ruinous thing that could happen to an individual. For most of us, especially the younger ones of us, the ability to work is the single greatest valuable asset we have. So please take steps to protect it.

Jason Pereira: Every promise has some form of support benefit [inaudible 00:04:21] those who are disabled. In Ontario, we have the Ontario Disability Support Program or ODSP. It will pay a maximum of $1,971 per month, depending on your personal situation. This program is means tested, which means that it's a final fail safe for those who have limited income or assets. Because it does test your income and assets to see how much you would receive. In fact, if you have too much, you could lose all of it and receive nothing. We'll talk about this later with our guest.

Jason Pereira:Even if you were only partially disabled and still working, you may qualify for the federal disability tax credit. The DTC is an $8,416 credit that will reduce your tax bill by up to $1,262 per year. To qualify, you and your doctor have to apply for this by filling out a government form, a T2201. And if you previously qualified, but you didn't know about this, you can apply now and get up to 10 years worth of miss benefits all in one shot, if you are approved.

Jason Pereira: If you qualify for the disability tax credit, you will also qualify to open a registered disability savings plan, or RDSP for short. The RDSP is an account that will allow for a disabled person or caregiver to save up to $200,000, in order to help the disabled person later on in life, when they may need additional care. The funds can be invested and will grow tax sheltered to help build a bigger nest egg for that disabled person. This type of account is available to anyone under the age of 59 and comes with significant incentives to encourage savings. You got to be under 49 in order to get these incentives, but they're significant, as I said.

Jason Pereira: The first incentive, is provided by the Canadian Disability Savings Bond, or CDSB. This is a benefit paid to a disabled person's RDSP, if their income is below a threshold. That threshold is $31,000, for 2020. People below this income will receive $1,000 a year, just for opening the account, up to a lifetime maximum of $20,000. If you make more than that threshold, you will still receive some money. And that is on a decreasing scale until you earn more than 48,500.

Jason Pereira: The second benefit is the Canada Disability Savings Grant, or CDSG for short. The CDSG will match contributions to an RDSP, up to a lifetime maximum of $70,000. For household earnings less than 97,000, the match is three for one, for the first 500, and then two for one for the next 1,000. What that means is, is that a contribution of $1,500 will receive $3,500 back from the government as a match. For households where they're over $97,000, the match rate is one for one, up to a maximum of $1,000 per year. So 1,000 comes in, 1,000 is matched by the government. Combined, these programs will provide candidates with up to $90,000 in incentives for finding an RDSP. So if you qualify, be sure to take advantage.

Jason Pereira: RDSPs are meant to provide for income later in life. As such, the grant and the bond are subject to a ten-year clawback. That is to say, that when you take money out, if you received any grant or bond in the last 10 years, you could lose some, or all of it. Once you're clear of that 10 year rule, you can take out money at any time, without any penalty. But you must start taking money out no later than age 60, and you have to pay it out slowly in accordance with your life expectancy. When you make a withdrawal, it's partially taxable. Your principal's considered consider tax-free, but the grant and bond and growth are considered taxable to the beneficiary.

Jason Pereira: Now we've covered a lot pretty quickly here, and there's a lot more to take into consideration with these programs and other areas as well. To help us dive deeper into the subject, I've invited my friend and colleague, financial advisor, Guy Anderson, to the studio today to discuss these.

Jason Pereira: Today in the studio, as mentioned, I have my friend and colleague, financial advisor, Guy Anderson. Guy, thank you for joining me today.

Guy Anderson: Pleasure to be here.

Jason Pereira: So Guy, you've worked a lot in the space of planning for people with disabilities. There's been some recent news around disability planning altogether. Can you share that with us?

Guy Anderson: Well, the details are sketchy at this point, but in the throne speech just last week, Trudeau did announce a federally funded disability support program. Which is kind of interesting, because so far they've really only just been in this space of the disability tax credit and RDSP, up to this point. But it looks like this new disability support program has actually been modeled after GIS, a guaranteed income supplement. So the details are yet to come out, but it does look interesting. I do have some perspectives on this, in my experience, it seems that a lot of people who have disabilities, unfortunately also fall into this low income area, where they often do get guaranteed income supplement. So I think, ultimately, there's a lot of people on GIS already that have disabilities. So it's going to be very interesting.

Jason Pereira: So it might just be an extension of that to people who are under 60?

Guy Anderson: Yeah, it could be. But at the end of the day, it does look... It's going to be interesting to see what they come out with.

Jason Pereira: Yeah. And the mentions, it was modeled after GIS. Now, we did an episode on that program previously. But one of the key factors to GIS is that it's also income tested. So if you earn money from other sources, just like I mentioned with the provincial programs, you wouldn't get to keep both, right? They would take back some of it?

Guy Anderson: Correct, yeah.

Jason Pereira: Okay. So that brings up a very interesting point, like we just mentioned, income testing and means testing. Those are big issues when we talk about planning for people with disability. Can you explain what's involved there and how it impacts planning for disabilities?

Guy Anderson: Sure. I think one of the main considerations when it comes down to income and asset testing, obviously in Ontario, as you mentioned, the Ontario Disability Support Program, that's the main consideration when people with disabilities are looking at the income and asset test. Because as you mentioned, it is possible, that if you have too much income or too many assets in your name, you could either have your disability payments either clawed back or completely cut off. So ultimately those who are receiving Ontario disability support payments, their basic benefit is about $1,167 a month right now. So the basic coverage is about that.

Jason Pereira: Yeah, the number I gave was actually was enhanced for the maximum-

Guy Anderson: The maximum.

Jason Pereira: If you have children and other support needs, you can get the 16.

Guy Anderson: Right. And the amount I'm talking about is for an individual as opposed to a couple. So keeping it simple. If somebody earns $200 a month, they can keep all of that. But if they earn in excess of $200 a month, 50% of that income is actually clawed back. Sorry. Yeah, 50% is clawed back.

Jason Pereira: So to clarify what that means, at that level of income, normally someone would pay no tax. But if that person earns more than $200, let's say they earn another a hundred bucks. That's a 50% tax rate, technically. Because you're basically taking it back. And this is one of those weird artifacts in the tax code. When we give people on the low income of the spectrum, support payments. Often there's these tests, that actually result with much higher taxes, tax rates that are essentially higher than some of the wealthier people in this country. It's really distorted.

Guy Anderson: Right. And I like what you're doing there, you're calling it a tax. Because that's really what it is, it's a clawback, but it's a tax.

Jason Pereira: I don't care what you call it, if you have something and the government takes it away, it's a tax, right? They can call it whatever they want.

Guy Anderson: Right. And so the issue there is, that if somebody earns about $2,500 a month, their ODSP will effectively be fully clawed back. So the other aspect of that is the asset test. And right now the asset test is $40,000. So someone can have $40,000 [inaudible 00:12:26] and still qualify, up to $40,000, and still qualify for ODSP benefits. But it wasn't so long ago, that $40,000 limit was only $5,000.

Jason Pereira: So basically you have to be destitute. And I'm sure that led to countless people, keeping cash, money under other people's names, just to try to maintain their support payments. Because nothing's wrong... If you have $10,000, that's not exactly a huge cushion. But it's enough of a cushion that they would actually look at you and say, "You don't deserve this benefit anymore." I'm glad they changed it, let's just say that much.

Guy Anderson: Well me too. Because at the end of the day, like you've probably experienced, it led to a lot of planning strategies that ultimately, people tried to keep money out of the person with a disability hands. So that they don't show, they didn't have to show it. Because as soon as they went over, they would be disqualified and they would have to use their own personal assets, wind those assets down and then have to reapply.

Jason Pereira: That exposes them to potential theft from family members, any number of issues. I mean, I don't think anyone should have a problem with someone who's on these payments, who's disabled, and has no other income, maintaining a nest egg or emergency fund, of 30 to $40,000. I mean, that's not a small sum of money, but at the same time, for someone who can't work, that's not a large amount of money.

Guy Anderson: No. And given what rents are nowadays, it doesn't necessarily go that far.

Jason Pereira: No, it does not.

 Guy Anderson: So we're talking about some of the planning strategies that people would utilize to get around the ODSP clawback or-

Jason Pereira: Yeah, so to make sure you maintain the benefits you're entitled to.

Guy Anderson: Right. This ties into, I think our next topic, which is the Henson trust.

Jason Pereira: Yep. So that's a good point. So just to set you up for that one, let's talk about the challenges there. So we have an individual who's receiving these payments and we want to make sure they continue to receive these payments. Maybe they're a relative. I'm well off, I want to give them something. I want to give them money. Problem is that if I give them their inheritance, they're going to lose their benefits. So there are planning strategies. Can you explain how that one would work?

Guy Anderson: Let's take this back a few years because if a family member wanted to gift a person with a disability, even 5 or $10,000, whether in their will or otherwise. I mean, it would completely deny them the benefit of the ODSP. So back in the eighties, there was a creative family, Leonard Henson, what he did was, he created a trust for his daughter. So they created an absolute discretionary trust. And the benefit of that was that it gave the trustees flexibility as to who was to receive income, when, and how much. So in the eyes-

Jason Pereira: So it's not in their hands, they had no control over it. There was no predictable income stream from it. So how can you say that you shouldn't basically be entitled to the benefit.

Guy Anderson: Right, so in 1989, the courts ruled that the beneficiary, his daughter, did not have a claim to those assets. And henceforth, couldn't be used on the asset test when qualifying for ODSP.

Jason Pereira: That was interesting, because that was technically a loophole of that gentlemen found. But that loophole has now been enshrined in law as a right. Because Hensons trust actually exists within the tax code, as something that is specific and separate from those types of challenges to benefits. In fact, there was a recent court ruling in BC, where they tried to get to the money in the... Or to try to disallow a subsidy, that person was entitled to because of it. So, wonderful, smart planning strategy, that ended up, because it was for noble purposes, basically ended up being acceptable. So that's one aspect. Can you speak to the RDSPs? I mean, I was just talking to people about putting money aside for someone who's disabled. Are they exposed to this type of clawback?

Guy Anderson: Actually, good reminder there. No, when doing the asset test, that is the one product or one account, that does not count against either income or assets, in any of the provincial programs. So whether it's Ontario Disability Support or any other program across the country, the RDSP assets don't count against your eligibility for ODSP.

Jason Pereira: Good. Now what about gifts? If I want to give someone who's a family member, some sort of amount. Is there a threshold which I can give them that wouldn't affect this amount?

Guy Anderson: Yeah. I believe that's a $6,000 a month.

Jason Pereira: So I can still continue to support them, give them enough money to live a decent life, without basically forcing them to live a destitute life. And that's really what the problem was before, right? Was, if you're going to start losing benefits, if you have anything, you're basically forcing someone to destitution, it doesn't really make sense.

Guy Anderson: Exactly. And it used to be, and it kind of still is, that if someone paid for medical services directly and it didn't go through that person's hands, it didn't affect ODSP. But there are some flexibilities now.

Jason Pereira: And I think it's important to remember that we're not talking about wealthy people paying for disabled people's family members. I'm not talking about some billionaire doing this. I'm talking about the fact that, even people [inaudible 00:17:27] incomes and lifestyles. I mean, if you have a disabled child, who's adult, and needs support, even if you are on your pension, you're going to find ways to try to support them, right?

Guy Anderson: Absolutely.

Jason Pereira: And so putting people who are not of substantial means in a situation where they had to see their kids just be destitute to get any support, it's, what are we trying to accomplish here. And I'm glad that they solved that. And it seems like a lot of the, we mentioned earlier, the throne speech mentioning new programs, we know that the Henson trust was enshrined in law, these changes. So there seems to be a lot of progress being made on saying, "Okay, you're disabled. We shouldn't be punishing you, we should be supporting you."

Guy Anderson: Exactly.

Jason Pereira: So what other strategies or factors should we considered when planning for someone with disabilities? We talked about the wills. We talked about how much cash they can have. Anything else that we can do to potentially help?

Guy Anderson: Well, I think we can expand on the Henson trust a little bit here. Because there were some recent changes in the tax code. So originally when Leonard Henson set up the Henson trust, it was an inter-vivos trust.

Jason Pereira: So that means it was set up while you were alive.

Guy Anderson: Right. And the other type of trust is obviously, testamentary.

Jason Pereira: Testamentary, when you're dead, through your will.

Guy Anderson: So it goes through your will. So a number of years ago, the inter-vivos trust would have qualified for tax benefits, if the assets were retained in there. That was done away with a number of years ago, but even just recently, the Trudeau government did away with the tax benefits of even testamentary trusts. Hence forth any... Even Henson trusts, that were created through a will, lost some tax benefits or potentially lost some tax benefits. So coming back to a comment that you were talking about earlier is the disability tax credit. Now, if someone qualifies for the disability tax credit, which is completely different from qualifying for ODSP. But if they qualify for the disability tax credit, and there is a Henson trust created a will, that trust could qualify, as what's called a qualified disability trust. And that is to this day, the only trust that actually has any tax advantages to it.

Jason Pereira: Yeah. And we'll often hear the term, qualified disability trust, and Hensons used almost interchangeably. I find it's pretty common.

Guy Anderson: It is. But you can have a Henson trust that doesn't have the disability tax credit. So it's a little nuance. So the impact there though, is that if a trust is going to be taxed at the very highest rate, in Ontario, 53%. Then there's an incentive to pay out the distributions to the beneficiary. Because-

Jason Pereira: Because they probably have a lower-income.

Guy Anderson: Generally, but then the beneficiary, if they have too much income, they're going to lose their ODSP. So when you have a qualified disability trust, then there's more planning aspects to keep money in the trust, at a lower tax rate. And that benefits the individual, overall.

Jason Pereira: I mean, and all we're doing there is providing a tax break, so that people with disabilities can better support themselves through inheritances essentially, right?

Guy Anderson: Right.

Jason Pereira: So you touched upon an interesting point there, that didn't spend much time on previously. And that's the differences between definitions. So not everybody considers a disability, a disability, depending on [inaudible 00:20:32] severity. So can you speak to... Let's go down a list. Let's start off with, I already mentioned Canada pension plan. They think disability means essentially severe and prolonged, never going back to work. How does WSIB look at a disability?

Guy Anderson: So WSIB, that's the provincial program that is mandatory for certain sectors. Again, like you said, it has to be a work injury. It's not an illness that you caught outside of work, et cetera. And the qualifications there, I mean, they only cover up to 85% of your income. The other-

Jason Pereira: So basically, you get an injury at work that prevents you from doing that job essentially, is the definition of, you're disabled.

Guy Anderson: Yeah.

Jason Pereira: Okay. So then let's talk about, and then this one's a longer one, the private insurance. So I get something through my group benefits plan at work, or I buy something myself, how do they look at disability?

Guy Anderson: Well, there again, there's some qualifications. But at the end of the day, if you buy a private plan, any sort of disability should qualify. Whether it's an injury at work or an illness or otherwise, and you're not able to work. And it falls under the categories of the disability plan.

Jason Pereira: But there are different standards, for example, there's one where essentially it's own occupation. So if I can't do one specific job, then I'm disabled. There's ones [inaudible 00:21:54] similar. And the standard one or the default one, is any occupation. And the truth is, is that if you go beyond two years of disability, you're probably never going to work at any job, whatsoever.

Guy Anderson: Right. And to that point, I mean, sometimes it starts off with your own occupation, and then to any occupation, et cetera. So there are variances in that.

Jason Pereira: So the disability tax credit then, because I mentioned briefly, that you can still be working and qualify for this. So what qualifies you for the disability tax credit?

Guy Anderson: So the disability tax credit is for those who have a prolonged and severe illness or injury. There are eight qualifications that you would go through on the T2201 form with your doctor. And if you qualify based on any of those, you would qualify for the disability tax credit. So the point that you made earlier is that, you can still be working while receiving the disability tax credit. But if you're not, ultimately, and if you have low income and you're not actually paying taxes, the disability tax credit, because it's a credit and it goes against the taxes that you're required to pay. It may not actually be all that beneficial. But in order to qualify, yes, you're supposed to be severe and prolonged.

Jason Pereira: So you have to basically have income, in order to benefit essentially, taxable income. You have to have it to benefit.

Guy Anderson: Or you can shift it to another family member.

Jason Pereira: Yeah, a caregiver or something.

Guy Anderson: Exactly, yeah. But to that point, there are eight categories, prolonged and severe. But as you know, I mean, if someone has a disability, there's really no harm in applying. Whether you think it's severe or not, you and I both know that people wits various illnesses, that may-

Jason Pereira: I've seen diabetes. Anything that, to my understanding, [inaudible 00:23:31] the threshold I use is, do you have something that's medically different than normal? And is it requiring some sort of ongoing care? We had a client who partially amputated leg, but worked in white collar work and basically had never missed a day of work in her life, she qualified for it.

Guy Anderson: Right. And that's the thing, the disability tax credit is not a workplace-based disability-

Jason Pereira: It's a, you have some sort of impairment in life.

Guy Anderson: Right. And it's supposed to impair you from doing the daily activities of life.

Jason Pereira: Yeah, you have some something that prevents it. But yeah. I've seen some kids with ADD, severe case of ADD qualify for it. And I would say this much too, the piece of advice I give is, unfortunately they're pretty inconsistent in the application of this form. So I've even said, "Oh, you got rejected. Okay. Go back, clean it up, submit it again." Because I've seen the craziest things, where something got approved one year, you get rejected the next year. And something that got rejected one month, got approved the next month. So administrators will not necessarily all view it the same way, but just keep trying, if you have a valid claim.

Guy Anderson: And that goes to my point, there's really no harm in applying. Other than the fact that your doctor might charge you a fee to fill out the form.

Jason Pereira: Which they shouldn't. But fair enough.

Guy Anderson: At the end of the day, if you don't qualify, so you've lost the 60 bucks or whatever it is. And it's well worth your... I mean, your return on investment for $60, if you qualify, is by far the best return on investment ever. But if you don't qualify, like you said, you could possibly try again next year.

Jason Pereira: And like I said, if you qualified and it's retroactive and you just didn't know about it, or you didn't get approved last time. You can get up to 10 years worth of payments back. And we've seen people get over $20,000 returned to them in one check from the government.

Guy Anderson: That's incredible.

Jason Pereira: Well, pretty close to 20,000, more like 10, but nevertheless. Everybody wants that kind of check coming back to them. So, I mean, that qualifies you for the RDSP, so that takes care of that, and the Hensons trust. So, I mean, this is, as always we talk about it, there's a lot of complexity to planning. And disability, unfortunately, a lot these people don't have the money to reach out for help. So a lot of... There's some resources online, but in general, you can typically find an advisor who's a little bit versed on this, but don't assume the average advisor knows a lot about disability planning. Find ones who actually have some sort of background in it. So before we go, where can people find you?

Guy Anderson: Yeah, so my name's Guy Anderson. My company website is parkviewfinancial.ca.

Jason Pereira: Okay. Thank you very much for coming in today.

Guy Anderson: It's been my pleasure.

Jason Pereira: Thanks. And thank you for joining us yet again for The Wisdom Of Wealth. I hope we've helped educate you a little bit more on important financial decisions. As always, I'm Jason Pereira, thank you.