Chapter 8. Closing an RDSP

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A PDF version of the Registered Disability Savings Plan provider user guide is available on the index page.

Introduction

When certain events occur, the Registered Disability Savings Plan (RDSP) needs to be closed. This chapter provides information relating to these events, as well as the conditions and timelines in place for regulating RDSP closures.

8.1 RDSP closure

An RDSP is normally closed when one of the following events occurs:

• loss of eligibility for the Disability Tax Credit (DTC)
• RDSP non‑compliant
• beneficiary's death
• transfer of the RDSP to another issuer
• other

Note: Technically, the trust account does not need to be closed when the RDSP is non‑compliant. In this case, the law requires that a deemed Disability Assistance Payment (DAP) is made to the beneficiary or their estate. The money does not have to be removed from the account.

When an RDSP is closed, the beneficiary or the beneficiary's estate receives the invested contributions and all earnings from the RDSP. However, all grants and bonds that have been paid into the RDSP during the last ten years must be repaid to the Government of Canada.

8.1.1 Loss of eligibility for the DTC

If the beneficiary loses eligibility for the DTC, the plan may be closed or may remain open. While a beneficiary is DTC-ineligible, and the choice to keep the plan open is made, no contributions can be made to the plan, including:

• rollover of Registered Education Savings Plan (RESP)
• investment income

The beneficiary is not eligible to receive grants and bonds, nor will entitlements accrue during any period where the beneficiary remains DTC‑ineligible.

Rollover of proceeds from a deceased individual's Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) to the RDSP of a financially dependent infirm child or grandchild will be permitted, if made by the end of the fourth calendar year following the first full calendar year throughout which the beneficiary is DTC-ineligible.

Withdrawals will be permitted but will trigger repayment of the Assistance Holdback Amount (AHA), which requires that $3 in grant and bond be repaid, for every $1 withdrawn from an RDSP up to a maximum of the total AHA, over a modified period.

The Assistance Holdback Amount will be determined as all grants and bonds paid into the RDSP in the 10‑year period immediately preceding the time when the beneficiary was no longer DTC‑eligible, minus any grants and bonds paid into the RDSP during that time that has subsequently been repaid to the Government of Canada.

The reference period for the AHA will remain the 10‑year period preceding the time when the beneficiary was no longer DTC‑eligible, until the beginning of the year that the beneficiary turns 51, when it will become 9 years, decreasing at the beginning of each subsequent year until the beginning of the year, the beneficiary turns 60 when it becomes nil.

To ensure an option to close a plan continues to exist for beneficiaries who are DTC-ineligible, a plan holder will be allowed, at any time during which a beneficiary is DTC-ineligible, to request closure of the RDSP. Upon such a closure, the sums remaining in the RDSP after repayment of the AHA to the Government of Canada will be paid to the beneficiary. The AHA will be modified to reduce by one year, for each year beginning the year that the beneficiary turns 51.

This means that during any period in which a beneficiary is DTC-ineligible, there will no longer be a requirement for the beneficiary to provide a medical certification that the beneficiary is likely to become DTC-eligible at some point in the future.

Note: Before March 19, 2019, if a beneficiary no longer qualified for the DTC, the RDSP had to be closed by the end of the year following the first full year without DTC-eligibility, unless a special election was filed. Since then, beneficiaries no longer qualifying for the DTC can decide to keep their RDSP open. When closing the plan, the AHA would be returned to the Government of Canada.

8.1.2 RDSP non‑compliance

An RDSP will be considered non‑compliant and cease to be an RDSP if the following issues arise:

• the RDSP fails to comply with a condition in subsection 146.4(4) of the Income Tax Act (ITA)
• the RDSP is not administered in accordance with its terms and conditions;
• the Minister of Employment and Social Development Canada (ESDC) notifies Canada Revenue Agency (CRA) that an RDSP is non‑compliant, when the administration of a condition or obligation is not in compliance with the Canada Disability Savings Act (CDSA)

Note: CRA has the authority to apply waivers to an RDSP that is non‑compliant.

8.1.3 Beneficiary's death

Upon the death of the beneficiary:

• the sums remaining in the RDSP (considering first, any AHA to be repaid to the Government of Canada) must be paid to the beneficiary's estate
• if the beneficiary has a will, the sums remaining in the RDSP will go to whomever they have named in the will
• if the beneficiary does not have a will, the sums remaining in the RDSP will be disbursed according to provincial/territorial law
• the RDSP must be terminated no later than the end of the calendar year following the year of the beneficiary's death

If the RDSP is not terminated by December 31 of the year after the beneficiary's death, it will lose its registered status. It will then be considered a Disability Savings Plan.

8.1.4 Transfer

It is possible to transfer funds between issuers. A new RDSP will need to be opened at the new issuer and the prior RDSP will need to be terminated immediately after the transfer.

If the holder has made an election to keep the RDSP open after the loss of DTC‑eligibility a new RDSP cannot be opened at a new issuer.

8.1.5 Other

At the holder's request, an RDSP can be closed in the following situations:

• there is no property in the RDSP
• only the AHA is left in the RDSP (there are no earnings or contributions in the RDSP),
• the holder requests a payment of all remaining funds in the RDSP to be made to the beneficiary and the payment is not more than the maximum amount for that year

Note: Applicable if the RDSP terms provide the holder with the ability to request a DAP.

Before terminating an RDSP, issuers should ensure they consider any associated trust laws and requirements.

8.2 Repayments

Prior to terminating an RDSP, the issuer is required to repay to the Government of Canada, in keeping with the conditions specified in the Issuer Agreement any AHA in the RDSP.

The conditions identified in the Issuer Agreement are:

• the RDSP is terminated
• the RDSP ceases to be an RDSP
• the beneficiary has died

The issuer must repay:

• any part of an amount not rightfully paid under the terms of the CDSA
• the Canada Disability Savings Regulations to an RDSP as a grant or a bond

Beneficiaries are required to repay any portion of a DAP that comes from a grant or bond not rightfully theirs. This repayment is mandated by the terms of the CDSA and the regulations.