Chapter 3: Employment- and Education-Related Tax Measures

As noted in Chapter 1 on context, the Committee placed a high priority on promoting the inclusion of persons with disabilities through participation in education and employment. This objective is consistent with the federal government’s statement, outlined in the February 2004 Speech from the Throne, to building the base of independence for persons with disabilities through supports for education and skills development.

Canadians of working age with disabilities tend to have lower incomes than persons without disabilities. A key reason is that individuals with disabilities generally have lower levels of both education and employment than other Canadians.

Data from the 2001 Participation and Activity Limitation Survey show that only 51 percent of persons with disabilities ages 25 to 54 were employed, compared with 82 percent of persons without disabilities. The survey also indicated that, for the same age group, 46 percent of persons with disabilities had post-secondary education, compared with 57 percent of those without disabilities.¹

Canadians with disabilities are willing and able to make a positive contribution to society, and it is clearly in the national interest as well as their own that they be enabled to do so. In fact, the federal government recently embarked upon a National Strategy on Skills and Learning to ensure that all members of Canada’s current and emerging workforce are highly skilled and adaptable.

International studies also stress the importance of employment and education. The Organisation for Economic Co-operation and Development, for example, has stated that investment in human capital is at the heart of strategies to promote economic prosperity, fuller employment and social cohesion.²

However, persons with disabilities often face barriers in pursuing employment or education that leads to employment and full participation. In some cases, employers and educational institutions provide the supports necessary to respond to the special needs of persons with disabilities. In other cases, however, persons with disabilities must acquire these supports on their own. Either way, they typically must pay for some or all of these costs.

The government and the disability community have made the inclusion of persons with disabilities a key goal. To achieve this, it is essential that barriers to employment and education be reduced and eliminated, where possible. One of the Committee’s priorities was to ensure that the tax system recognize the additional costs that persons with disabilities face when they seek to participate in the labour force and in educational institutions. Such recognition is essential if the tax system is to help remove barriers to work and enable persons with disabilities to make their full contribution to society and lead fulfilled lives.

In this chapter, we examine how the tax system recognizes the costs of accommodating persons with disabilities in education and employment. We begin with the personal income tax system where we discuss how tax relief is provided when the cost is covered by individuals themselves with their own resources or government assistance. We believe that the funds to help pay for these supports should not be taxed.

Given the importance of this issue, we made it one of our first areas of study. In fact, we put forward an interim recommendation in January 2004 that a deduction be provided for the cost of disability supports purchased by persons with disabilities in order to pursue employment or education. Such a deduction helps ensure horizontal equity by treating a person with disability expenses in a similar fashion to a person without a disability who has the same net income.

We consider this recommendation to be a crucial part of our package to ensure greater fairness and opportunity to persons with disabilities, and we were pleased that the government accepted our interim proposal in its 2004 budget.³ This new measure and its proposed enhancements are described in more detail below.⁴ A key feature of the deduction for disability supports is that it ensures that government assistance for students with disabilities to help them acquire disability supports for education is not subject to tax.

The Committee sought not only to improve tax recognition for the cost of disability supports, but also to improve the awareness of these measures. For example, many disability supports are recognized under the medical expense tax credit. But persons with disabilities and their caregivers may not seek tax relief under this measure because they are not aware that they can claim some disability-related expenses. We believe that changing the name of this credit to the ‘medical and disability expense tax credit’ would improve awareness, and we make a recommendation to that effect.

We also recommend that the Department of Finance and the Canada Revenue Agency gather research data on the medical expense tax credit. It has been the fastest-growing tax measure delivering health-related tax relief to taxpayers, including persons with disabilities.

With respect to employment, a significant component of the federal tax system is the refundable medical expense supplement. The supplement provides some financial aid to low-income workers with above-average medical expenses, including persons with disabilities. The measure addresses, to a limited extent, the important issue of the loss of support from social assistance when persons with disabilities try to move off this income program to enter the workforce. As their income rises, they frequently lose their eligibility for income-tested disability supports and health benefits and end up paying for these items on their own. After reviewing the measure, we recommend that the supplement be enhanced to give more support to low-income workers with high medical expenses.

The Committee also reviewed the provisions for accommodating persons with disabilities within registered education savings plans. These plans provide tax-assisted savings to enable families to put aside money for post-secondary education for their children. In this chapter, we suggest improvements to the registered education savings plans rules to better reflect the special needs of students with disabilities.

We also reviewed the present tax incentive for employers relating to the cost of accommodating the special needs of persons with disabilities. Given the lack of awareness of these measures, we recommend that this information be publicized more broadly. New measures to stimulate the entry of persons with disabilities into the labour market by increasing the probability of their receiving required accommodation should be considered in the longer term.

We conclude this chapter by discussing the tax treatment of disability pension income that individuals receive when they have to leave the labour force because of disability. This discussion is in response to a request from the House of Commons Standing Committee on Human Resources Development and the Status of Persons with Disabilities, which recommended in its June 2003 report, Listening to Canadians: A First View of the Future of the Canada Pension Plan Disability Program, that we examine the taxation of Canada Pension Plan disability benefits.

In some cases, employers will cover the costs of accommodating the needs of employees with disabilities. Generally, these benefits are non-taxable to the employee.

However, in many cases persons with disabilities themselves may have to purchase disability supports, such as sign language interpreters and talking textbooks, in order to overcome barriers to their participation in education or employment. Some pay for these supports from their own income, while others receive financial assistance from governments or other sources, such as private insurance companies.

A fair tax system attempts to ensure that individuals in similar circumstances pay similar amounts of tax. Current tax credits for persons with disabilities recognize that these individuals (and those who care for them) face additional disability-related expenses, thereby reducing their ability to pay tax.

Going further and recognizing these costs relating to securing employment and training through a deduction in the tax system would ensure that individuals who purchase disability supports for these purposes — either with government assistance or with their own income — pay no more tax than persons with the same net income (after disability costs) who do not need to purchase these supports. At the same time, however, these tax measures are not intended to reimburse individuals for costs they incur.

Until recently, persons with disabilities could receive limited tax relief for the cost of disability supports for employment and education only through the attendant care deduction or the medical expense tax credit.

This deduction recognized the costs incurred by taxpayers eligible for the disability tax credit who required attendant care in order to earn business or employment income or to attend school. The attendant could not be a spouse or common-law partner and had to be 18 years of age or older.

The deduction was limited to the lesser of the qualifying amounts paid to the attendant and two-thirds of the taxpayer’s earned income. For those attending school, the maximum deduction was two-thirds of the taxpayer’s earned income plus two-thirds of the lesser of (a) the taxpayer’s income from other sources (up to $15,000) and (b) $375 times the number of weeks of attendance at the designated educational institution or secondary school.

As discussed later in this chapter, as a result of an interim recommendation made by this Committee, the March 2004 federal budget proposed a disability supports deduction that will subsume and greatly expand the attendant care deduction.

The medical expense tax credit recognizes the effect of above-average medical expenses on an individual’s ability to pay tax. For 2004, the credit equals 16 percent of qualifying medical expenses in excess of the lesser of $1,813 and 3 percent of net income. The net income threshold is used to determine above-average expenses. There is no upper limit on the amount of eligible expenses that may be claimed.

Many expenses that persons with disabilities incur for education or employment are eligible for the medical expense tax credit, including tutoring for persons with learning disabilities, sign language interpreter fees and talking textbooks.

This measure and the Committee’s associated recommendations are discussed in greater detail later in the chapter.

Students with disabilities may also receive tax relief through the tuition and education credits as well as the $3,000 exemption for scholarship and bursary income.

In the case of the education credit, part-time students with disabilities can claim the full-time education amount ($400 per month) for each month of part-time study at a post-secondary educational institution or occupational training program certified by the Minister of Human Resources and Skills Development. Eligible students include those who qualify for the disability tax credit and those who cannot reasonably be expected to enrol full time because of a certified mental or physical impairment. In order to be eligible for the education credit, the student’s program must be at least three weeks long and involve at least 12 hours of course work per month.

In reviewing these measures prior to making its interim recommendation, the Committee determined that they do not always provide full tax recognition of the cost of disability supports. This issue is of particular concern with respect to the medical expense tax credit:

• Given that only expenses in excess of the medical expense tax credit threshold are recognized (i.e., the lesser of 3 percent of net income and $1,813), the portion of expenses below the threshold does not qualify for relief.

• If grants used to purchase disability supports are included in net income, as they would be when tax recognition is provided under the medical expense tax credit, such inclusion may affect the receipt of income-tested benefits, such as the GST credit and the Canada Child Tax Benefit.

• Because the medical expense tax credit is a credit, it offsets tax owing at the lowest tax rate (i.e., 16 percent). It is thus worth the same amount to taxpayers in all tax brackets. The medical expense tax credit, however, does not completely offset the tax owing of higher-income taxpayers on the income used to purchase disability supports.

As a result, some persons with disabilities may pay tax on the income they use to purchase disability supports.

These shortcomings of the pre-2004 budget system underscore a related problem highlighted in some of the submissions to the Committee. The Prince Edward Island Association for Community Living, the Autism Society of Prince Edward Island, the Canadian Hearing Society, ARCH: A Legal Resource Centre for Persons with Disabilities and Disability Services of the University of Manitoba all raised the issue of the tax treat-ment of government assistance for disability supports. This concern was also identified by the Opportunities through Work and Rehabilitation Society in its submission to the Committee.

In addition to general assistance provided to students (e.g., Millennium Scholarships, Canada Student Loans), the federal government makes available two grants to financially assist post-secondary students with disabilities.

• The Canada Study Grant for Students with Permanent Disabilities is worth up to $8,000 and is intended to fund education expenses to accommodate the special needs of persons with disabilities such as tutoring, sign language interpreters and note takers.

• The Canada Study Grant for High-Need Students with Permanent Disabilities is intended for students with disabilities who demonstrate financial need. It is worth up to $2,000 and is intended to fund educational costs such as tuition, books and supplies, and living costs.

The 2004 federal budget introduced a change to the Canada Study Grant for High-Need Students with Permanent Disabilities. This grant will now be paid up front, meaning that the grant will be provided first, and student loans will be intended for financial needs in excess of the grant. The new up-front grant will be available to students with disabilities who qualify for student loans.

These grants are administered by provincial and territorial governments.

Generally, government assistance for education and occupational training received as a bursary, scholarship or employment benefit under Employment Insurance is included in income. This practice applies as well to bursaries that enable persons with disabilities to purchase supports for education (e.g., hire a sign language interpreter). Some grants paid from the federal Opportunities Fund, depending on their nature, may also be subject to income tax.⁵

The existing tax credits provide relief from this taxation, although there are cases where this relief is incomplete. Prior to the introduction of the disability supports deduction, the result was that many individuals who received government assistance to help with the cost of disability supports ended up paying some tax on this assistance. Even though individuals might get government assistance intended to cover the full cost of supports, these individuals still had to pay a portion of the expenses from their own pocket.

The Committee supports very strongly the principle of non-taxability of government assistance for disability supports. A direct cash transfer intended for the purchase of a technical aid or special service is not a payment like wages or other earnings; it is a transfer paid in respect of a disability support. When recipients must pay income tax on this cash benefit, its real value decreases even though the cost of the item or service for which it was intended remains the same.

Many of the organizations that raised this issue in their submissions suggested that the government exclude from taxation any benefits paid in respect of disability supports. The Committee recommended instead, prior to the 2004 federal budget, that disability supports purchased for purposes of employment or education be fully deductible, in a manner similar to that of attendant care expenses.

To recognize the cost of required accommodation for persons with disabilities, the Committee recommended prior to the March 2004 federal budget that:

The March 2004 budget implemented this proposal by introducing a disability supports deduction. The measure has an estimated cost of $15 million annually.

This deduction addresses the issue of taxability of disability supports. By allowing the full deduction of such costs, the funds used to purchase these items are excluded entirely from the computation of net income for tax purposes. This new measure ensures that persons with disabilities do not have to pay tax on the benefits (from whatever source) they use to purchase these supports, and that this income will not affect income-tested benefits (see example).

Thomas is a student living in New Brunswick who has a taxable income of $17,000 (composed of scholarships and earnings from a part-time job). He has a severe hearing impairment and needs a sign language interpreter in order to attend university. He received an additional $5,000 from a Canada Study Grant for Students with Permanent Disabilities that he uses to purchase sign language interpretation services to go to class, giving him a total income of $22,000 subject to tax.

Prior to the introduction of the disability supports deduction, Thomas would have had only partial recognition of his sign language interpreter costs under the medical expense tax credit. As a result, he would have paid $170 (net) from his own pocket to cover the income tax liability on his $5,000 grant. If Thomas had been eligible for income-tested benefits, such as the GST credit, he might have had to pay even more since the amount of the credit would have been reduced as a result of the grant being treated entirely as personal income.

With the new disability supports deduction announced in the 2004 federal budget, Thomas will be able to deduct from his total income the full amount of the grant he received to pay for the sign language interpreter fees. Thomas’ taxable income will remain $17,000, which means that he will pay no income tax on the government assistance he received in respect of the interpreter services and his eligibility for income-tested benefits will not be affected.

In addition, a deduction treats equally those persons who receive assistance for disability supports and those who do not. It recognizes the cost of disability supports for employment or education regardless of the source of income used to pay for them, and thus grants relief for those who must pay for such aids from their own resources.

The disability supports deduction recognizes disability expenses for purposes of employment and education more completely than its predecessor, the attendant care deduction. First, the disability supports deduction recognizes more eligible expenses than attendant care. Second, the disability supports deduction allows persons with disabilities to deduct expenses for disability supports, up to the taxpayer’s total earned income. The attendant care deduction was limited to two-thirds of the taxpayer’s earned income.

Finally, the attendant care deduction required that taxpayers be eligible for the disability tax credit to claim the deduction. The disability supports deduction, by contrast, requires only that the need for some eligible expenses be certified by a medical practitioner.

It is therefore available to all persons who require disability supports and not only to those eligible for the disability tax credit.

Following are the provisions of the disability supports deduction as stated in the 2004 federal budget.

In the case of an employee, the deduction generally will be limited to the lesser of the amounts paid for eligible expenses and the taxpayer’s earned income. A similar limit also applies to students, except that they can also claim the deduction against some other income, based on the length of their education program.

The disability supports deduction will recognize amounts paid for:

• Sign language interpretation services

• Real-time captioning services

• Teletypewriters and similar devices

• Devices to be used by blind individuals in the operation of a computer

• Optical scanners and similar devices

• Electronic speech synthesizers

• Note-taking services

• Voice recognition software

• Tutoring services

• Talking textbooks

• Attendant care

The need for some of these supports must be certified by a medical practitioner. For more details, please see The Budget Plan 2004, pp. 324—326.

Unlike the attendant care deduction, individuals will not have to be eligible for the disability tax credit in order to claim expenses under the disability supports deduction.⁶

Expenses claimed under the disability supports deduction will not be claimable under the medical expense tax credit. Persons who purchase disability supports for purposes other than education or employment will still be able to claim them under the medical expense tax credit.

We were pleased that the government responded positively to our recommendation by proposing in the March 2004 budget to replace the attendant care deduction with a broader disability supports deduction that will recognize attendant care as well as other disability supports expenses incurred for education or employment purposes.

We view the new disability supports deduction as an important and strategic part of efforts to improve the fairness of the tax treatment of persons with disabilities and enable their participation in the labour market.

While the Committee applauds the government’s initiative in this area, we believe that some key disability supports have been overlooked. We consider that the proposed deduction could be improved further by including more disability-related expenses.

The Committee considered recommending the addition of an extensive list of expenses for the purposes of this deduction. This expansion could have been achieved either by adding specific expenses to the current list eligible for the deduction or by replacing this list with broad categories of expenses (e.g., personal supports and computer access technology), with a set of examples for each category. Under the latter approach, examples would be used for illustrative purposes only, and the principles would be inclusiveness and openness to emerging services and devices.

Due to cost considerations, however, we decided to focus initially on adding specific disability supports that are used strictly for the purposes of employment and education. Examples of expenses that we recommend be added to the current list include personal supports, such as job coaches and readers, and technical devices such as Braille note takers, page turners, print readers, voice-operated software, memory books and assistive devices used to access computer technology.

Going forward, the government should consider adding to the list of expenses eligible for the deduction other expenses that enable persons with disabilities to participate in education and employment. The objective would be to include all disability supports (personal supports, equipment and technical aids) designed specifically to assist the participation of persons with disabilities in employment and education.

To further improve the disability supports deduction, the Committee recommends that:

We estimate that this improvement would cost $5 million annually.

As noted, the Committee favoured the principle of excluding support for disability aids from income. We were informed by the government that the only grants subject to income tax were those for employment and education. The introduction of the disability supports deduction puts in place a mechanism to ensure that government assistance used to pay for disability supports will no longer be taxed.

The Committee also felt strongly that persons with disabilities should be able to deduct from income the cost of disability supports used for education and workforce participation and paid for from their own resources.

With the introduction of the disability supports deduction, government assistance to purchase disability supports effectively will be non-taxable (i.e., the deduction offsets the inclusion in income of any assistance for disability supports). The Committee suggests that if, in future, cases are identified in which government assistance used for disability supports is subject to tax, the government should take immediate steps to rectify the situation.

Although government assistance in respect of supports should ultimately not be subject to tax, in some cases taxes may be withheld on grants. Even though under the new provisions such taxes ultimately will be refunded, the deduction of tax at source is inconsistent with the principle of non-taxability of disability supports.

When individuals are provided with funding for a disability support, initially they may receive less than the full amount of the grant. They are, in effect, being asked to shoulder part of the cost of the disability support until they fill in their tax return and receive a refund. This process can take months — which is particularly problematic for persons with disabilities who tend to have lower incomes.

The Committee feels that taxes should not be withheld at source on grants intended for disability supports that ultimately will not be subject to tax. This issue is complicated by the fact that a number of jurisdictions and different programs may be involved. The Canada Revenue Agency is currently examining the problem. The Committee suggests that if instances where taxes are being withheld on grants that are ultimately not included in net income are discovered, the government should remedy the situation.

The medical expense tax credit (METC) recognizes the effect of above-average medical or disability-related expenses on the ability to pay tax.

Of all the tax measures delivering relief to persons with disabilities, the medical expense tax credit has been the fastest growing. The continual expansion and updating of the list of expenses eligible under the medical expense tax credit, together with growth in the use of prescription drugs and other health aids, mean that both the number of claimants and the cost of the measure have increased steadily over the past decade. As with almost all other tax measures, only a small percentage of claims for the medical expense tax credit is reviewed before they are allowed. This practice contrasts with claims for the disability tax credit, all of which are reviewed prior to being granted.

The number of taxpayers claiming the medical expense tax credit and who have expenses over the required threshold (the lesser of 3 percent of net income and a set dollar amount) has more than tripled since 1988 (see Figure 3.1).

Source: Department of Finance

The medical expense tax credit provided $575 million in tax relief to Canadian taxpayers in 2001. As Figure 3.2 illustrates, the tax expenditure on the medical expense tax credit underwent an almost five-fold increase from 1988 to 2001. The Department of Finance projects that the amount of tax relief provided under the medical expense tax credit will increase to $765 million in 2004.

The medical expense tax credit provides relief to all taxpayers incurring above-average medical expenses. Although the credit may be claimed by anyone, it plays an important role in recognizing disability-related expenses, as many of the eligible expenses it recognizes are incurred by persons with disabilities.

Source: Department of Finance

In 2001, the average medical expense tax credit claim for individuals and families making a claim for the disability tax credit was almost five times as high as the average claim for individuals and families with no claim for the disability tax credit (see Table 3.1). Further, individuals and families that had a disability tax credit claim were more than twice as likely to make a claim for the medical expense tax credit than individuals and families that had made no claim for the disability tax credit. This discrepancy was even larger for individuals and families with an individual eligible for the disability tax credit who was under age 65.

Nonetheless, families that had a disability tax credit claim comprised only about 5 percent of the total population of medical expense tax credit claimants.

Source: Department of Finance

It was brought to our attention that the federal government often characterizes the medical expense tax credit as a measure for persons with disabilities and includes this credit when estimating tax expenditures for persons with disabilities. The Committee objects to this characterization since the medical expense tax credit offers tax relief to all taxpayers, not only those with disabilities. We would therefore suggest stopping the practice of including the medical expense tax credit when calculating tax expenditures for persons with disabilities.

While the disability supports deduction addresses many of the shortcomings of the medical expense tax credit from the perspective of students and workers with disabilities, there is still one outstanding issue. A number of persons with disabilities and their caregivers are unaware that they can claim many disability-related expenses under the medical expense tax credit. Indeed, many of the expenses recently added to the list eligible for the medical expense tax credit would be incurred only by persons with disabilities or their caregivers.

We agree with the submissions to our Committee on the issue of awareness of the credit. We believe that changing the name of the credit will result in greater awareness of the availability of the medical expense tax credit to recognize certain disability-related costs.

The Committee recommends that:

There is no cost associated with this recommendation.

The medical expense tax credit recognizes both above-average medical expenses and disability-related expenses. The Committee has found that generally there is little data available on the actual expenses claimed under this credit. This is a concern, particularly since the medical expense tax credit has been the fastest-growing tax measure that provides relief to persons with disabilities, among others.

The design of the present credit is also a subject of some question. Only expenses in excess of the lesser of 3 percent of income and $1,813 are claimable for the credit. However, expenses can be claimed by a spouse or common-law partner (with a lower, but taxable, income) so as to maximize the claim.

It is important to have reliable information about the medical expense tax credit in order to undertake periodic reviews of the measure, and the Committee believes that such data should be gathered. More specifically, there are concerns as to whether the expenses claimable under this provision include some costs that may be considered personal or optional, such as non-essential elective cosmetic surgery, designer eyeglasses, rejuvenation or spa treatments, and similar items.

The Committee recommends that:

The estimated cost of this recommendation is nominal.

The 1996 Federal Task Force on Disability Issues emphasized the need to reduce the disability-related costs that create barriers to the full participation of persons with disabilities. In response to the Task Force’s recommendations, the government announced a number of measures in the 1997 federal budget.

One of the issues highlighted by the Task Force was that individuals might lose all medical- or disability-related supports provided by governments when they go off social assistance or other disability income programs, which can be a significant disincentive to enter the labour force. To address this issue, the 1997 federal budget introduced the refundable medical expense supplement.

For 2004, the maximum refundable medical expense supplement is 25 percent of the allowable portion of expenses that can be claimed under the medical expense tax credit plus 25 percent of the amount claimed under the disability supports deduction announced in the March 2004 federal budget, up to a maximum of $562.⁸ To ensure that the supplement is targeted to persons entering or in the labour force, it is available only to workers with earnings from employment or self-employment above $2,809.⁹

Unlike most other credits, it is refundable — which means that individuals who do not have tax owing can benefit as well. If a worker’s refundable medical expense supplement exceeds his or her net federal tax, the worker receives the difference. The refundable medical expense supplement is targeted toward those with low incomes, and is reduced by 5 percent of family income in excess of $21,301.¹⁰

The supplement benefited more than 300,000 Canadians in 2001 and is projected to provide $70 million in assistance in 2004. Table 3.2 shows that both the number of beneficiaries and the cost of the refundable medical expense supplement have increased steadily (approximately doubling) since its introduction in 1997.

Source: Department of Finance

The Committee believes that the existing supplement has been a positive influence in enabling low-income Canadians with significant medical and disability costs to enter or re-enter the labour force. We also feel that an enrichment of this credit would further benefit many low-income workers and, more generally, Canadian society by encouraging workforce participation where possible.

The existing supplement could be augmented by raising the percentage of allowable expenses on which the benefit is based, say from 25 percent to 35 percent. However, greater federal assistance for a portion of out-of-pocket medical and disability costs for low-income Canadians could raise questions about appropriate federal and provincial roles with respect to the costs of health and disability supports.

Alternatively, the net family income threshold at which the supplement begins to be clawed back could be increased. But, in our view, the existing threshold seems high enough to cover the range at which individuals typically lose social assistance and other benefits.

The Committee considers that the best way to strengthen the existing credit is to increase the maximum claim, thus benefiting workers with substantial medical and disability costs, and without changing the overall structure of the program. Enhancing the maximum amount of the refundable medical expense supplement from $562 to $1,000 would allow these individuals to receive greater support (see example).

The Committee recommends that:

The estimated cost of this recommendation is $20 million per year.

Melanie needs to purchase disability supports in order to mitigate the effects of her disability (these supports are required for everyday life, not necessarily for employment). The cost of these supports used to be covered by the provincial government when she was on social assistance. She recently began working at a job that pays $18,000 a year, but her employer does not provide a health plan that covers the cost of her supports. Melanie now has to pay for the supports herself, which cost $4,500 a year.

Currently, Melanie would receive the maximum $562 from the refundable medical expense supplement. She would also receive $634 in federal tax relief under the medical expense tax credit as well as some provincial tax relief. However, the significant amount of her disability-related expenses could cause her to consider giving up her job and going back on social assistance.

Increasing the maximum amount of the federal refundable medical expense supplement to $1,000 would allow Melanie to receive $990 from the refundable medical expense supplement, which is the full 25 percent of her expenses in excess of 3 percent of her income. This change represents a tangible improvement in her financial situation and helps ease the transition from social assistance to employment. She would continue to receive $634 in federal tax relief under the medical expense tax credit as well as some provincial tax relief.

Many students with disabilities receive help from their families to cover the cost of post-secondary education. The government provides a tax-assisted savings vehicle, known as registered education savings plans (RESPs), to help families save funds for the post-secondary education of designated children.

The rules for registered education savings plans allow a family to contribute up to $4,000 a year for a child, to a lifetime limit of $42,000 per child. Since 1998, through the Canada Education Savings Grant (CESG) program, the federal government has supplemented private savings in registered education savings plans: the first $2,000 contributed each year to a registered education savings plan for a child attracts a 20 percent Canada Education Savings Grant.¹¹ Generally, once the registered education savings plan is established, contributions can be made for 21 years and the plan generally must be wound up no later than the 25th year after it was established.

Contributions to registered education savings plans are not tax deductible. However, investment earnings on contributions can grow tax-free until they are distributed, at which point they are included in the recipient’s income and taxed accordingly. In most cases, the recipient is a student whose total income (net of tuition and other claims) results in a minimal amount of tax.

Registered education savings plan funds can be withdrawn without penalty to pay for the costs of a full-time qualifying educational program. In order to qualify, an educational program must last at least three consecutive weeks, and must require a student to spend no less than 10 hours per week on courses or work in the program.

The program must be at the post-secondary school level. A post-secondary educational institution includes:

• a university, college or other designated educational institution in Canada;

• an educational institution in Canada certified by the Minister of Human Resources and Skills Development as offering non-credit courses that develop or improve skills in an occupation; and

• a university, college or other educational institution outside Canada that has courses at the post-secondary school level, as long as the student is enrolled in a course that lasts at least 13 consecutive weeks.

The registered education savings plan rules already include one special disability-related provision. Students with disabilities do not have to be registered full time at a qualifying post-secondary institution in order to benefit from a registered education savings plan.

However, students with disabilities often have special needs that must be accommodated in order to pursue post-secondary education. Doing so may involve additional costs, require access to a broader range of educational programs or require more time in order to begin or complete a post-secondary program. The Committee therefore recommends two measures to make registered education savings plans a more useful vehicle for the support of the education of students with disabilities. For the purposes of these measures, consideration must be given to defining the period of time that the child must be deemed to have a disability in order to qualify for these special treatments.

To address the special needs of students with disabilities, the Committee recommends that:

The estimated cost of these measures is nominal.

The tax system provides additional recognition of capital expenses incurred by businesses to accommodate the special needs of persons with disabilities, whether as customers or employees. Usually, capital expenses such as purchasing a piece of equipment or making alterations to a building cannot be fully deducted from business income in the year these costs are incurred. Instead, these expenses are written off over a number of years under the Capital Cost Allowance system as the asset depreciates.

By contrast, the capital expenses to accommodate the special needs of persons with disabilities are fully deductible in the year they are incurred (see box for list).

Eligible expenses include:

• renovations or alterations to a building to enable individuals with a mobility impairment to gain access to the building or to be mobile within it (e.g., the installation of interior and exterior ramps, hand-activated electric door openers and modifications to bathrooms, elevators or doorways);

• elevator car position indicators for individuals with a visual impairment;

• visual fire alarm indicators;

• listening devices for group meetings;

• telephone devices for individuals having a hearing impairment; and

• disability-specific computer software and hardware attachments.

Allowing full deductibility of these expenses encourages businesses to make these socially and economically important investments. The businesses receive in one year the tax relief they normally would get over many years, resulting in a reduction in the effective after-tax costs of their accommodation expenditures. However, decisions about investing in accommodation measures are not exclusively influenced by tax considerations.

Despite this favourable tax treatment, the Committee is concerned that it is not known whether businesses are taking advantage of these provisions in a significant way, perhaps due to lack of awareness. The Committee believes that steps should be taken by the Canada Revenue Agency to make businesses more aware of these provisions so that more investments are made to accommodate the special needs of persons with disabilities in the workplace and in the community.

The Committee recommends that:

The estimated cost of this recommendation is nominal.

The Committee also considered whether any additional incentive should be offered to businesses to induce them to hire qualified persons with disabilities. Federal funding to encourage the employment of persons with disabilities is currently provided through the federal-provincial-territorial Multilateral Framework for Labour Market Agreements for Persons with Disabilities (a framework whereby the federal government grants funding to support employment assistance programming for persons with disabilities delivered by provincial governments) and the federal Opportunities Fund. Both the Opportunities Fund and some provincial programs pay wage subsidies.

We noted with interest the Work Opportunity Tax Credit in the U.S. tax system. This non-refundable credit is intended to increase the employment and earnings of workers belonging to certain disadvantaged groups that have consistently high unemployment rates by providing employers with an incentive to hire and retain these workers.

Persons with disabilities (defined as persons with a physical or mental disability that results in an impediment to employment) are one of the targeted groups. For their employer to be eligible for the credit, persons with disabilities must be referred to the employer upon completion of, or while receiving, rehabilitative services by a state employment security agency. The amount of tax relief that employers receive depends upon how long they retain the employees and the level of wages they pay.

The Work Opportunity Tax Credit is, in effect, a wage subsidy. Wage subsidies can be delivered either through the tax system (i.e., a credit like in the United States) or through a separate program as is done in Canada. Because the tax system is a blunt instrument, it may not be the most appropriate delivery mechanism for a wage subsidy. Unlike a focused program, the tax system cannot easily be tailored to individual circumstances.

For example, one concern with using the tax system is the fact that it is not well suited to handling complex eligibility criteria. The Work Opportunity Tax Credit addresses the question of eligibility by basing it on participation in rehabilitation service programs. In short, the tax credit relies on the eligibility criteria established by the rehabilitation programs.

The disability tax credit could act as a readily available eligibility screen for a similar tax incentive in Canada. Allowing only employees who are eligible for the disability tax credit to qualify for the purposes of such a credit, however, may be subject to some question. Although other eligibility criteria could be developed, this change would increase the complexity of the tax system.

The tax system also has more limited reach than other programs. Small and medium-sized businesses and the voluntary sector are important employers of persons with disabilities. However, if the wage subsidy were delivered through the tax system, many of these organizations might not benefit from the credit. Small and medium-sized businesses that do not have tax payable could not take advantage of the credit. Neither could charities and non-profit organizations, which are exempt from tax.

Despite these caveats, the Committee believes that a wage subsidy delivered through the tax system similar to the U.S. tax credit, under which employers would receive tax credits to offset the possibly higher costs involved in employing persons with disabilities, warrants investigation. More specifically, work is needed to determine whether such a measure would be a cost-effective way of providing an incentive to employers to consider the employment of additional persons with disabilities, and complement the proposed measures to enhance the ability of individuals to seek and fill such positions. To be cost-effective, such a program would need to adhere to a number of important conditions:

• Credits would be available only to employers who hire persons with disabilities for positions that do not displace other workers.

• Eligibility for the credit would require that the person with the disability be employed for a designated minimum length of time.

• The program would apply only to the hiring of persons with severe mental or physical disabilities, such as those currently eligible for the disability tax credit.

• The employer would have to provide appropriate standards of accessibility to the workplace.

• The program would have to fit in with existing government programs that provide wage subsidies and other types of employment and income supports for persons with disabilities.

The Committee recommends that:

The previous sections of this chapter focused on encouraging the entry into the labour force of persons with disabilities. Unfortunately, some individuals must leave the labour force because of a disability. Many of them then receive some degree of income replacement from private or public sources. This section discusses the tax treatment of this income.

Currently, disability benefits paid by the Canada Pension Plan (CPP)¹² are taxable, as is the case for retirement benefits under those plans. At the same time, tax relief is provided for employee contributions to the plans through a non-refundable tax credit. Tax relief is offered to employers through a deduction. Disability benefits under the CPP are payable only until age 65, when regular retirement benefits begin.

In 2003, the House of Commons Standing Committee on Human Resources Development and the Status of Persons with Disabilities identified its concern about the taxation of Canada Pension Plan disability benefits, particularly in light of the fact that some other forms of income replacement for individuals who leave the workforce because of a disability are not taxed. The Standing Committee recommended that our Committee examine how best to adjust CPP contributions deducted for tax purposes in order to remove amounts paid in respect of disability benefits and thereby eliminate the taxation of these benefits.¹³

There is a tax policy rationale for the current tax treatment of Canada Pension Plan disability benefits. CPP contributions are a work-related expense that reduces an employee’s ability to pay tax as well as a legitimate business expense for employers. It is therefore appropriate to provide tax relief on these contributions.

At the same time, benefits from the Canada Pension Plan, like benefits from an employer pension plan or registered retirement savings plan (RRSP), are forms of earnings replacement that increase ability to pay tax and thus are treated like other forms of income. The tax treatment of the Canada Pension Plan is analogous to the tax treatment of employer pension plans and registered retirement savings plans: tax relief is provided on the contributions and withdrawals from the plans are taxed.

In effect, the tax on the contributions is deferred until money is withdrawn from the plan. (Further, the present treatment of CPP disability benefits is similar to private sector disability pension plans in which the employer pays part of the cost: the employers’ contributions are deductible and the benefits are taxable.)

As noted by the Standing Committee, the current treatment of CPP disability benefits contrasts with some other forms of income replacement or support for persons with disabilities. For instance, two other forms of benefits — social assistance and workers’ compensation — are non-taxable.

Social assistance payments are non-taxable because they are recognized as payments of last resort and since they are needs-tested, are already reduced as the individual earns income from other sources. Workers’ compensation benefits have always been non-taxable because these programs were in place before the income tax was introduced. Making workers’ compensation benefits taxable would require a major overhaul of their benefit and premium structure.

Under private sector insurance arrangements, disability benefits are paid under a variety of plans, subject to a range of conditions and terms. Where the employer contributes to the premiums for the plans, the payor generally obtains a tax deduction for the payment, but benefits paid under such arrangements are taxable.

Where the employer does not contribute to the cost of the plan, the employee obtains no tax relief for the premiums, but the benefits themselves are not included in income for tax purposes.¹⁴ This practice is consistent with the principle noted above for the Canada Pension Plan. If tax relief is provided for contributions, the benefits are taxable. When no tax relief is provided on the contributions, the benefits are not taxable.

The Standing Committee’s suggestion to make Canada Pension Plan disability benefits non-taxable raises a number of complex issues. More specifically, such a change would depart from a position of tax equity, as non-taxable payments would be permitted from a plan where the contributions previously had been granted tax relief. Such treatment would be inconsistent with the general approach to tax-sheltered savings.

Even if the premiums for Canada Pension Plan disability coverage were not accorded tax relief, and the disability benefits were made non-taxable, there would be transitional issues. In the short term, individuals would be receiving non-taxable benefits based on contributions for which they received tax relief. Moreover, the non-taxation of benefits would provide little or no benefit to low-income persons with disabilities — as they are paying little tax — while it would allow higher benefits to Canada Pension Plan disability beneficiaries in higher-income tax brackets.

In addition, there is no basis to deny a deduction to employers for their contributions to the disability portion of the CPP. This issue might be resolved, at the cost of some complexity and huge transitional issues, by dividing the present CPP contributions between those related to disability and other benefits, and having the entire cost of the disability benefit paid for by the employee on a non-deductible basis.

Finally, making Canada Pension Plan disability benefits non-taxable may also require provincial consultations as this change might entail amendments to the Canada Pension Plan financing arrangements. While the Committee recognizes the concerns of the Standing Committee and the community on this issue, we are not able to recommend a general solution that would be preferable to the existing position.¹⁵

Most private sector disability plans contain offset clauses, under which the full amount of benefits otherwise payable under such plans for disability is reduced by the amount of the disability benefits the recipient receives from the Canada Pension Plan. However, many private insurers are willing to pay the full amount of benefits (including what would be paid under the Canada Pension Plan) while the individual awaits approval of Canada Pension Plan disability benefits.

In these cases, there are ‘assignment of benefit agreements’ entered into by the claimant. Under these agreements, once Canada Pension Plan approval is obtained, the CPP will reimburse the private insurer for the equivalent of the Canada Pension Plan disability benefits it paid to the recipient prior to the CPP approval. While this arrangement is intended to provide as much income replacement to individuals as quickly as possible upon leaving the workforce because of their disability, there are tax consequences that the Standing Committee and others such as the Canadian Life and Health Insurance Association have raised as a concern.¹⁶

As noted, unlike Canada Pension Plan benefits, many long-term disability benefits from private insurers are non-taxable. When the private benefits are replaced by the retroactive Canada Pension Plan benefits, the recipient must pay tax on the CPP benefits that were assigned to the insurer. This practice can create hardship for some recipients, as they unexpectedly may be called upon to pay tax on benefits that they have already received (and spent).

The Committee recognizes the importance of this issue raised by the Standing Committee. We note that in its response to the Standing Committee report, the government committed to work with private insurers to develop possible solutions to address this issue.¹⁷ We urge the government to find ways to resolve this issue expeditiously.

¹ Human Resources Development Canada, Disability in Canada: A 2001 Profile, 2003, p. 23.

² Organisation for Economic Co-operation and Development, Human Capital Investment: An International Comparison, 1998, p. 7.

³ Department of Finance Canada, The Budget Plan 2004, 2004, pp. 103, 324—327.

⁴ At the time of writing, legislation to enact the 2004 federal budget tax proposals had not been approved by Parliament.

⁵ Payments made from the Opportunities Fund to individuals with disabilities include wage subsidies, which are taxable like any other source of employment income.

⁶ Eligibility for the disability tax credit is one means to substantiate a claim for attendant care.

⁷ Tax expenditure data is presented in current dollars (i.e., not adjusted for inflation). When inflation is taken into account, the real tax expenditure grows, but at a slower pace.

⁸ The amount is indexed annually to the cost of living.

⁹ The amount is indexed annually to the cost of living.

¹⁰ The amount is indexed annually to the cost of living.

¹¹ The 2004 federal budget proposed enhancements to the Canada Education Savings Grant program to strengthen assistance for low- and middle-income families that wish to save for their children’s post-secondary education. See Department of Finance Canada, The Budget Plan 2004, 2004, p. 118.

¹² The province of Quebec operates its own similar plan, the Quebec Pension Plan. The tax treatment of contributions to and benefits from the Quebec Pension Plan is the same as that for the Canada Pension Plan.

¹³ House of Commons Standing Committee on Human Resources Development and the Status of Persons with Disabilities, Listening to Canadians: A First View of the Future of the Canada Pension Plan Disability Program, 2003, p. 82.

¹⁴ It should also be noted that where the employee pays the total cost of the disability benefits, the amount of benefits payable under the arrangement is frequently reduced from what would be a ‘taxable equivalent’ to take account of the fact that the benefits are not taxed.

¹⁵ For many individuals, the disability tax credit can largely offset the income tax owing with respect to Canada Pension Plan disability benefits. The Committee made a recommendation in Chapter 2 that could provide tax relief to more recipients of Canada Pension Plan disability benefits by increasing the take-up of the disability tax credit.

¹⁶ House of Commons Standing Committee on Human Resources Development and the Status of Persons with Disabilities, Listening to Canadians: A First View of the Future of the Canada Pension Plan Disability Program, 2003, p. 82.

¹⁷ Government of Canada, Response to "Listening to Canadians: A First View of the Future of the Canada Pension Plan Disability Program," 2003, p. 32.