While there is a certain amount of legwork involved, the savings can be significant – as much as 20% for a taxpayer in Ontario. And with more and more parents seeking out special schools to help their learning-disabled children, the number of clients who may be able to use this deduction is likely to rise significantly.
There are challenges, however. The Canada Revenue Agency (CRA) has been challenging some of these claims, alleging that the relevant section of the Income Tax Act (ITA) – which uses the term « mental handicap » – does not include learning disabilities. But the March decision of the TCC in Karn v. The Queen concludes that the term does include learning disabilities and that a tax credit may be claimed for special-education costs if there is appropriate supporting documentation from a qualified medical expert.
The legislation covering the tax credit has existed since 1971, says Patrick Lindsay, a tax litigator with Borden Ladner Gervais LLP in Calgary, who represented the plaintiff in Karn on a pro bono basis. « It’s clear, » Lindsay says, « that Parliament intended learning disabilities to be caught by this section. »
The Karn decision is a good example of why financial advisors should talk to their clients about such issues, says accountant Paul McVean of McVean Professional Corp. in Toronto: « It speaks to getting a deeper understanding of the client’s situation, and then having an understanding as the advisor as to what tax relief may be available under various situations. »
The plaintiff in the TCC case, Darlene Karn, is the mother of a child enrolled at a school for children with learning disabilities in Calgary. Karn claimed a medical expense tax credit for tuition in the 2009 and 2010 taxation years. The Minister of National Revenue disallowed the claim, ruling that the tuition was not for medical expenses as defined by the ITA.
Such claims have been increasingly scrutinized by the CRA, says Lindsay. Previous decisions, including 2012’s Lucarelli v. The Queen (see Investment Executive, September 2012), held that a medical expense tax credit for special schooling can be claimed even where the medical documentation is not in the form of a certificate as set out in the ITA (s. 118.2(2)(e)). But, crucially, says Lindsay, the claim must be supported by a report from a member of a qualified medical profession, such as a psychologist, that is precise about the medical impairment.
It is not sufficient to describe a generic learning disability. The report « should go a step further and describe what the learning disability is, » Lindsay notes, « such as [attention deficit hyperactivity disorder (ADHD)] or dyslexia. »
The report should also be specific about the needs that arise because of the disability and that the student requires a specialized school.
If your client has such a letter before filing their tax return and,Lindsay adds, « they’ve read it and they’re comfortable that it’s precise enough, then if the CRA audits them it should be a fairly simple matter of handing over the letter. »
The requirements to be met were outlined in the TCC’s 1998 decision in Collins v. The Queen: the patient « must suffer from a mental handicap » and « an appropriately qualified person must certify the mental or physical handicap is the reason the patient requires that the school specially provide the equipment, facilities or personnel for the care or the care and training of individuals suffering from the same handicap. »
In Karn, a key issue was the definition of the outdated term « mental handicap. » Says Lindsay: « People think, ‘My kid doesn’t have a mental handicap; he has a learning disability,’ which is the exact same thing. It’s just that the [ITA] hasn’t kept up. »
In Karn, Justice Diane Campbell looked at whether the three medical reports obtained by the parents were sufficient to support a medical certificate for a « mental handicap » as required by the ITA. Two of the doctors’ letters diagnosed an anxiety disorder and indicated that the student had escalating learning difficulties in the same areas. The third diagnosed ADHD in addition to other learning disabilities.
Campbell ruled that the certification provided by Karn was sufficient. The certification, Campbell concluded, « need not contain the phrase ‘physical or mental handicap’; there must, however, be no doubt that a reasonable person, looking at that certification, would reasonably conclude that the qualified professional has declared or positively identified the physical or mental handicap from which the individual suffers. »
The third doctor’s report specified the need for a specialized school. Campbell ruled that the requirements of the ITA are met if the school meets the accreditation requirements of the province « without dictating the specific specialized school » the student is required to attend.
These tax credits are not huge, McVean adds, but they are substantial. The federal credits are 15% on top of the provincial rate (5.05% in Ontario). Adds McVean: « For somebody in Ontario, essentially, you’d get 20.05% savings on the expense. »