TaxTips.ca - Registered disability savings plans

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Financial Planning
Disabilities -> RDSPs

Payments out of the RDSP

There are three types of payments that can be made from a registered disability savings plan (RDSP):

Disability assistance payments (withdrawals),

transfers to another RDSP

repayments 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

	GST credit (GSTC) (ITA s. 122.5(1))
	Canada Child Tax Benefit (CCTB) (ITA s. 122.6))
	Old Age Security clawback (ITA s. 180.2(1))
	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:

the RDSP is terminated

the RDSP no longer qualifies to be an RDSP

a disability assistance payment is made from the RDSP

the beneficiary ceases to be a DTC-eligible individual, or

the beneficiary dies

The amount that would have to be repaid as the result of one of the above occurrences is the lesser of:

the assistance holdback amount immediately before the occurrence, or

the fair market value, immediately before the occurrence, of the property held by the RDSP

Shortened life expentancy

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. 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.

There may be certain circumstances in which the assistance holdback amount may still have to be repaid, even with a shortened life expectancy.

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

Maximum annual lifetime disability payments

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 beneficiary's life expectancy as determined by Statistics Canada, except in the following two exceptions:

where the beneficiary's age exceeds the life expectancy as determined by Statistics Canada, the beneficiary's life expectancy will be deemed to be his or her age at the beginning of the year. This will result in the limit on the annual payment for the year being one-third of the value of the RDSP

where written certification from a medical doctor indicates a shorter life expectancy than that determined by Statistics Canada, the shorter life expectancy will be used in the calculation.

Life expectancy data will be provided on the Canada Revenue Agency (CRA) website.

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 60 years.

Fair market value of the assets in the RDSP at the beginning of the year is $296,538. This is made up of:

$30,000 of contributions = $1,500/year x 20 years

$70,000 of Canada Disability Savings Grants (CDSGs) = $3,500/year x 20 years

$20,000 of Canada Disability Savings Bonds (CDSBs) = $1,000/year x 20 years

$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 / (60 + 3 - 40) + 0 = $296,538 / 23 = $12,893 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:

the total amount of any disability assistance payments in the year shall not exceed the amount calculated for the maximum lifetime disability assistance payments.
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.
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

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Revised: December 21, 2011