Avoid the potential for an effective 80% marginal bracket
When an elderly parent will have to be moved to either assisted living or residential care, special attention is required at tax filing. Let’s look at residential care. Using British Columbia as an example, there is monthly co-pay contribution required when an elderly parent moves into government subsidised residential care. The contribution required from the elderly parent is based on a formula calculation including reported net income and tax payed in the most recent tax assessment. Within upper and lower limits (available on government websites) the contribution required will be a percentage of net income minus tax payed. In my view it’s a fair system and the government required co-pay is far less than the actual cost of medical care.
How can this go wrong within a tax filing? Anything that increases net income can potentially increase the co-pay. And in BC the residential care co-pay formula percentage is 80%. What that means is that an action like cashing in a RRIF, pension income splitting, or selling a taxable investment could inadvertently accrue an effective real world marginal tax (via increased co-pay) rate of 80% on such actions in the following year. Your tax software doesn’t know when Mom or Dad are facing a move to residential care in the relative near future so could potentially recommend pension income splitting or other strategies that could cost a lot of money.
Depending on which assets are cashed in to pay expenses there is the potential to incur a major real world financial penalty that no one was aware of. It’s easy to visualize an example where tax software makes a pension income split recommendation that leads to $1,000 in combined tax savings but inadvertently leads to $10,000 in additional subsequent co-payments the following year. Ouch!
Mike Campagne CFP, BA **
** The views and content are those of the author and the article is not to be construed as financial advice, but rather as general information. Please contact your health care provider to determine specific potential government health care supports to you or family members. Always consult a tax professional in determining the optimal way for you to file your 2018 tax return in regard to relevant tax credits and deductions. Due to the differences in provincial health care rules and regulations, DTS serves elderly clients only in British Columbia.