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Payments Out of an RDSP

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Financial Planning
Disabilities -> RDSPs -> Payments out of an RDSP

Payments out of a Registered Disability Savings Plan (RDSP)

There are three types of payments that can be made from a registered disability savings plan (RDSP):
bulletDisability assistance payments (withdrawals),
bullettransfers to another RDSP
bulletrepayments under the Canada Disability Savings Act

Disability assistance payments made from an RDSP will not be included in the income of the beneficiary for purposes of calculating

bullet GST credit (GSTC) (ITA s. 122.5(1))
bullet Canada Child Tax Benefit (CCTB) (ITA s. 122.6))
bullet Old Age Security clawback (ITA s. 180.2(1))
bullet Employment Insurance (EI) benefit repayments (Employment Insurance Act s. 144)

A disability assistance payment is any payment made from the RDSP to the beneficiary or to the beneficiary's estate.  The terms of each individual RDSP must specify whether disability assistance payments that are not lifetime disability payments are allowed or not.

Lifetime disability assistance payments are disability assistance payments that are identified under the terms of the RDSP as lifetime disability assistance payments.  After they begin to be paid, they are payable at least annually until the beneficiary dies or the plan is terminated.  Lifetime disability assistance payments must be started no later than the end of the year in which the beneficiary turns 60.

A disability assistance payment is prohibited from being made if it would result in the fair market value of the RDSP being less than the assistance holdback amount.

The assistance holdback amount is the total of Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs) paid into the plan (or into any prior RDSP of the beneficiary) in the immediately preceding 10-year period, less any amount of CDSGs or CDSBs paid in that 10-year period that has been repaid to the government.

The assistance holdback amount is the amount that will have to be repaid if:
bullet the RDSP is terminated
bulletthe RDSP no longer qualifies to be an RDSP
bullet a disability assistance payment is made from the RDSP
bullet the beneficiary ceases to be a DTC-eligible individual, or
bullet the beneficiary dies

The amount that would have to be repaid as the result of one of the above occurrences is the lesser of:
bullet the assistance holdback amount immediately before the occurrence, or
bullet the fair market value, immediately before the occurrence, of the property held by the RDSP

Shortened life expectancy

Income Tax Act s. 146.4(1), s. 146.4(1.1) to 146.4(1.4)

RDSP beneficiaries with shortened life expectancies (five years or less) are allowed to make withdrawals without the requirement to repay the assistance holdback amount, if the taxable portion of withdrawals does not exceed $10,000 per year.  A medical doctor must certify as to the life expectancy, and the holder of the plan can elect for the RDSP to become a specified disability savings plan.

This change was brought into effect as a result of the June 2011 budget.

Maximum annual lifetime disability payments

Income Tax Act s. 146.4(4)(l)

There is a limit to the annual amount that can be paid as lifetime disability assistance payments.  The limit allows equal annual payments to be made for the remainder of the beneficiary's lifetime, plus an additional three years.  The formula for calculating the annual limit is:

A/(B + 3 - C) + D, where

A is the fair market value of the plan's assets at the beginning of the year, excluding the value of any locked-in annuity contracts held by the plan at that time.

B is the greater of 80 and the beneficiary's age in whole years at the beginning of the calendar year for which the limit is being determined.  If the beneficiary's age exceeds 80, this will result in the limit on the annual payment for the year being one-third of the value of the RDSP.

C is the beneficiary's age at the beginning of the year for which the annual limit is being determined.

D is the total amount of periodic payments received by the RDSP in the year under a locked-in annuity (the fair market value of which has been excluded from variable A above).

Example (assumes that contributions have been made to the RDSP for 20 years, starting when the beneficiary was 20):

Beneficiary is 40 years old at the beginning of the year.  Assume that life expectancy is 80 years.

Fair market value of the assets in the RDSP at the beginning of the year is $296,538.  This is made up of:
bullet $30,000 of contributions = $1,500/year x 20 years
bullet $70,000 of Canada Disability Savings Grants (CDSGs) = $3,500/year x 20 years
bullet $20,000 of Canada Disability Savings Bonds (CDSBs) = $1,000/year x 20 years
bullet $176,538 of earnings at 8% per year for 20 years

The RDSP is not invested in any locked-in annuities.

Maximum annual lifetime disability payments are equal to

$296,538 / (80 + 3 - 40) + 0 = $296,538 / 43 = $6,896 per year.

Restrictions on payments when CDSG + CDSB are greater than contributions

When, at the start of any year, the lifetime total paid into the RDSP from Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs) exceeds the lifetime total of contributions to the RDSP, there are some restrictions on payments:

  1. the total amount of any disability assistance payments in the year shall not exceed the amount calculated for the maximum lifetime disability assistance payments.
  2. if the beneficiary has attained the age of 59 before the start of the year, the amount calculated for the maximum lifetime disability assistance payments is also the minimum amount to be paid in the year.
  3. if the beneficiary has attained the age of 27, but not 59, before the start of the year, the beneficiary has the right to direct that one or more disability assistance payments be made from the plan to the beneficiary in the year, as long as the payment does not result in the fair market value of the RDSP being less than the assistance holdback amount.

Note that (i) above does not apply in a year which is a "specified year".  A specified year is a year in which a medical doctor certifies that the beneficiary is not expected to live for more than another 5 years, and each of the 5 years following the certification by the doctor.

Next:  Taxable amount of disability assistance payments

Back to RDSP main page

 

Revised: October 29, 2014

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