When I was admitted to the hospital for treatment of Acute Promyelocytic Leukemia in December 2017, there were a million things running through my mind; who was going to take care of my kids, was I going to die, what was going to happen with my husbands work, would I be alone at the hospital, what about my job, my retirement savings, my children’s education funds…simply living through each day. The absolute furthest thing from my mind was income taxes. Unfortunately, the reality is, sick or not, you owe the government a tax return.
I was months into treatment before I had a conversation with a good friend who warned me, among other things, to be prepared for the tax implications of being sick. He warned me to make sure I was stock piling money away because the government wouldn’t take taxes off my disability payments. Even more unfortunate was that I dismissed that warning. At the time, I was still being paid short term disability by my insurance company and had bigger fish to fry. By the time my long term disability kicked in, that conversation was long out of my mind.
Know the basics before you get sick. Chances are you or someone you know is going to need that advice also and it’s too late after it happens.
I think I was fortunate to land in the hospital during the last month of 2017. There was no real tax implication as I was only off work for the last 3 weeks of the year. The next time income taxes snuck up on me was in March 2019. I had been on long term disability from March 2018. My insurance company was calling me every 4 – 8 weeks for updates on my condition. When it was very clear that I was not going back to work anytime soon, I was informed I would have to apply for Canadian Pension Plan Disability (CPP Disability) with the Canada Revenue Agency (CRA). This was a particularly unnerving conversation. As a person who has been ‘healthy’ my whole life and being under 40 years old, I had spent virtually no time thinking about things like disability. The real irony of the situation is, I had only switched Financial Advisors less than one month before my diagnosis and when he asked me to consider Life Insurance, my response was, ‘I don’t plan on going anywhere anytime soon’. In hindsight, such a presumption was wildly irresponsible. I digress..
It would have been a good idea to have at least a basic understanding of what CPP Disability even was. My initial reaction was, ‘Oh my god, they are going to start deducting my CPP contributions at 37 years old!!! In an already heightened state of emotion, my reaction to the news about CPP Disability was not one of my most shining moments. After that minor panic attack and a discussion with my trusted HR representative from work, I understood better how CPP Disability works. It is a service offered to Canadians unable to work. The requirement to apply for CPP Disability is typical in the event that a back to work date is unknown. However, this may be dependent on the insurance coverage so it’s always a good idea to check with your insurance provider on how it works in the event of injury or illness! I now understand that CPP Disability has nothing to do with the CPP contributions made through regular income payments. In other words, being approved for CPP Disability would NOT impact my Canada Pension Plan payments when I retire. Assuming, that is, that I am so luck to make it to retirement because let’s be honest, making it to retirement is a privilege, NOT a right.
You may owe the government money and you don’t even know it…yet.
The process of applying for CPP Disability is a long one. It requires documentation from all medical parties treating the applicant. As well as a full write up of side effects and limitations of activity from the applicant. Once approved, the CRA will notify the applicant and advise of the next steps and expectations. Since CPP Disability is retroactive to the first day of long term disability (LTD) eligibility, depending on the type of LTD you have and when it started, you could find yourself owing the government for unpaid taxes. This was the first time I recalled the conversation I had with my friend a year earlier.
Tax implications on LTD payments depends on who pays the premiums.
It’s very important to understand who pays the insurance premiums for LTD; you or your employer. Who pays the premiums makes the difference of how your CPP Disability is taxed. If your employer pays the LTD premiums, you will not have to pay tax on what is paid to you through your insurance provider. SAY WHAT?! That’s the good news.
When you start working for a new employer and fill out the paperwork for benefits and insurance, you will need to select things like what type of long term disability coverage you want. Some companies will outright pay the premiums on your behalf. Some companies have multiple disability options and some options may be paid by the employer, and some may not. Other companies will not pay the insurance premiums at all and you will pay for it directly out of your income. This would appear as an income deduction on your pay stub. To understand the tax implication in the event you need LTD, check your insurance coverage or your pay stub for deductions. If you have insurance deductions, you are paying your own premiums, you will need to save for income taxes.
Watch out for retroactive payments!!!
You may be asking yourself, ‘Why the heck is she making this such a big deal?’, and I don’t blame you. The ability to ramble is strong in me! However, there is a very good reason for the emphasis I’m placing on this point. What it boils down to is, if your insurance is set up in such a way that requires you to apply for CPP Disability when your short term disability (STD) coverage ends, it could take months for the application to be approved. Heck, it could take months for your insurance company to prompt you to take such action with the CRA. Before you know it, you could be a year or more into your LTD when the CRA approves you for CPP Disability. Here’s the real kicker, CPP Disability is tax deductable.
When your CPP Disability is approved, CRA will retroactively pay back your insurance company to the first day you were eligible for CPP Disability, which is likely the first day of your LTD, for any monies the insurance company paid you that would have been paid to the CRA as tax deductible income. To reiterate one of my previous statements, if you have NOT been paying the premiums on your insurance through your employer, those monies would NOT have been considered tax deductible but when the CRA pays your insurance company back it will become taxable income. This is the bad news.
In order to avoid this unpleasant outcome, you can:
- Understand what type of insurance coverage you have so that you can determine if you need to put money away for income tax repayment and how much, before it’s too late
- Find a good accountant who can help you prepare appropriately
It’s also very important to consider that CPP Disability payments are NOT automatically tax deducted by CRA. Here are some steps you can take to avoid an even more unpleasant outcome:
- At the time your CPP Disability is approved, ask the CRA to deduct 20% of the payments so you don’t have to worry about it come income tax time, OR
- Calculate 20% of your CPP Disability payments and put them away in a savings account so you are prepared when the CRA comes knocking
What can I claim?
There are a number of eligible medical expenses that can be claimed on your income taxes related to illness. Things such as equipment, mileage, meals, medical marijuana, etc. During a time of illness, we don’t really want to spend a ton of time worrying about taxes. There are a couple of things you can do to help manage your expenses prior to tax time:
- Since eligible items can vary year to year, it is important to check the Canada Revenue Agency website annually for a comprehensive list of eligible expenses, or you can just click here!
- You can also find an accountant to help out. A good accountant will help you by identifying your eligible expenses and present them to the CRA in the most effective way possible.
Before choosing an accountant, it is critical to do your homework or you could be faced with an income tax nightmare! Getting references from trusted sources and looking up any available reviews may help. Reviews can be found most anywhere these days – whether it be on Facebook business pages, YellowPages or Google reviews.
Lastly, if you have a caregiver, they are also eligible for certain medical expenses. Make sure to review what can be claimed by caregivers or at least give them the heads up so they can look into it too. Better yet, tell them to read this article and subscribe to my blog!!!
Keep records of EVERYTHING!
Unless you already know exactly what you can claim, keep receipts for everything! Scratch that, whether you think you know or whether you know you don’t, keep receipts for everything. With the potential for eligible medical expenses to change yearly, being prepared for what is to come will be your best friend!
A few days after I was admitted to the hospital, I asked my husband to bring me a journal so I could keep track of what was happening to me. I kept notes of conversations, I kept records of my daily blood counts, the medications I took when and how much, all of my nurses names, and later I began to track the date and time of all of my appointments as an outpatient and what side effects I was feeling on a daily basis. This was an easy routine to fall into as an inpatient since I already had to record my ‘input’ and ‘output’ for each day so the nurses knew how much medication to give me.
I didn’t understand at the time how helpful doing this would be for me. For instance, keeping a record of all my appointments helped me easily calculate the number of kilometers I drove in the 2018 tax year for medical appointments. Also, if you’re like me, you don’t like making a big deal of being ill and may even downplay how sick you really are. Keeping these records also helped me provide my insurance company with thorough updates on my condition and treatment, as well as, helped me though the CPP Disability process.
Simplified Method vs. Detailed Method
Some expenses are super easy to calculate. For instance, when you go to the pharmacy to pick up your medications, you get receipts. If you keep them (definitely keep them), you can simply calculate the total amount you paid in the tax year for medications. Easy peasy.
Some expenses are not so easy to calculate. Take travel expenses for instance. I drove an average of 160 kilometers almost daily for 4.5 months and then made anywhere from weekly to bi-weekly visits to the hospital for the entire 2018 calendar year. I made over 90 trips during the year. While keeping track of the number of trips I made was easy, there was the variable of how to calculate the kilometers. I decided to count the kilometers on my odometer one day to determine the number of kilometers either my driver or I drove on each trip. Truth be told, I didn’t take the same route every day. The majority of my trips were during the dead of winter so we avoided certain roads for safety. I also had to make frequent trips to a nearby town for other related medical appointments, but I did the best I could to be accurate. As it turns out, no matter how you slice it, Google Maps will not calculate the same number of kilometers I calculated on my odometer. The moral of the story?
The simplified method may only be simple at the time you are preparing your tax return. As is noted in the Income Tax Guide, the CRA reserves the right to request additional details to support any claims made using the simplified method. In order to ensure it remains simple, it is important to understand how the government will calculate certain items and keep all records that support the claims. The unfortunate reality is, they won’t take my word for it.
Using the detailed method upfront may be a little more work but in the long run you likely avoid being bothered with a T1 Processing Review. A T1 Processing Review is conducted after Income Taxes have been processed. If the CRA feels they need justification for anything you’ve claimed, they will come looking for answers. One of the requested pieces of information was all of my appointment dates, where I went, for what treatment and what condition was being treated. Unfortunately, my recorded notes didn’t cut it. I was asked to provide records from the hospital. The turn around time was roughing 30-45 days (as long or longer than the alotted time to respond) and the cost for the hospital to mail records information was $50. In short, it can be a big hassle and costly to prove your case. Also, as a side note, if you are selected for a T1 Processing Review, and you believe you will need more time to pull together the requested information, you can ask CRA to grant you additional time by calling the 800 number on the letter.
Be prepared to justify your claims for years to come.
As most of us probably know, the general rule of thumb is to maintain all tax records for 7 years. The CRA reserves the right to question any claim for that period of time so keeping your documents and records in good order may also make your life a little easier for years to come.
If you made it this far, let me just say, thank you for hanging in there and you deserve that perfectly paired glass of wine!
Until next time, keep up the good fight. You’ve got this!