Registered Disability Savings Plans (RDSP) Budget 2011 Provisions - Questions & Answers

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Official Title: Registered Disability Savings Plans (RDSP) Budget 2011 Provisions

Registered Disability Savings Plans (RDSP) Budget 2011 Provisions

Number:
CDSP/ PCEI -2011/12-003B-063
Date:
July 18th, 2011
Subjet:
Notice #063 - Registered Disability Savings Plans (RDSP) Budget 2011 Provisions

General Questions and Answers for Issuers

1. What is changing with this increased flexibility?

This increased flexibility will now allow RDSP beneficiaries, who have shortened life expectancies, access to more of their RDSP savings by permitting the Plan Holder to request annual withdrawals for the beneficiary without triggering the 10-year repayment rule, subject to specified limits and certain conditions.

Previously, RDSP rules did accommodate the need for beneficiaries with shortened life expectancies to have greater access to their savings in the short term. Although maximum withdrawal limits normally applied to an RDSP—if total CDSGs and CDSBs exceeded total private contributions—these limits did not apply if the beneficiary had been certified as having a shortened life expectancy (SLE). However, the 10-year repayment rule still applied in this situation, with the result that a withdrawal from the plan may have triggered a significant repayment of CDSGs and CDSBs.

2. What are the eligibility criteria?

An RDSP beneficiary, who is considered to have a shortened life expectancy under current rules, will be eligible. These rules require a medical doctor to certify in writing that the beneficiary's state of health is such that, in the doctor's opinion, the beneficiary is not likely to survive more than five years. The medical doctor must be licensed to practice under the laws of a province or territory (or of the place where the beneficiary resides).

3. How can plan holders and beneficiaries take advantage of this measure?

The plan holder must choose to make an "election", (a request that the RDSP fall under the SLE rules)—in order to take advantage of this new measure. To do so, the plan holder will be required to submit a signed document indicating the election along with the medical attestation to the Issuer, who will then notify Human Resources and Skills Development Canada (HRSDC). Once the election has been made and the Issuer notifies the Government of Canada, the RDSP is then referred to as a "Specified Disability Savings Plan" (SDSP).

4. For what length of time can an election last?

Once an election has been made and the Issuer notifies the Government of Canada, the plan is deemed an SDSP. It will remain a SDSP unless one of the provisions in 146.4(1.2) of the Income Tax Act occurs.

  • The holder elects to reverse the designation.
  • The taxable amount of a Disability Assistance Payment exceeds $10,000 or the maximum allowed by the Lifetime Disability Assistance Payment formula during a primarily government assisted plan year.
  • A contribution is made to the plan.
  • Monies from a designated provincial program or other program with a similar purpose are paid into the plan.
  • The plan is terminated.
  • The plan is deregistered due to noncompliance.
  • Lifetime Disability Assistance Payments have not commenced prior to the end of the year following the year the plan is designated a SDSP.
  • The amount of Lifetime Disability Assistance Payments paid in a specified year do not equal the amount of the Lifetime Disability Assistance Payment formula during a primarily government assisted plan year.

5. What rules apply to a SDSP?

Withdrawals made at any time following an election will not trigger the repayment of CDSGs and CDSBs provided that the total of the taxable portions of the withdrawals does not exceed $10,000 annually or the maximum allowed by the Lifetime Disability Assistance Payment formula during a primarily government assisted plan year. Accordingly, total annual withdrawals may exceed $10,000 due to non-taxable portions. Once an election has been made, the following rules apply:

  • Lifetime disability assistance payments (LDAPs) must begin in the year following the year the plan became an SDSP.
  • The maximum amount of the taxable portion of a Disability Assistance Payment (DAP) that can be withdrawn from the plan each year is $10,000 or such greater amount as would be required to satisfy the minimum withdrawal requirements that ordinarily apply during a primarily government assisted plan year if the beneficiary had attained 60 years of age.
  • No further contributions to the plan will be allowed, except that a rollover of a deceased individual's Registered Retirement Savings Plan, Registered Pension Plan or Registered Retirement Income Fund proceeds to the RDSP of a beneficiary, who is a financially dependent child or grandchild, will still be permitted.
  • No new CDSGs or CDSBs will be paid into the plan. Upon the passing of the beneficiary, any CDSGs and CDSBs remaining in the plan and that were received by the plan within the preceding 10 years must be repaid to the government.
  • No payments from a designated Provincial Program or similar program are allowed.
  • No Carry forward of CDSG or CDSB entitlements would be allowed with respect to the years under election, other than for the year in which the election is made.

Generally, these rules will apply to the plan on an ongoing basis unless a plan holder reverses the election, the plan is terminated or is considered non-compliant under 146.4(10)(a) of the Income Tax Act. If withdrawals of taxable amounts exceed the annual $10,000 limit, then the normal 10-year repayment rule will apply, to the extent that grants and bonds and other assets remain in the plan to satisfy that requirement.

6. Can an election be reversed?

Yes, a plan holder will be permitted to reverse an election on a prospective basis at any time. In this case, the regular RDSP rules will generally apply, except that no new CDSGs and CDSBs will be paid into the plan until the year after which the election is reversed. To reverse an election, the plan holder will be required to provide a written notice to the RDSP Issuer; and the Issuer will be required to notify HRSDC of the reversal. Note: withdrawals of taxable amounts exceeding the $10,000 annual limit will result in the automatic reversal of an election.

7. Is there a waiting period between reversing an election and making a subsequent election?

Reversing an election will not preclude a plan holder from making a subsequent election if a new medical certification of SLE is obtained. However, a subsequent election will be permitted only two or more years after the reversal of the preceding election.

8. What happens if a plan fails to comply with any of the conditions that apply to an SDSP?

If a plan fails to comply with any of the conditions provided in Question 5, the plan will lose its SDSP status and the plan will be subject to the regular RDSP rules. This may require the repayment of grants and bonds. The Minister of National Revenue will have the discretion to waive the application of these conditions, as well as the 24-month waiting period for subsequent SDSP elections, if it is just and equitable to do so.

9. What is the timing of this measure?

This measure will apply to withdrawals made after June 25, 2011. However, as a transitional rule, holders making an election under this measure will be permitted to direct that the remainder of the 2011 withdrawal limit be applied in 2012 provided that the required medical certification was obtained before 2012.

Examples

The following table compares the treatment of a typical RDSP for a beneficiary who is certified as having a SLE in 2012 under the new rules versus the former rules. The table compares assets and withdrawal amounts in 2012 for an RDSP opened in December 2008. From 2008 to 2012, $1,500 is contributed to the plan, attracting $3,500 in CDSGs in each year. In addition, the plan receives $1,000 in CDSBs annually during these years. By 2012, there is $34,919 in plan assets in the RDSP, including contributions, CDSGs, CDSBs and investment income.

Under the old rules, if a withdrawal of any amount was made from the plan, all CDSGs and CDSBs paid into the plan in the preceding 10 years had to be repaid – an amount equal to $22,500. As a result, at most $12,419 could have been withdrawn from the plan (i.e. the amount of contributions and investment income), which would have fully depleted the available RDSP assets.

Under the new rules, pursuant to an election, up to $10,000 in taxable amounts may be withdrawn from the RDSP in 2012 without the requirement to repay any CDSGs or CDSBs. The total withdrawal would also include a non-taxable portion (i.e. contributions). Accordingly, as contributions make up 21 per cent of plan assets, the maximum total annual withdrawal would be $12,735, consisting of $10,000 in taxable amounts and $2,735 in non-taxable amounts (which is 21 per cent of the total withdrawal). The remaining $22,184 in RDSP assets could be withdrawn in future years.

An Example of Access to RDSP Assets Under the Old versus the New Rules

(This example assumes a 5.5% annual nominal rate of return.)

Assets Old Rules New Rules
Contributions+ $ 7,500 $ 7,500
CDSGs++ $ 17,500 $ 17,500
CDSBs++ $ 5,000 $ 5,000
Investment income++ $ 4,919 $ 4,919
Total Assets $ 34,919 $ 34,919


Calculation of Withdrawal: Old Rules New Rules
Total assets $ 34,919 $ 34,919
CDSG/CDSB repayment $(22,500) $ 0
Taxable portion of withdrawal $ 4,919 $ 10,000
Non-taxable portion of withdrawal $ 7,500 $ 2,735*
Maximum 2012 withdrawal $ 12,419 $ 12,735**
Remaining Assets $ 0 $ 22,184

Notes:

+ The non-taxable portion of the plan, i.e. the contributions, consists of 21.5% of Total Assets.

++The taxable portion (i.e. Grant, Bond and investment income) is 78.5% of Total Assets.

* Under the new rules, the $10,000 taxable amount is 78.5% of $12,735; therefore, $2,735 makes up the non-taxable portion of the withdrawal (i.e. $12,735 - $10,000 = $2,735).

** If the beneficiary were certified as having a SLE in 2011, any unused portion of the $10,000 taxable withdrawal limit for 2011 could be carried forward to 2012. In this situation, the maximum 2012 withdrawal limit could be as high as $25,471.

Contact Us

Questions on this Information Bulletin should be directed to the Canada Disability Savings Program by e-mail at rdsp-reei@hrsdc-rhdcc.gc.ca, or by calling 1-866-204-0357.

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