Couples and Long-Term Care
For illustration purposes only:
Canadians are living longer than ever. In 2015, the World Health Organization reported that the average life expectancy in Canada is 82.2 years. And with increased longevity comes a greater chance that people will require long-term health care services. In fact, it’s estimated that about 70 per cent of people over age 65 will eventually need some form of long-term care.
Long-term care in Canada is either fully private or publicly subsidized. Those who opt for fully private care pay their facility’s going rate. Those who choose publicly subsidized care in B.C., however, will have to pay up to 80 per cent of their after-tax income. Fortunately, there is an opportunity for couples to potentially reduce the cost of one spouse’s long-term care.
How is my rate calculated?
As mentioned above, long-term care rates are income-tested, and are based on one’s tax return from two years prior. This means that someone entering care in 2019 would use their 2017 tax return, specifically, Line 236 less the amount in Line 435.
In British Columbia, if a person’s after-tax income is less than $19,500 per year, their monthly rate is calculated as their after-tax income less a $3,900 deductible, divided by 12. For example, someone with $19,000 of after-tax income would pay about $1,258 per month. Regardless of income level, the minimum monthly rate is $1,162.80 per month.
If a person’s after-tax income is equal to or greater than $19,500 per year, their monthly rate is calculated as their after-tax income multiplied by 80 per cent, divided by 12. For example, a person with $40,000 of after-tax income would pay about $2,666 per month. For 2019, the maximum monthly rate for subsidized long-term care is $3,377.10 per month.
Income Splitting
Most people aged 65 or older have pension income, or the means to create some. In most cases, if one spouse is entering long-term care, it makes sense to fully split that spouse’s pension income, even if it pushes the other spouse’s income higher than theirs.
For example, consider a husband and wife with identical incomes in 2017: $50,000 pre-tax; $35,000 of which is pension income. Each has the option to allocate up to $17,500 pension income to the other. The husband is entering long-term care.
If the husband does not elect to split his pension income, his after-tax income will be about $42,955, and his long-term care rate would be $2,864 per month. If he decided to income-split, his after-tax income would be about $29,908 and his monthly rate would be reduced to $1,994.
Their combined tax bill, which would normally be $14,090 per year, would increase to $15,077 with income splitting. On the other hand, they would save $10,440 per year on the husband’s reduced bed rate, for a net savings of $9,453. This would greatly assist his wife with the household expenses, especially those that don’t change whether or not her husband lives at home.
Re-file past returns
You may be thinking, this all sounds good, but if my current long-term care rate is based on my 2017 tax return, there’s nothing I can do to lower my rate during the first year or two. Not so! Previous year’s tax returns can be re-filed with pension income fully split, and those new figures used to determine one’s monthly rate.
Unfortunately, due to attribution rules, income from joint accounts can’t be allocated completely to one spouse or the other. Additionally, nothing can be done about personal investment accounts unless the owner gives away their money but doing so could trigger unwanted taxation in the form of capital gains.