Personal Tax Planning - Jamie Golombek · 342 n canadian tax journal / revue fiscale canadienne (2009) vol. 57, no 2 n the beneficiary’slegal parent, guardian, tutor, curator, or

canadian tax journal / revue fiscale canadienne (2009) vol. 57, no 2, 338 - 60

338

Personal Tax PlanningCo-Editors: Pearl E. Schusheim* and Gena Katz**

Planning wiTh RegisTeRed disabiliTy savings Plans

Jamie Golombek***

The introduction of the registered disability savings plan (rdSP) represents a significant development in facilitating the financial security of persons with disabilities. Commencing in 2008, Canadians with severe and prolonged disabilities who are eligible for the disability tax credit, or those who support them, can contribute up to $200,000 to an rdSP. Tax on the accumulated income and gains is deferred as long as the funds are held in the plan, and contributions can be supplemented through potentially generous government assistance, in the form of the new Canada disability savings grants and Canada disability savings bonds. Withdrawals are partially taxable in the hands of the beneficiary and, in most cases, should not affect eligibility for provincial disability benefits (depending on the province or territory of residence). rdSPs will play an important role, in conjunction with standard disability trust planning, in securing the financial future of disabled individuals in Canada.

KeywoRds: DisableD n tax planning n savings plans n grants n registereD Disability

savings plan n rDsp

* OfCouzinTaylorLLP,Toronto(alliedwithErnst&YoungLLP).

** OfErnst&YoungLLP,Toronto.

*** CIBCPrivateWealthManagement,Toronto(e-mail:[email protected]).IwishtothankmycolleaguesAnnEliseAlexanderandAryehSnitmanofCIBC,Toronto,fortheirvaluablecommentsonearlierdraftsofthisarticle.Anyerrorsoromissionsaresolelymyown.

C o n T e n T s

Introduction 339What Is an rdSP? 340

Beneficiary 340Issuer 341Holder 341

Contributions to rdSPs 343Annual Government Assistance 344

Canada disability Savings Grant 344

personal tax planning n 339

inTRoduCTion

Registereddisabilitysavingsplans(RdSPs)wereintroducedbythefederalgovern-mentinthe2007federalbudget.ThepurposeoftheRdSPis“tohelpparentsandotherssaveforthelong-termfinancialsecurityofachildwithaseveredisability.”1Inaddition,disabledpersonsmaysetupplansforthemselves,iftheyhavethecap-acitytodoso.

Theplanstructureismodelledontheregisterededucationsavingsplan(RESP),asrecommendedbytheExpertPanelonFinancialSecurityforChildrenwithSeveredisabilities.2 Generally, a person who establishes an RdSP (the plan holder) canmakecontributionstotheplan,uptoaspecifiedlifetimelimit,forthebenefitofthepersonnamedasthebeneficiaryoftheplan.Subjecttocertainrestrictions,incomeandgainsaccumulatedintheRdSParenon-taxablewhileheldintheplan.Asignifi-cantfeatureoftheRdSPistheavailabilityofgovernmentfundsdepositeddirectlyintotheplanintheformofmatchingCanadadisabilitysavingsgrants(CdSGs)andCanadadisabilitysavingsbonds(CdSBs).

ThefirstRdSPsbecameavailableindecember2008.Giventhelatecommence-mentdate,thegovernmentannouncedthatthe2008deadlineforopeninganRdSP,

Canada disability Savings Bond 345Maximizing Government Assistance Payment 345

Payments out of an rdSP 347repayment of CdSGs and CdSBs: Assistance Holdback Amount 347disability Assistance Payments 350

Lifetime disability Assistance Payments 350Shortened Life Expectancy 351restricted Years—Maximum/Minimum dAP rules 351

rdSP Transfers 353death of the Beneficiary 353rdSPs and Taxes 354

Taxability of rdSP Payments 354Taxability of rdSPs 354

Prohibited Contributions 355Non-Compliant rdSPs 356Effect on Other disability Programs and Benefits 356rdSPs Versus Trusts 358Conclusion 359

1 Canada,departmentofFinance,2007Budget,BudgetPlan,March19,2007,annex5,at379.

2 Canada,departmentofFinance,A New Beginning,TheReportoftheMinisterofFinance’sExpertPanelonFinancialSecurityforChildrenwithSeveredisabilities(Ottawa:departmentofFinance,december2006).Thepanel’sreporthaditsgenesisintwoacademicpaperspublishedinOctober2005bythePlannedLifetimeAdvocacyNetwork(aVancouver-basednon-profitorganization):RichardShillington,Disability Savings Plan: Policy Milieu and Model Development(Vancouver:PLAN,2005);andKeithHorner,Disability Savings Plan: Contribution Estimates and Policy Issues(Vancouver:PLAN,2005).

340 n canadian tax journal / revue fiscale canadienne (2009) vol. 57, no 2

makingcontributionstotheplan,andapplyingfortherelatedgovernmentassist-ancewouldbeextendedtoMarch2,2009.The2009RdSPcontributionyearwouldthenbeginonMarch3,2009.3

whaT is an RdsP?

AnRdSPisanarrangementbetweentheissuer(atrustcompany)andoneormoreindividualsorentities(theholderorholders),whichpermitscontributionsandgov-ernmentgrantsandbondstobeinvestedandultimatelyusedbytheissuertomakepaymentstoaqualifyingdisabledperson(thebeneficiary).Theplanmustberegis-teredwiththeCanadaRevenueAgency(CRA)pursuanttotheIncomeTaxAct.4

ToqualifyasabeneficiaryofanRdSP,an individualmusthavea“severeandprolongedphysicalormentalimpairment,”suchthattheindividualisentitledtoclaimthedisabilitytaxcredit(dTC).5ThedTCisanon-refundabletaxcreditthatreducestheamountoftaxthatthedisabledindividual(orinsomecases,asupportingrelative)wouldotherwisehavetopayinrespectofthetaxationyear.ToapplyforthedTC,theclaimantmustobtainacertificate(formT2201,“disabilityTaxCreditCertificate”) from a qualified practitioner—generally, a medical doctor or othermedicalspecialist—statingthatthedisabledpersonmeetstherequisitecriteriasetoutintheIncomeTaxAct.6TheclaimforthecreditissubjecttofinalapprovalbytheCRA.

beneficiaryThe beneficiary (or “dTC-eligible individual”) is the person who will ultimatelybenefitfromRdSPassetaccumulation,governmentgrantsandbonds,andultimateplanwithdrawals.AnRdSParrangementmustbebetweentheissuerandeither

n thebeneficiary;orn a“qualifyingperson”inrelationtothebeneficiary(discussedbelow);orn alegalparentwhoisnot,atthetimethearrangementisenteredinto,aquali-

fyingpersoninrelationtothebeneficiary,butwhois,atthattime,aholderofanotherRdSPofthebeneficiary.7

IftheRdSPisthefirstplanestablishedforthebeneficiary,practicallyspeaking,thebeneficiarymustbeaCanadianresident;however,aplanmaybeopenedfora

3 Section81oftheBudgetImplementationAct,2009,SC2009,c.2.

4 Subsection146.4(1),thedefinitionof“disabilitysavingsplan,”andsubsection146.4(2)oftheIncomeTaxAct,RSC1985,c.1(5thSupp.),asamended.Unlessotherwisestated,statutoryreferencesinthisarticlearetotheIncomeTaxAct.

5 Subsection146.4(1),thedefinitionof“dTC-eligibleindividual.”

6 Subsection118.3(1).

7 Subsection146.4(1),thedefinitionof“disabilitysavingsplan.”


beneficiarywhohasbecomeanon-residentifheorsheisthebeneficiaryofanexist-ingplanthatisbeingtransferredtothenewplan.8(Exceptforthebriefoverlapthatmayoccurinthecourseofatransfer,onlyoneRdSPcanexistforaparticularbene-ficiaryatanytime.)

AnRdSPmustspecifythatitistobe“operatedexclusivelyforthebenefitofthebeneficiary.”9Sincethis isdifficulttodetermineobjectively,non-compliancewillnot lead to the immediate deregistration of the plan (see the discussion under“Non-CompliantRdSPs”below).However,thisprovisioncouldhelpadisgruntledbeneficiary,orthebeneficiary’slegalrepresentative,inseekingtotakeovertheplanfromthecurrentholder.

ThedesignationofabeneficiaryofanRdSPisirrevocable,andthebeneficiarycanneither surrendernor assignhisorher rights to receivepayments from theplan.10

issuerAnRdSPissuermustbelicensedorauthorizedunderthelawsofCanadaoraprovincetocarryoninCanadathebusinessofofferingtothepublicitsservicesastrustee.Inaddition,atthetimethearrangementisenteredinto,theremustbeanagreement,fortheexchangeofinformationandthepaymentofthegrantsandbondsbetweentheissuerandtheministerofhumanresourcesandskillsdevelopment,thatappliestothearrangementforthepurposesoftheCanadadisabilitySavingsAct.11

InordertoestablishanRdSPtrust,theissuermustbeprovidedwithsocialinsur-ancenumbersforboththebeneficiaryandtheholder.12

holderTheholderofanRdSPistheperson(orpersons,orentity)whoestablishestheplanonbehalfofthebeneficiaryandistheprincipaldecisionmakerregardingthechoiceofinvestmentsintheRdSP.Inaddition,iftheplanpermits,theholdercandeter-minetheamountand/orthetimingofpaymentsfromtheplan.

Theholdercanbethedisabledindividual(thebeneficiary)oranentitythatisa“qualifyingperson”inrelationtothebeneficiary,13definedas

8 Paragraph146.4(2)(c).

9 Paragraph146.4(4)(a).

10 Ibid.

11 SC2007,c.35,section136;andIncomeTaxAct,paragraph(a)ofthedefinitionof“disabilitysavingsplan”insubsection146.4(1)andparagraph146.4(2)(a).detailedinformationontheRdSPissuerenrolmentprocessisavailableonlinefromHumanResourcesandSkillsdevelopmentCanada,athttp://www.hrsdc.gc.ca/eng/learning/education_savings/publications_resources/enrolment_process/iep.shtml.Thedepartment’sWebsitealsomaintainsalistofRdSPissuers:seehttp://www.hrsdc.gc.ca/eng/disability_issues/disability_savings/update_financial.shtml.

12 Paragraph146.4(2)(b).

13 Subsection146.4(1),thedefinitionsof“disabilitysavingsplan,”“holder,”and“qualifyingperson.”


n thebeneficiary’slegalparent,guardian,tutor,curator,oranotherindividualwhoislegallyauthorizedtoactonbehalfofthebeneficiary;or

n apublicdepartment,agency,orinstitutionwithsuchlegalauthority.

AqualifyingpersoncanestablishandadministeranRdSPonbehalfofthebeneficiaryonlyifthebeneficiarylacksthelegalormentalcapacitytodosohimselforherself.Thedefinitionprovidesthatifthebeneficiaryisaminor,aqualifyingpersoncanbeanyoftheindividualsorentitiesidentifiedabove.14IfthebeneficiaryhasreachedtheageofmajoritybutisnotmentallycapableofopeninganRdSPforhimselforherself,aqualifyingpersoncanbeanyofthelistedpersonsother thanthebenefici-ary’slegalparent.15Thisexclusionofalegalparentfromthedefinitionissignificant.Itmeansthatonceadisabledchildhasreachedtheageofmajority,aparentcansetupanRdSPforthechildonlyiftheparentislegallyauthorizedunderprovinciallawtoactonhisorherbehalf.

Practicallyspeaking,sincethedefinitionofaqualifyingpersonappliesonlyinrespectofabeneficiarywhoisaminororismentallyincapable,adisabledadultwithmentalcapacitywhowishestobenefitfromanRdSPmustestablishtheplanhimselforherself;nooneelsecansetupaplanonthatperson’sbehalf.However,familymembers,friends,orotherscouldcontributetoaplanestablishedbythedisabledperson,withhisorherwrittenpermission.16

TheholderofanRdSPmaychangeovertime,ifthereisachangeinthebenefici-ary’sageormentalcapacity,orintheholder’sstatusasaqualifyingperson.Consider,forexample,asituationwheretheguardian(whoisnottheparent)ofaminorchildopensanRdSPforthechild.Whenthechildreachestheageofmajority,theguard-iancannolongerbetheplanholder,unlessthebeneficiaryisnotmentallycapableofexercisinghisrighttobecometheholderandtheguardianretainsthelegalau-thoritytoactonbehalfofthebeneficiary.17

A legalparent isspecificallyexemptedfromthiscondition,soas topreventachildfromforcingaparenttogiveupcontroloftheRdSPwhenthechildreachesmajority.However,uponreachingmajority,thechildhastheright,thoughnottheobligation,tobecomeaholdertogetherwiththeparentorparents.Ifthechildisnotmentallycapable,presumablythechildcannotexercisethatright.

Thus,anRdSPcanhavesuccessiveholdersoverthedurationoftheplan,anditcanhavemorethanoneholderatagiventime.Suppose,forexample,thatthelegalparentsofaminordisabledchildestablishanRdSPfortheirchild,withbothparentsasholdersoftheplan.Theplanmightprovidethatoncethebeneficiaryreachestheageofmajority,heorshecanbecomeaholderwiththeparents.However,because

14 Subsection146.4(1),thedefinitionof“qualifyingperson,”paragraph(a).

15 Ibid.,paragraph(b).

16 Paragraph146.4(4)(h).

17 Paragraph146.4(4)(c)andparagraph(b)ofthedefinitionof“qualifyingperson”insubsection146.4(1).


amentallycompetentchildisentitled,atlaw,tobecomeaholderonreachingtheageofmajority,suchaprovisionisnotstrictlynecessary.Inaddition,theplancouldstipulatewhetherdecisionsmustbemadejointlyorseverally;however,unanimousconsentofalltheholdersisrequiredbeforetheassetsintheplancanbetransferredtoanotherRdSP.

ConsideranotherexamplewhereaparentsetsupanRdSPforaminorchildwhoismentallycapable.Ifthatparentdies,thesurvivingparentcanbecomethesucces-sorholderoftheRdSP,providedthatthebeneficiaryisstillundertheageofmajorityandthatthedeceasedparentnamedthesurvivingparentasthepersonentitledtobecometheholder.Ifthelatterconditionismetbutthebeneficiaryhascomeofage,thesurvivingparentcantakeontheroleofholderonlyifheorsheisthelegalguardianofpropertyofthebeneficiary.

Asafinalexample,supposethatawidowhasayoungdaughterwhoisdisabledbutmentallycapable.ThemothersetsupanRdSPforherdaughterbutunexpect-edlydieswhilethechildisstillaminor.Thelocalchildren’saidsociety(CAS)stepsinandassumeslegalcustodyofthechild,becomingtheplanholder.Oncethechildreachestheageofmajority,shemustbecometheplanholder(assumingthatsheismentallycapableatthattime).Thus,theplanwillhavehadthreesuccessiveholders:themother;theCAS;andfinally,thechildherself.

RdSPholdersmaybejointlyliablewiththebeneficiary(orthebeneficiary’sestate)fortaxesthatmayarisefromthederegistrationofanRdSP,18orfromnon-complianttransactionsintheplan,suchasholdingnon-qualifyinginvestments.19Theserulesarediscussedinlatersectionsofthearticle.

ConTRibuTions To RdsPs

ThereisnoannualcontributionlimitforanRdSP,asthereisforaregisteredretire-mentsavingsplanoratax-freesavingsaccount.However,similartoanRESP,thereisalifetimelimittotheamountthatcanbecontributedtoRdSPsforaparticularbeneficiary;themaximumamountiscurrentlysetat$200,000.20ThislifetimelimitspecificallyexcludesgrantsandbondspaidintotheplanundertheCanadadisabil-itySavingsAct(discussedbelow).21

ContributionstoanRdSPmaybemadeatanytime,uptotheendoftheyearinwhichthebeneficiaryturns59.22However,RdSPcontributionscannotbeacceptedatanytimethatthebeneficiaryisnotaresidentofCanada;23nocontributionsmay


19 Section206.1.OthertaxesmaybeapplicablepursuanttopartXI.

20 Subparagraph146.4(4)(g)(iii).NotethatthisparallelsthecurrentRESPrules:theannualcontributionlimitwasrepealedbythe2007budget(firstbill),andthelifetimecontributionlimitwasincreasedto$50,000(subsection204.9(1)).

21 Seethedefinitionof“contribution”insubsection146.4(1).

22 Subparagraph146.4(4)(g)(i).

23 Subparagraph146.4(4)(g)(ii).


bemadeafterthedeathofthebeneficiary;24andcontributionsareprohibitedinayear inwhich thebeneficiary isno longereligible for thedTC.25AnRdSPmustgenerallybeterminatedbytheendoftheyearfollowingtheyearinwhichthebene-ficiaryceasestobeadTC-eligibleindividualordies.26

NooneotherthanaholderoftheRdSPcanmakeacontributiontotheRdSPwithoutthewrittenconsentoftheplanholder(s).27Thisrestrictionisimportant,becauseitpermitstheRdSPholder(s)toplancontributionsstrategically,inordertomaximizematchinggovernmentgrantsandbondswhilekeepingwithinthelifetimecontributionlimit.

annual goveRnmenT assisTanCe

Formanyindividualsandtheirfamilies,thegenerousassistanceavailabletoRdSPsfrom the government of Canada may be the primary reason for establishing anRdSPinthefirstplace.Theassistancecomesintwoforms:anincome-testedmatch-inggrant,knownastheCanadadisabilitysavingsgrant;andanincome-testedbond,whichisindependentofanycontributions,knownastheCanadadisabilitysavingsbond.

BothCdSGsandCdSBscanbepaidintoanRdSPuptotheendoftheyearinwhichthebeneficiaryturns49.28

C anada disabilit y savings gr antTheamountoftheCdSGdependsontheamountofcontributionsmadeintotheplanaswellasthedisabledperson’s“familyincome.”Thedefinitionoffamilyin-comedependsontheageofthedisabledbeneficiaryandwhetherornotheorsheislivingwithaparentorlegalguardian.29

IftheRdSPbeneficiaryhasnotreachedtheageof18intheprioryear,theannualfamily incomeofthebeneficiary’sparentsor legalguardianisusedtodeterminewhetherthebeneficiaryiseligibleforthebondandmatchinggrantamounts.

IftheminorchildisinthecareofanagencythatreceivesanamountforthechildundertheChildren’sSpecialAllowancesAct,30thedeterminationofthebenefici-ary’sfamilyincomeisnotrelevant.Thebeneficiaryistheneligibleforthemaximumlevelofgrantsandbonds,asdiscussedbelow.

24 Paragraph146.4(4)(f ).

25 Ibid.

26 Paragraph146.4(4)(p).Underparagraph146.4(12)(d),anexceptiontothisdeadlinemaybepossiblewherethedisabledperson’sdTCeligibilityisindispute.

27 Paragraph146.4(4)(h).

28 CanadadisabilitySavingsRegulations,PC2008-1005,SOR/2008-186(2008)vol.142,no.13Canada Gazette Part II1404-8,regulations2(c)and3(d).

29 Section2(1)oftheCanadadisabilitySavingsActdefines“familyincome”astheincomedeterminedunderthedefinitionof“adjustedincome”insection122.6oftheIncomeTaxAct.

30 SC1992,c.48.


Beginningintheyearafterthebeneficiary’s18thbirthday,hisorherownfamilyincomeisusedtodeterminethegrantamount,evenifheorshecontinuestoresidewithaparentorlegalguardian.

ThefamilyincomeusedtocalculateeligibilityfortheCdSGsandCdSBsforaparticularyearisactuallytheincomeforthesecondprecedingyear.Forexample,eligibilityforthe2008CdSGandCdSBisbasedonthe2006familyincome.

Thismakesitcriticallyimportanttofiletaxreturnsfortheprevioustwoyears.Forexample,togetthe2009CdSGs(andCdSBs,discussedbelow),boththe2008and2007taxreturnsmusthavebeenfiledtoestablishanincomebasis.Otherwise,HumanResourcesandSkillsdevelopmentCanadawillnothavetheincomeinformationitrequiresfordeterminingthebeneficiary’seligibilityforaCdSGand(possiblyaCdSB).Asaresult, itmaylimittheamountoftheCdSGmatchandprecludetheCdSBaltogether.

TheamountoftheCdSGpayableannuallywhenfamilyincomeisunder$75,769(thelevelusedfor2008CdSGs,basedon2006income,tobeindexedannuallytoinflation)is

n 300percentonthefirst$500ofcontributionsandn 200percentonthenext$1,000ofcontributions.

Asanexample,forafamilywithincomeof$70,000,ifcontributionsforayearare$500,a300percentCdSGamountingto$1,500willbepaidintotheRdSP.If$1,000iscontributedintheyear,theamountoftheCdSGpaidintotheplanwillbe$1,500+$1,000=$2,500.Tomaximizetheavailablegrant,anannualcontribu-tionof$1,500willyieldaCdSGof$3,500annually,foratotalof$5,000paidintotheRdSPeachyear.

Ifthefamilyincomeisover$75,769(ortheindexedthreshold),orifprioryears’taxreturnshavenotbeenfiledtoestablishthehigherlevelofCdSG,theCdSGislimitedto100percentofthetotalcontributionsuptoamaximumof$1,000.

ThemaximumamountofCdSGspayabletoabeneficiary’sRdSPduringhisorherlifetimeis$70,000.

C anada disabilit y savings bondTheCdSBisequalto$1,000inanyyearwhenfamilyincomeisbelow$21,287(the2008 threshold,basedon2006 income, tobe indexedannually to inflation).Nocontributions are required for payment of the CdSB into an RdSP. The CdSB isphasedout,prorata,forfamilyincomerangingbetween$21,287and$37,885(again,applicablein2008andadjustedforinflationinfutureyears).Amaximumof$20,000ofCdSBscanbepaidtoabeneficiary’sRdSPsoverthebeneficiary’slifetime.

ma ximizing government a ssistance PaymentByplanningthetimingandamountofannualcontributions,aholdercanmaximizethebenefitsofthegovernmentassistancepayments.ThefollowingfourexamplesdescribeboththecalculationandtheoptimizationofCdSGsandCdSBs.


Example 1: CDSG/CDSB Calculation

JohnwasborninMarch2009withaseveredisabilityandqualifiesforthedTC.Hisparentsearn$80,000peryear.Johnisunlikelytoearnanyincomeduringhislifetime.IfhisparentsopenanRdSPforhimin2009andcanaffordtocontribute$1,500everyyear, assuming that the family income remains above the threshold for maximumCdSGpayments,howmuchinCdSGsandCdSBscantheyexpecttoaccumulate?

From2009to2028,whenJohnturns19,theCdSGswillbebasedonJohn’sparents’income,which isover the$75,769 threshold.Asa result, John’s RdSPwillget a100percentmatching CdSGeachyear for19years, for thefirst$1,000of RdSPcontributionsmadetotheplan.Fromage19onward,John’sownincomewillbebelowtheCdSGthreshold;therefore,hewillqualifyfor$3,500ofmatchingCdSGsand$1,000ofannualCdSBsuntil the lifetimelimits—$70,000fortheCdSGand$20,000fortheCdSB—arereached,atages33and38respectively.

Example 2: Calculation of CDSBs

HenryandJunehaveadisableddaughter,Gayle,whois10yearsoldin2009.Theirnetfamilyincomeisonly$30,000peryear,leavingnofundsavailabletocontributetoanRdSP.Gayle’sannualincomeisnotexpectedtoexceed$15,000aftersheturns18.CanGaylequalifyforCdSBassistance,andifso,howmuchmightshebeentitledto?

SinceCdSBeligibilityisbasedonfamilyincomeandnotontheamountofRdSPcontributions,GaylewillbeentitledtoCdSBassistance,providedthatHenryandJuneopenanRdSPforher.AslongasGayleremainsaminor,thelevelofassistancewillbereduced,becausethefamilyincomefallswithintheclawbackrangeof$21,287to$37,885.TheannualCdSBuntiltheyearGayleturns19,iscalculatedas

$1,000×{1−[($30,000−21,287)/($37,885−21,287)]}

or$475annually.Inthatyearandsubsequentyears,aslongasGayle’sannualin-comedoesnotexceedthethresholdforfullassistance,shewillbeeligibleforannualCdSBpaymentsintoherRdSPof$1,000,untilthemaximumof$20,000isreachedintheyearGayleturns34.

Evenwithnocontributionsandamodestannualrateofreturnof5percent,simplyopeninganRdSP toobtain themaximumgovernmentassistancecanaccumulatenearly$130,000by the time thebeneficiary turns60, basedononly$20,000ofCdSBsdepositedtotheplan,andassumingnowithdrawalsbeforethattime.

Example 3: CDSG/CDSB Calculation

davidis33andqualifiesforthedTC.Hisannualincomeis$65,000.In2009,heopensanRdSPofwhichheisthebeneficiary.WhatistheminimumamountthatdavidshouldcontributeannuallyinordertomaximizeCdSGand/orCdSBpaymentsintotheplan?

Sincedavid’sincomeisabovetheCdSBentitlementthreshold,hewillnotqualifyforanyCdSBassistance.TomaximizehisCdSGs,hewillhavetocontributeatleast$1,500totheRdSPeachyearfrom2009until2025,whenheturns49.Forcontributions


totalling$25,500overthisperiod,hecanaccumulate$3,500ofCdSGsannuallyfor17years,foratotalof$59,500inCdSGdeposits.

Example 4: CDSG/CDSB Maximization—Lump-Sum Funding

dineshandKamihaveadisabled10-year-olddaughter,Anna,forwhomtheywouldliketostartanRdSP.Becauseofherdisability,Annawillneverbeabletoearnherownannualincome;however,herparentsarequitewelloff.Theyhaveanannualfamilyincomeof$400,000,andcaneasilyaffordtocontribute$200,000inonelumpsumtotheRdSPin2009.Shouldthey?

Theproblemwithcontributingtheentire$200,000inonelumpsumisthatdineshandKamiwillonlybeabletocollectoneCdSGpayment,fortheyearinwhichthecontributionismade,andthatpaymentwillbelimitedto$1,000,becausetheirfam-ilyincomeisabovethethresholdforthehigherrate.Instead,theyshouldspreadtheircontributionsacrossfutureyears,ensuringthattheamountcontributedeachyearqualifiesforthemaximumgovernmentassistance.OnceAnnaturns19,sheshouldbeeligibleforthehigherCdSGrateandalsoCdSBpayments,becausethelevelofassistancetowhichsheisentitledwillbebasedonherfamilyincome.

The optimal contribution schedule in this scenario is set out in table1. Theamountsarecomputedbyworkingbackward:first,determinethedollaramountofcontributionsthatshouldbesavedinordertomaximizeCdSGpaymentsinfutureyears;thensubtractthattotalfromthelifetimeRdSPcontributionlimitof$200,000.Thedifferenceshouldbecontributedinthefirstyear.Thiscontributionschedulewilloptimizethetax-freegrowthintheplanandatthesametimemaximizethegovernmentassistance.

PaymenTs ouT of an RdsP

ThreetypesofpaymentscanbemadeoutofanRdSP:31repaymentsofgovernmentassistancereceivedbytheplan,“disabilityassistancepayments”(dAPs),andtransfersfromoneRdSPtoanother.Therulesgoverningeachtypeofpaymentaresummar-izedbelow.

Repayment of Cdsgs and Cdsbs: a ssistance holdback amountTheCanadadisabilitySavingsRegulationscontainrulesrequiringrepaymentofgovernmentassistancepaidintoanRdSPincertaincircumstances.32

Undertheserules,intheeventthat

n theRdSPisterminated,n thebeneficiaryceasestobeeligibleforthedTC,

31 Paragraph146.4(4)(i).

32 CanadadisabilitySavingsRegulations,regulations5through7.


n adAPismadefromtheplan,orn thebeneficiarydies,

theissuermustrepayallCdSGsandCdSBspaidintotheplaninthe10yearspreced-ing thatevent (lessanyrepaymentsof suchassistancemadeduring thatperiod).However, the amount of such repayment shall not exceed the fair market value

Table 1 Schedule of RDSP Contributions To Maximize the entitlement to Government assistancea

Year Ageofbeneficiary Contribution CdSG CdSB

years dollars

2009................... 10 165,000 1,000 na2010................... 11 1,000 1,000 na2011................... 12 1,000 1,000 na2012................... 13 1,000 1,000 na2013................... 14 1,000 1,000 na2014................... 15 1,000 1,000 na2015................... 16 1,000 1,000 na2016................... 17 1,000 1,000 na2017................... 18 1,000 1,000 na2018................... 19 1,500 3,500 1,0002019................... 20 1,500 3,500 1,0002020................... 21 1,500 3,500 1,0002021................... 22 1,500 3,500 1,0002022................... 23 1,500 3,500 1,0002023................... 24 1,500 3,500 1,0002024................... 25 1,500 3,500 1,0002025................... 26 1,500 3,500 1,0002026................... 27 1,500 3,500 1,0002027................... 28 1,500 3,500 1,0002028................... 29 1,500 3,500 1,0002029................... 30 1,500 3,500 1,0002030................... 31 1,500 3,500 1,0002031................... 32 1,500 3,500 1,0002032................... 33 1,500 3,500 1,0002033................... 34 1,500 3,500 1,0002034................... 35 1,500 3,500 1,0002035................... 36 1,500 1,500 1,0002036................... 37 nil na 1,0002037................... 38 nil na 1,000

200,000 70,000 20,000

a Assumptions:(1)Aregistereddisabilitysavingsplan(RdSP)isopenedin2009bytheparentsofabeneficiarywhois10yearsold;(2)in2009through2017,theparents’familyincomeisabovethethresholdforentitlementtoCanadadisabilitysavingsbond(CdSB)assistanceandabovethethresholdforthehighermatchingrateforCanadadisabilitysavingsgrants(CdSGs);(3)in2018,whenthebeneficiaryturns19,andinallsubsequentyears,thebeneficiary’sfamilyincomeisbelowboththresholds,entitlinghertothemaximumlevelofCdSBandCdSGassistance.


(FMV)oftheassetsheldintheplan.Forthispurpose,theRdSPissuermustkeepan“assistanceholdbackamount”availableintheplantocovertherepaymentofgov-ernmentdepositsifrequired.33

TheassistanceholdbackrulewasputinplacetoensurethatRdSPsareusedtopromotelong-termsavings,34andtopreventgovernmentgrantsandbondsfrombeingessentially“recycled”throughwithdrawalsinordertoobtainmatchinggrantsinfutureyears.However,theruleiscomplex,andhasbeenmetwithseveralobjec-tionsfromprospectiveissuers.

WhentheoriginaldraftRdSPruleswerereleasedinOctober2007,35commentsontherulesweresolicitedfromthegeneralpublic.Feedbackwasprovidedbysev-eralfinancial institutionsandnon-profitorganizations, someofwhichexpressedconcernaboutthe“administrativecomplexity”surroundingtheassistanceholdbackamount.36

Asoriginallyproposed,theassistanceholdbackamountincludednotonlyCdSGsandCdSBspaidintotheplanovera10-yearperiod,butalsoanyinvestmentearn-ingsorgrowththereon.Realizingthatthiswouldbenearlyimpossibletotrack,thegovernmentremovedtheearnings/growthcomponentfromtheassistanceholdbackamount.

Inthespringof2008,thegovernmentheldadditionalRdSPconsultationses-sions,inwhichseveralstakeholdersaskedthattheassistanceholdbackamountbereviewedagain.Oneofthebiggestoutstandingissuesistheneedtotracknotonlytheamountsofcontributions,CdSGs,andCdSBs,butthedateonwhicheachpay-mentwasreceived.Thiswouldbeessential toproperlydeterminetheassistanceholdbackamountifanRdSPweretobetransferredfromoneissuertoanother(see“RdSPTransfers”below).

Thegovernmenthasindicated37thatacloserexaminationoftheassistancehold-back amount will be part of the three-year RdSP review mandated by the 2008budget.38

33 Ibid.,regulation5andthedefinitionof“assistanceholdbackamount”inregulation1.ThisdefinitionalsoappliesforpurposesoftheIncomeTaxAct(seesubsection146.4(1)).

34 SeethedepartmentofFinanceRegulatoryImpactAnalysisStatementissuedonJune5,2008inconjunctionwiththeCanadadisabilitySavingsRegulations:Canada Gazette Part II,supranote28,1408-12,at1409.

35 Canada,departmentofFinance,Legislative Proposals, Explanatory Notes and Overview Relating to Registered Disability Savings Plans(Ottawa:departmentofFinance,October2007).

36 Forexample,theInvestmentFundsInstituteofCanadahasformallywrittentotheministeroffinanceinthisregard.Foradescriptionoftheconsultationprocessandtheoutcome,seeCanada Gazette Part II,supranote28,at1410-11.

37 SeeRegulatoryImpactAnalysisStatement,Canada Gazette Part II,supranote28,at1411. 38 Canada,departmentofFinance,2008Budget,BudgetPlan,February26,2008,annex4,at

263:“ToensurethatRdSPsmeettheneedsofCanadianswithseveredisabilitiesandtheirfamilies,theRdSPprogramwillbereviewedthreeyearsafterplansbecomeoperational,asrecommendedinthedecember2006reportoftheExpertPanelonFinancialSecurityforChildrenwithSeveredisabilities.”


disabilit y a ssistance PaymentsAdisabilityassistancepaymentisanypaymentmadetoanRdSPbeneficiaryfromthe RdSP during the beneficiary’s lifetime or to the beneficiary’s estate after thedeathofthebeneficiary.39Thewithdrawalsarepartiallytax-freeandpartiallytax-able,onthebasisofaproratedportionofcontributionsovertheFMVoftheplan(discussedbelow).

TheplancanstipulatewhetherdAPsarepermitted.Underthelegislation,gen-erallyadAPcanbepaidoutoftheplanatanytime,providedthatthepaymentismadetothebeneficiaryorthebeneficiary’sestate.However,theissuerisprohibitedfrommakingadAPifitcouldcausetheFMVoftheRdSP’sassetstofallbelowtheassistanceholdbackamount.40Forexample, if theassistanceholdbackamount is$10,000but,owingtomarketconditions,theRdSP’sassetshavedroppedto$9,000,nodAPscanbepaidout.ThismeasureismeanttoensurethattheRdSPhasenoughassetstomeetanypotentialrepaymentobligations.Aswell,ifgovernmentassistanceexceedsprivatecontributionstotheplan,totaldAPsintheyearmustnotexceeda specified formula (the “lifetime disability assistance payment” [LdAP] formula,discussedbelow),whichisbasedontheFMVofassetsintheplanandthebenefici-ary’sage.

TheamountbywhichadAPexceedsthenon-taxableportionofthedAP(seebe-lowunder“RdSPsandTaxes”)mustbeincludedinthebeneficiary’sincomeorthedeceasedbeneficiary’sestate,asthecasemaybe.41

lifetime Disability assistance Payments

“Lifetimedisabilityassistancepayments”areasubsetofdAPsthatarespecificallyidentifiedassuchinthetermsofanRdSPandthat,oncetheycommence,arepay-ableatleastannuallyuntileitherthebeneficiarydiesortheplanisterminated.42ThetermsofanRdSPmustalsostipulatewhetherornottheplanpermitsdAPsthatarenotLdAPs.43

LdAPsmustbeginnolaterthantheendoftheyearinwhichthebeneficiaryturns60.44ThemaximumLdAPthatmaybepaidoutinanygivenyearisdeterminedbyaformulabasedonthecurrentFMVoftheassetsintheplanandthebeneficiary’sage.45ThepurposeoftheformulaistoallowtheRdSPassetstobepaidoutmoreorlessevenlyoverthebeneficiary’sremainingyears.

39 Subsection146.4(1),thedefinitionof“disabilityassistancepayment.”

40 Paragraph146.4(4)( j).


42 Subsection146.4(1),thedefinitionof“lifetimedisabilityassistancepayments.”

43 Paragraph146.4(4)(m).

44 Paragraph146.4(4)(k).

45 Paragraph146.4(4)(l).


TheformulalimitingthemaximumamountofLdAPsthatcanbemadeinanyyearisasfollows:

A/(B+3−C)+D,

where

A= thefairmarketvalue(FMV)oftheRdSPassetsonJanuary1ofthatyear,otherthanthevalueofanylocked-inannuitiesheldintheplan;

B= thegreaterof80andthebeneficiary’sage(inwholeyears)onJanuary1ofthatyear;

C= thebeneficiary’sage(inwholeyears)onJanuary1ofthatyear;andD= thetotalamountofperiodicpaymentsreceivedbytheRdSPintheyearunder

alocked-inannuityheldbytheRdSPonJanuary1ofthatyear.

Therefore,oncethebeneficiaryreachesage80,theannuallimitonLdAPswillbeequaltoone-thirdoftheRdSP’sopeningassetsthatyear.

NotethattheFMVoftheRdSPspecificallyignoresthevalueofalocked-inan-nuity.Alocked-inannuityisessentiallyalifetimeannuitywithaguaranteeperiodof15yearsorlessthatcannotbesurrendered.AsaresultofvariableDintheaboveformula,theannualLdAPlimitcanneverbelessthantheannuitypaymentreceivedbytheRdSPfromalocked-inannuityinthatyear.46

Shortened life expectancy

TheannualLdAPlimitwillnotapplyiftheissueroftheplanhasbeenprovidedwithwrittencertificationbyamedicaldoctorthatthebeneficiaryisnotlikelytosurvivemorethanfiveyears.Theyearofcertification(ortheyearinwhichsuchcertificationisreceivedbytheissuer)andthefollowingfiveyearsarereferredtoas“specifiedyears.”47

Notethatfortheyearofcertificationtobeaspecifiedyear,theRdSPissuermusthavebeenprovidedwiththecertificateinthatparticularcalendaryear.Therefore,ifadoctorissuesamedicalcertificateinNovember2009buttheissuerdoesnotre-ceiveacopyofituntilJanuary2010,thespecifiedyearswillcommencein2010,not2009,andcontinuethrough2014.

Restricted Years—Maximum/Minimum DaP Rules

ThereisaspecialrulethatlimitstheamountthatcanbepaidoutofanRdSPincer-taincircumstances.TherulestatesthatifinanycalendaryearthetotalofallCdSGsandCdSBspaidintoanyRdSPonbehalfofaparticularbeneficiaryinpreviousyearsexceedsthetotalofcontributions(otherthanbyapermittedtransfer)toRdSPsof

46 Ibid.

47 definedinsubsection146.4(1).


thebeneficiaryinthoseyears,themaximumdAPpayableoutoftheparticularplanislimitedtotheamountdeterminedbytheLdAPformulaabove.48

Inotherwords, insuchayear (referredtohereasa“restrictedyear”),49 totaldAPscannotexceedtheLdAPformula.

Example 5: Calculation of a DAP

StevenisthebeneficiaryofanRdSPwithanFMVof$400,000in2045.Thetotalofallcontributionstotheplaninpreviousyearsis$15,000,andthematchingCdSGsandCdSBspaidintotheplantotal$55,000.Nogovernmentassistancehasbeenpaidintotheplansince2030;therefore,thereisnorepaymentrequirementinrespectofwith-drawalsfromtheplan.Stevenis55andwouldlikeapaymentfromtheRdSP.WhatisthemaximumdAPthatStevencanreceivein2045,assumingthattheplanholdsnolocked-inannuities?

SincethetotalgovernmentdepositsintotheRdSP($55,000)exceedthetotalcontri-butions($15,000),themaximumdAPthatStevencanreceiveisrestrictedbytheLdAPformula,A/(B+3−C)+D.Asdiscussedabove,AisthecurrentFMVoftheRdSP’sassets;Bisthegreaterof80andthebeneficiary’sageatthebeginningofthecurrentyear;Cisthebeneficiary’scurrentage;andDistheamount,ifany,receivedbytheRdSPfromalocked-inannuity.ApplyingtheformulatoSteven’sRdSPgivesus

$400,000/(80+3−55)+0=$14,286.

ThemaximumdAPlimitdoesnotapplyinthecaseofshortenedlifeexpectancy(thatis,aspecifiedyear).Italsodoesnotapplyifthebeneficiaryhasdiedandtheplan’sremainingassetsarebeingpaidtothebeneficiary’sestate.

TherulesalsorequireaminimumdAPtobemadeincertaincircumstances.IntheyearthatthebeneficiaryofanRdSPturns60andthereafter,ifthetotalofallgovernmentgrantsandbondspaidintoanyRdSPonbehalfofthebeneficiaryinallpreviouscalendaryearsexceedsthetotalofthecontributions(otherthanpermit-tedtransfers)madetoallRdSPsinthoseyears,thereisaminimumannualwithdrawalrequirement50determinedbytheLdAPformulaabove.

Asapracticalmatter,thismeansthatinsituationswherethebulkoftheRdSPhasbeenfundedwithgovernmentassistance(CdSGsand/orCdSBs)asopposedtoprivatetaxpayercontributions,oncethebeneficiaryisatleast60,theissuermustpayouttheamountdeterminedbytheLdAPformulaabove.(Obviously,iftheplan’sassetshavedeclinedsignificantlyinvalueowingtomarketlosses,theissuerneedonlypayoutwhatisintheplan.)

48 Subparagraph146.4(4)(n)(i).

49 The“restrictedyear”terminologyisborrowedfromthedepartmentofFinance’sexplanatorynotestoparagraph146.4(4)(l),supranote35,at49.

50 Subparagraph146.4(4)(n)(ii).


IfanRdSPbeneficiaryisbetweentheagesof27and58(inclusive),heorshehastherighttodirectthatdAPsbemadefromtheplantohimselforherselfinarestrict-edyear.51Thepurposeofthisruleislikelytwofold.First,itistoensurethatifthebeneficiaryasksforadAP,suchpaymentwillnottriggerrepaymentofgovernmentgrantsandbondspaidintotheRdSPwhilethebeneficiarywasaminor,pursuanttotheassistanceholdbackrule.(TheruleonlyrequiresrepaymentofCdSGsandCdSBspaidintotheplaninthepreceding10years.)Theotherpurposeoftheruleistoen-surethatgovernmentassistanceisactuallyavailabletoabeneficiary,evenifaholder(who isnot thebeneficiary) refuses toauthorizeanydAPs.This is an importantcondition,particularlyforadultbeneficiariesofRdSPssetupbytheirparentsbeforetheyattainedtheageofmajority.Absentthiscondition,theadultbeneficiarywouldhavenosayastotheamountortimingofadAP;however,itappliesonlywheregovernmentassistanceexceedsprivatecontributions.

RdsP Tr ansfersTheholderisallowedtotransfertheassetsorvalueoftheRdSPfromoneissuertoanother, subject to the rules in the Income Tax Act governing such transfers.52Wheretherearemultipleholders,allholdersmustagreetorequestthetransfer.Thetransferorisobligatedtotransfernotjusttheplanassets(orvalue)butallhistoricalinformationheldbythatissuerwithrespecttoCdSGs,CdSBs,andcontributions,53sothatthenewRdSPissuerwillbeinapositiontodeterminetheappropriateproratataxabilityoffuturedAPs,aswellastheassistanceholdbackamountintheeventthatrepaymentofgovernmentassistanceisrequired.

SincetherecanonlybeoneRdSPforanygivenbeneficiaryatanytime(otherthananoverlapperiodpermittedduringaplantransfer),thetransferringRdSPmustbeterminatedimmediatelyfollowingthetransfer.54

OnceanRdSPbeneficiaryisatleast60yearsofageandLdAPshavecommenced,upona transferofanRdSP fromone issuer toanother, thereceivingplan issuermustundertaketopaytothebeneficiaryanydAPsthatthetransferringplanwouldhavebeenrequiredtomakeduringtheremainderoftheyearhadthetransfernottakenplace, including theminimumpayments that the transferring RdSPwouldotherwisehavebeenrequiredtomake,asdiscussedabove.55

deaTh of The benefiCiaRy

Intheeventofthebeneficiary’sdeath,theRdSPassetsmustbepaidouttothede-ceasedbeneficiary’sestate(lessanyassistanceholdbackamountthatmustberepaidto

51 Subparagraph146.4(4)(n)(iii).


53 Paragraph146.4(4)(o).


55 Paragraph146.4(8)(d).


thegovernment)bytheendoftheyearfollowingtheyearofthebeneficiary’sdeath.56ThismeansthattheRdSPassetswillpassinaccordancewiththebeneficiary’swill,orifthereisnowill,inaccordancewiththerulesapplicabletoanintestacy.

RdsPs and Taxes

Ta x abilit y of RdsP PaymentsWhenadAPismadefromanRdSPandreceivedbythebeneficiary,thepaymentmustbeapportionedbetweenitstaxableandnon-taxablecomponents.Theportionofthepaymentthatisnon-taxableiscalculatedaccordingtothefollowingformula:57

DAP×TotalRdSPcontributions−Priornon-taxablepayments

. FMVofRdSPassets−Assistanceholdbackamount

Asaresultofthisformula,anyincreaseintheFMVoftheRdSP’sassets(owingtonewcontributions,CdSGandCdSBdeposits,incomefromtheplan’sinvestments,orgrowthinthevalueofitsassets)willincreasethetaxableportionofthedAP.

Example 6: Taxation of RDSP Payments

In 2050, Erica’s RdSP is worth $400,000, consisting of $65,000 in contributions,$70,000 in CdSGs, and $20,000 in CdSBs, with the balance attributed to income/growthintheplan.Theassistanceholdbackamountiszero,sincenoCdSGsorCdSBswerereceivedafter2039.EricawillreceiveanLdAPpaymentof$10,000.Howmuchistaxable?

Usingtheformulaabove,thenon-taxableportionoftheLdAPpaymentissimplytheratioofcontributionstoplanvaluemultipliedbytheLdAPpaymentof$10,000.Thecalculation[$10,000×($65,000/$400,000)]givesusanon-taxableportionof$1,625(or16.25percent),withthebalanceof$8,375beingtaxabletoErica.

Ta x abilit y of RdsPsGenerally,anyincomeorgainsearnedbytheRdSPtrustarenon-taxablewhileinthetrust.58Thereareafewexceptionstothisrule.

First,iftheRdSPtrusthasaloanoutstandingintheyear,allofthetrust’sincomewillbetaxable.59

Second,iftheRdSPtrustcarriedonabusinessinayear,itistaxableonthein-comefromthatbusiness.60

56 Subparagraph146.4(4)(p)(i).






Finally,ifanRdSPtrustholdsinvestmentsotherthan“qualifiedinvestments,”61itmustpaytaxonanyincomeearnedonnon-qualifiedinvestmentsandonanycap-italgainsrealizedfromthedispositionofsuchinvestments.Notethatbothcapitaldividends62 (whicharenormallytax-free)63andcapitalgains(whicharenormallyhalf-taxable)64inrelationtonon-qualifiedinvestmentswouldbefullytaxable.65

It isworthmentioningthat the issuerofanRdSP isrequired“toexercise thecare,diligenceandskillofareasonablyprudentperson”tominimizethechancesthatanRdSPholdermaybecomeliabletopaytaxasaresultoftheacquisitionofnon-qualifyinginvestmentsorthedispositionofassetsforinadequateconsideration.66

PRohibiTed ConTRibuTions

Prohibitedcontributionsincludecontributionsinexcessofthe$200,000maximumandcontributionsmadeeitherwithoutthewrittenconsentoftheholder,afterthedeathofthebeneficiary,afterthebeneficiaryisnolongerdTC-eligible,orafterthebeneficiaryturned60orbecamenon-resident.SuchcontributionswillgenerallycauseanRdSPtobecomenon-compliantandfacederegistration.

Theminister,however,hastheauthoritytowaivethederegistrationoftheRdSPiftheprohibitedcontributioniswithdrawnfromtheRdSPwithinaspecifiedperiodoftime,tobedeterminedbytheminister.67Insuchacase,theprohibitedcontribu-tionisdeemednevertohavebeenmade,andthewithdrawalisdeemednottobeadAP(andthereforeisnon-taxable).

IfabeneficiaryofanRdSPdiesornolongerhasa“severeandprolongedimpair-ment,”suchthatthedTCisnolongeravailable,theRdSPshouldbeterminatedbytheendofthefollowingcalendaryear.68Ifitisstillinexistencebeyondthattime,theRdSPwillimmediatelybecomenon-compliant.

If,however,theRdSPissuerisunawarethatthebeneficiaryhasdied,orthatthebeneficiary’sdTCeligibilityhasbeenrevokedorisotherwiseindoubt,theministermaypermitanextensionofthedeadlineforterminationoftheRdSP.69

Thisruleisespeciallyhelpfulincaseswherethebeneficiary’sdTCstatusisun-certainorindispute,sinceitallowstheRdSPtocontinueuntiltheissueisresolved.Thiscantakemonthsorevenyearsiftheissueproceedstolitigation.

61 definedinsubsection205(1).

62 Subparagraph146.4(5)(b)(i).

63 Section83.

64 Paragraph38(a).

65 Subparagraph146.4(5)(b)(ii).


67 Paragraph146.4(12)(c).

68 Paragraph146.4(4)(p).



Oncethematterissettled,ifthebeneficiary’sdTCeligibilityisultimatelycon-firmed,theRdSPcancontinue.Ontheotherhand,if it isultimatelydeterminedthatthebeneficiaryisnolongerdTC-eligible,theministercansetanewdeadlineforterminationoftheplan.Thiswouldhavethebeneficialresultofpreservingthetax-deferredgrowthonRdSPassetsfromthedateofdisputeuntilthedateofresolution.

non-ComPlianT RdsPs

IfanRdSPbecomesnon-compliantatanytime—forexample,forfailuretomeettheconditionsofregistrationorfailuretoproperlyadministertheCdSGsandCdSBs70—itimmediatelylosesitsregisteredstatus.71Ifthatoccurs,theplanisdeemedtohavemadeadAPtothebeneficiary(or,ifthebeneficiaryhasdied,tothebeneficiary’ses-tate)immediatelybeforethederegistrationoftheplan.72This“deemedpayment”isequaltotheFMVoftheRdSP’sassetsimmediatelybeforederegistrationlessanyassistanceholdbackamount.ThetaxableportionofthisdeemeddAPmustbein-cludedintheincomeofthebeneficiary(orthebeneficiary’sestate)fortheyearinwhichthepaymentwasdeemedtobemade,asdiscussedabove.

AnRdSPmayalsobederegisteredifalloraportionoftherequiredassistanceholdbackamountisincludedinadAP.73Inthisevent,theRdSPisdeemedtohavemadeanadditionaldAP,equal to theportionof theassistanceholdbackamountpaidout,tothebeneficiary(orthebeneficiary’sestate)immediatelybeforetheRdSPwasderegistered.Thisdeemedpaymentisfullytaxabletothebeneficiary(orthebeneficiary’sestate);74however,ifalloraportionofthepaymentisultimatelypaidbacktothegovernment,thebeneficiary(orestate)isentitledtoanoffsettingdeduc-tionequaltotheamountrepaid.75

Notethattheministerhasthediscretiontoeitherdelayorwaivethederegistra-tionofanon-compliantRdSP“ifitisjustandequitabletodoso.”76

effeCT on oTheR disabiliTy PRogRams and benefiTs

Manygovernmentprogramsatboththefederalandprovinciallevelsareeitherincome-orasset-tested,suchthatanyincomeearnedorassetsaccumulatedinex-cessofaspecifiedthresholdwilleitherdisqualifyorsignificantlyreducetheamountofgovernmentassistance.

70 Paragraphs146.4(11)(a)and(c).



73 Paragraphs146.4(10)(c)and146.4(4)( j).

74 Subparagraph146.4(10)(c)(iii).

75 Paragraph60(z).



WhenRdSPswerefirstannounced, thefederalgovernmenttookthe leadtoensurethatwhenincomefromtheassetsheldinanRdSPiswithdrawnbythebene-ficiary,thewithdrawaldoesnotreducethebeneficiary’sentitlementtofederalin-come-testedbenefitsdeliveredthroughthetaxsystem,suchasthefederalsalestaxcreditorthechildtaxbenefit.Inaddition,RdSPincometothebeneficiarywillnotreduceoldagesecuritybenefitsoremploymentinsurancebenefits.77

Allprovincesandterritoriesprovidevarious levelsof incomesupport fordis-abledpersons,whicharemeans-tested.TheExpertPanelonFinancialSecurityforChildrenwithSeveredisabilitiesrecommendedthatinorderfortheRdSPprogramtobeeffective,RdSPassetsshouldnotdisqualifyaplanbeneficiaryfromreceivingprovincial or territorial income supportprovided topersonswithdisabilities. Inaddition, the expert panel recommended that income payments from the planshouldnotreduceincomesupportprovidedundertheseprograms.78

Inthe2007federalbudget,theministeroffinancestatedthathisdepartment,workingincollaborationwiththeministerofhumanresourcesandskillsdevelop-ment,wouldworkcloselywithalltheprovincesandterritories“toensurethattheRdSPisaneffectivesavingsvehicletoimprovethefinancialsecurityandwell-beingofchildrenwithseveredisabilities.”79Subsequently,allprovincesandtwoof theterritoriesannouncedeitherafullorpartialexemptionofRdSPassetsandincomefromprovincialasset-orincome-testeddisabilitybenefits.80Thecurrentexemptionsarepresentedintable2.

77 Forthesepurposes,amendmentshavebeenmadetothedefinitionof“adjustedincome”insubsection122.5(1),section122.6,andsubsection180.2(1)oftheIncomeTaxAct,andthedefinitionof“income”insection144oftheEmploymentInsuranceAct,SC1996,c.23.

78 A New Beginning,supranote2,recommendation15,at59.

79 Supranote1,at382.

80 See,forexample,Alberta,SeniorsandCommunitySupports,“AlbertaSupportsNewFederaldisabilitySavingsPlan,”Information Bulletin,November27,2008;Saskatchewan,SocialServices,“NewExemptionWillBenefitPeoplewithdisabilitiesandParentsofChildrenwithdisabilities,”News Release,September4,2008;Manitoba,FamilyServicesandHousing,“RewardingWorkStrategyToReduceRentBurden,HelpBuildSavingsforLow-IncomeManitobansinUncertainTimes:Mackintosh,”News Release,November21,2008;Ontario,MinistryofCommunityandSocialServices,“OntarioSupportsRegistereddisabilitySavingsPlans,”News Release,November30,2008;NewBrunswick,departmentofSocialdevelopment,“ProvinceHelpsFamiliesSaveforLong-TermFinancialNeedsofPersonswithdisabilities,”News Release,december10,2008;NovaScotia,departmentofCommunityServices,“ProvinceHelpsFamiliesSaveMoreforRelativeswithdisabilities,”News Release,February11,2009;PrinceEdwardIsland,SocialServicesandSeniors,“PrinceEdwardIslandGovernmentHelpsFamiliesSaveforPeoplewithdisabilities,”News Release,december4,2008;andNorthwestTerritories,Hon.JacksonLafferty,“RegistereddisabilitySavingsPlanExemption,”StatementtotheLegislativeAssembly,February6,2009.AlsoseeBCReg.98/2009amendingEmploymentandAssistanceRegulation,BCReg.263/2002;IndividualandFamilyAssistanceRegulation,QuebecOC1073-2006(asamended),andNLReg.41/08amendingIncomeandEmploymentSupportRegulations,NLReg.144/04;andSocialAssistanceRegulation,YukonOIC2008/68.


Table 2 Provincial and Territorial exemption of RDSP assets and Income from Income-Tested Programs

Province Exemption

BritishColumbia . . . . . . . . . . . . . . . . . . . . FullexemptionAlberta............................ FullexemptionSaskatchewan . . . . . . . . . . . . . . . . . . . . . . . FullexemptionManitoba. . . . . . . . . . . . . . . . . . . . . . . . . . FullexemptionOntario. . . . . . . . . . . . . . . . . . . . . . . . . . . . FullexemptionQuebec. . . . . . . . . . . . . . . . . . . . . . . . . . . . PartialexemptionaNewBrunswick. . . . . . . . . . . . . . . . . . . . . PartialexemptionbNovaScotia. . . . . . . . . . . . . . . . . . . . . . . . FullexemptionPrinceEdwardIsland . . . . . . . . . . . . . . . . PartialexemptioncNewfoundlandandLabrador. . . . . . . . . . FullexemptionYukon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FullexemptionNorthwestTerritories. . . . . . . . . . . . . . . . FullexemptionNunavut . . . . . . . . . . . . . . . . . . . . . . . . . . . decisionpending

a ExemptstheRdSPasanassetandpartiallyexemptsincomereceivedoutoftheplan.Exemptionoftheincomeisalloweduptothelow-incomethresholdsetbytheInstitutdelastatistiqueduQuébec.Thisworksoutto$300amonthinincomeforasingleadultand$340amonthinincomeforacouple.

b ExemptstheRdSPasanassetandpartiallyexemptsincomereceivedoutoftheplan.Thisworksoutto$800amonthinincomeforanadult,andwillbeadjustedforfluctuationsinthelow-incomecutoffthreshold.

c ExemptstheRdSPasanassetandincomereceivedoutoftheplanincalculatingeligibilityforincome-testedsocialprogramsforapplicantswhosetotalincomedoesnotexceedthelow-incomeleveldefinedbytheNationalCouncilofWelfare.Source:PlannedLifetimeAdvocacyNetwork,Provincial/Territorial Updates—Registered Disability Savings Plan(Vancouver:PLAN,2009),1-3.

RdsPs veRsus TRusTs

UntiltheadventoftheRdSP,mostplanningforpersonswithdisabilitiesfocusedonthe use of trusts. Specifically, a fully discretionary trust (widely referred to as a“Hensontrust”)81isoftenusedtoprotecttheassets,includinganinheritance,onbehalfofthedisabledbeneficiaryandtopreservethebeneficiary’srightstocollectasset-testedgovernmentbenefitsandentitlements.

Since the trust is fullydiscretionaryand there isnodirectentitlementof thebeneficiarytothetrust’sassets,thegeneralruleinmostprovincesisthatfundsin

81 NamedaftertheOntarioCourtofAppealdecisioninOntario (Director of Income Maintenance) v. Henson(1989),36ETR192,involvingafatherwhoestablishedafullydiscretionarytrustforhisdaughter.TheOntarioMinistryofCommunityandSocialServicestriedtolookthroughthetrustsuchthatthedaughterwouldbedisqualifiedfromcertainasset-testedgovernmentbenefits.Thecourtruledinherfavour,findingthattheassetsdidnotbelongtoher.ForanexcellentguidetotheuseofHensontrusts,seeHarryBeatty,MaryLouisedickson,andJohnStapleton,Consider a Henson Trust(Thornhill,ON:TheReenaFoundation,2008)(availableonlineathttp://www.reena.org/pdfs/hensontrust.pdf ).(TheReenaFoundationisanon-profitagencydedicatedtointegratingadultswithdevelopmentaldisabilitiesintothemainstreamofsociety.)


thesetrusts,setupeitherduringthedonor’slifetimeoronthedonor’sdeath,canbeprovidedforabeneficiarywithoutaffectingthebeneficiary’sentitlementtoprovin-cialgovernmentbenefits.This isconsistentwiththetreatmentofRdSPassets inmostprovinces,asdiscussedabove.

Clearly,theabilitytocollectCdSGsandCdSBswillbeamajorfactorinthedeci-siontouseanRdSPasopposedtoaHensontrust,assumingthatacontributor’sfundsarelimited.Inaddition,thecostsofsettingupandmaintainingthetrust(an-nualtrusteefees,taxreturnfilingfees,etc.)mayreduceitsultimatebenefitunlesssignificantfundsareavailabletosettlethetrust.Keepinmind,however,thatfundscontributedtoanRdSPmayonlybepaidtothebeneficiaryorthebeneficiary’ses-tate.Thereisnooptionto“sprinkle”assetsamongotherfamilymemberswhilethebeneficiaryisaliveorwhenthebeneficiarydies,norcanassetsrevertbacktothecontributor(s).Atrustlikelyaffordsmoreflexibilityinthisregard.

Onefinalconsideration is that in thecaseofamentallydisabledpersonwholacks thecapacity tomakeawill, thedistributionsofanyremaining funds inanRdSPwillbegovernedbyprovincial intestacy rules.Bycontrast, ifmoney is setasideforthesupportofadisableddependantthroughatrust,uponthedeathofthatindividual,theassetsinthetrustcanflowdirectlytootherbeneficiarieschosenbythesettlorofthetrust.

Forwealthierparents,however,anRdSPwilllikelybeusedinconjunctionwithaHensontrusttoprovideforadisabledchild.

ConClusion

Thefederaltaxsystem,throughgeneraldisabilitycredits,itemizedmedicalexpensecredits,andotherdeductions,providessignificantassistancetodisabledindividualsandfamilieswhosupportthem.Nowthatassistanceisaugmentedthroughtheintro-ductionoftheRdSP.

ContributionstoRdSPs,whichcanbemadebydisabledindividuals,theirpar-ents,orotherfamilymembersorentities,arenottax-deductible;however,similartoRESPsandotherregisteredplans,earningsinanRdSParetax-deferredwhiletheyremainintheplan.AlsosimilartoRESPs,thereisnoannualcontributionlimitbutonlyalifetimecumulativemaximumamount.ThemostsignificantbenefitoftheRdSPwilllikelyturnouttobethefederalgovernment’smatchingcontributionsintheformofCdSGsandCdSBs.

Asaresultoftheadditionalgovernmentsupplementsandthetax-deferredaccumu-lationwithinRdSPs,substantialsavingscanbeachievedovertime.Bystrategicallyplanningtheamountandtimingofcontributions,contributorscanmaximizetheavailablegovernmentassistance,evenfurtherenhancingprivatesavings.

PaymentsfromanRdSPtoabeneficiarycanbemadeatanytimeandusedforanypurpose.However,thetimingandtheamountofpaymentsareconstrained,particu-larlyintheearlyyearsoftheplan,bytheassistanceholdbackrule.Thisrulehasbeencriticized,particularlybyissuersandadvocacygroups,andthegovernmenthasin-dicatedthatitwillre-examinetheholdbackrequirementaspartofitsthree-yearRdSPreview.


Annual payments, referred to as lifetime disability assistance payments, mustcommencenolaterthantheyear inwhichthedisabledindividualturns60.ThemaximumLdAP,determinedbyformula,isdesignedtoensurethatpaymentsoutoftheplanwillextendoverthebeneficiary’sremaininglifetime.Inthecaseofshort-enedlifeexpectancy,thisannualmaximumdoesnotapply.

AportionofanyRdSPpaymentsmadetothebeneficiarymustbeincludedinthebeneficiary’sincome.Thenon-taxableportion,determinedbyformula,representstheproportionofcontributionstothetotalFMVoftheassetsintheplan,lesstheassistanceholdbackamount,multipliedbytheamountofthepayment.

RdSPassetsandRdSPincomewillnotbetakenintoaccountindeterminingeli-gibilityformostfederalandprovincialdisabilityprogramsandbenefits.

RdSPsprovideopportunitiestosavefordisabledindividualsnomatterwhatthefamily income level. For individuals with modest means, the funding availablethroughCdSGsandCdSBscanprovidesignificantfinancialsupporttoadisabledrel-ativeinfutureyears.Forwealthierfamilies,RdSPswilllikelybeusedinconjunctionwithpersonaltruststosupplementsupport.Fordisabledindividualswhowanttosecuretheirownfuture,theRdSPcanofferanothermeanstofundtheirretirement.

IntroductionWhat Is an RDSP?BeneficiaryIssuerHolder

Contributions to RDSPsAnnual Government AssistanceCanada Disability Savings GrantCanada Disability Savings BondMaximizing Government Assistance Payment

Payments out of an RDSPRepayment of CDSGs and CDSBs: Assistance Holdback AmountDisability Assistance PaymentsLifetime Disability Assistance PaymentsShortened Life ExpectancyRestricted Years—Maximum/Minimum DAP Rules

RDSP Transfers

Death of the BeneficiaryRDSPs and TaxesTaxability of RDSP PaymentsTaxability of RDSP

Prohibited ContributionsNon-Compliant RDSPsEffect on Other Disability Programs and BenefitsRDSPs Versus TrustsConclusion

Documents

Personal Tax Planning - Jamie Golombek · 342 n canadian tax journal / revue fiscale canadienne (2009) vol. 57, no 2 n the beneficiary’slegal parent, guardian, tutor, curator, or