Taking Care of Yourself Financially When You Become Disabled
Shortly after I turned 25, and was newly married, I discovered I had a chronic kidney disease that would almost certainly lead to kidney failure. Somehow kidney failure was delayed a lot longer than the prognosis originally indicated, but in 2014 my kidney function got so low that I had to go on dialysis and consequently disability. Two years later, thanks to the willingness of a couple of friends to become donors, I received a kidney from a living donor through the Kidney Paired Donation program. I have my life back, for which I am grateful.
This blog post will explore some of the resources available to people who find themselves in ill health and unable to work.
CPP Disability Benefits
When we think about the Canada Pension Plan (CPP) we probably only think about the income we receive upon retirement and can begin anytime between age 60 and 70. However, CPP provides a variety of supports. One of them is a monthly payment for individuals who qualify as disabled.
- Under age 65
- Have made enough contributions to CPP
- Have a mental or physical disability that regularly stops you from doing any type of substantially gainful work
- Have a long-term disability that is of indefinite duration, or is likely to result in death
When you turn 65, your disability benefit automatically changes to the CPP retirement pension. You should be aware that your retirement pension will almost certainly pay you less than your disability benefits.
If you have dependent children, they may qualify for the CPP Children’s Benefit. The child must be under age 18 or between the ages of 18 and 25 and in full-time attendance at a recognized school or university.
You need to apply for this benefit, which you can do either online or through a paper form.
How much will you receive?
The CPP Disability Benefit payment consists of two components. There is a basic amount of $524.64 as of January 2022 plus an additional amount that is based on how much you have paid into CPP while you were working. To qualify for the benefit, you need to have paid into CPP for at least four of the six years before becoming disabled. Alternatively, if you have been a long-term (25 years plus) contributor to CPP, then contributions need only have been made for three of the past six years.
Assuming you meet these criteria, in addition to the $524.64, you will also receive 75% of your normal retirement benefit. The average recipient is paid $1,031.55 per month, while the maximum amount is $1,457.45. You may notice that this is more than the maximum CPP retirement pension you can receive at the normal retirement age of 65, which is $1,253.59 for the first quarter of 2022.
If you are under age 65, and already receiving your CPP retirement pension when you become disabled you can receive a CPP Post-Retirement Disability Benefit of $524.64 per month.
The CPP Children’s Benefit is a flat $264.53 per month as of the first quarter of 2022.
Drop-Out or Drop-In Provision
You may be familiar with the general drop-out provisions for calculating the amount you could receive from CPP. The CPP program automatically removes or “drops out” 17% of your lowest income earning months. This period begins at age 18 and, if you begin CPP at age 65, adds up to 47 years or 564 months. The lowest 17% works out to 8 full years. If you begin CPP before age 65, the drop-out period is reduced. If you wait until after age 65 to begin your CPP, for each month after age 65 that you delay you can drop out an additional lower-earning month.
However, before this calculation is done, there are two other calculations that you can consider. One is the child-rearing provision. This allows the person caring for the child, commonly the mother, to remove the months between the birth or adoption of a child until the child reaches age 7 from the calculation of CPP benefits.
Finally, specific to this blog post, periods of disability are also removed from the calculation, again allowing you to qualify for a higher retirement pension when the time comes.
Provincial Disability Supports
Unlike CPP disability benefits, the ability to receive provincial disability support, to the extent it exists (several provinces support residents with disabilities through their normal income assistance (i.e., welfare) programs, is limited by testing for both income and assets. Someone who has been working full-time for 25 years and may have amassed substantial assets for their retirement, would not qualify.
Disability Insurance
While government supports may be insufficient to cover your expenses by themselves, if you qualify you can receive it irrespective of the benefits offered by your employer or through a private plan. For many employed persons, disability insurance is part of the group benefits you have through your employer. If your employer does not offer disability insurance, then you may wish to consider privately purchased disability insurance. However, you would do well to make those arrangements while you are healthy.
There are at least two aspects of disability insurance that you should consider. First, your employer may choose to pay the premium for you. In that case, if you become disabled the payments will be fully taxable. If, on the other hand, the premiums are paid by you, any disability insurance payments are received tax-free. In my case, my former employer structured the benefit so that the premium was paid by me and therefore the benefit was paid to me tax-free.
Second, depending on the policies in your group benefits, you may find all or a portion of your group disability payments reduced by payments from other sources. In my case, my group benefit was reduced by 90% of the amount I received from the CPP disability benefits. Using round numbers, if my group disability benefit paid me $3,000 per month and I received $1,000 per month from CPP, then my group benefit would be reduced to $2,100 per month, that is, by $900, which is 90% of $1,000. Employers wish to structure plans so that they are not so generous as to disincentivize a return to work.
I have written more about disability insurance in an earlier blog post.
Disability Tax Credit
In addition to receiving CPP Disability Benefits, you may also qualify for the Disability Tax Credit (DTC). Your medical practitioner can fill out their part of the application form online and then print and pass it on to you to complete.
Like most tax credits, it is non-refundable. That is, you can only use it to get your taxes down to zero. For 2022, the federal DTC amount is $8,870. You then multiply that figure by 15%, the lowest federal tax rate to determine your credit, which is $1,330.50. This is the figure by which your federal taxes are reduced. If you cannot use all of the credit, the remaining portion can be transferred to a spouse.
Medical Expense Tax Credit
If you incur out-of-pocket eligible medical expenses, you can claim a medical expense tax credit for any twelve months ending in the year of the tax return you would file. For example, if in the 12 months from July 1, 2022 to June 30, 2023, you had substantial medical expenses, on the tax return you would file in the spring of 2024 you could use those expenses to claim a credit. For 2022, the federal threshold is either 3% of your net income (line 23600) or $2,479, whichever is less. Here is an example of how that might work out.
It is generally advantageous for the lower-income spouse to claim this credit. The provinces also offer their own credit.
Registered Disability Savings Plan (RDSP)
An RDSP is a savings plan that is intended to help parents and others save for the long-term financial security of a person who is eligible for the Disability Tax Credit (DTC).
To qualify for an RDSP, you must, as noted above, qualify for the DTC. In addition, you must have a valid Social Insurance Number, be a resident of Canada at the time you enroll in the plan or make contributions, and you must be under the age of 60. On that last point, you do not need to be a child to enroll in an RDSP, although the RDSP is often begun because of a disabled child.
There are several benefits to an RDSP. While your contributions do not get you a tax deduction, investments inside the account grow tax-free. At the time of withdrawal, the contributed capital can be withdrawn tax-free, while grants, bonds, and investment income are taxed in the hands of the beneficiary. In many respects, it is treated like an RESP for tax purposes.
The lifetime contribution limit to an RDSP is $200,000.
The government will pay matching grants of up to 300% depending on income to a maximum of $3,500. If you are the disabled person and are age 19 or over, your income alone, or if married/common-law, the income of your spouse/partner, too, are taken into consideration. Up to $70,000 in grants can be received in your lifetime. If your income falls below a certain threshold you may also be eligible for the Canada Disability Savings Bond.
You can read more about RDSPs in one of my previous blog posts.
Becoming disabled is challenging at the best of times. Although I am glad to see that these various supports are available, it troubles me that applying for these programs is difficult and is especially the case for those who are already dealing with challenges. If your health situation leads to a disability, I strongly urge you to speak to your doctor for assistance. I was grateful for the help I received from my doctor as well as from my hospital social worker when I needed it.
This is the 133rd blog post for Russ Writes, first published on 2022-01-31.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.