Registered Disability Savings Plans (RDSP) and Registered Education Savings Plans (RESP) – Anti-avoidance Rules
Notice to the reader
On September 8, 2017, the Department of Finance released proposed changes to the exceptions to the new anti-avoidance rules for advantages. As a result, the answer to Question 4 below has been modified to reflect these proposed changes. For further information, please consult the Department of Finance’s press release.
Notice to the reader
This measure and the proposed changes have received Royal Assent.
Budget 2017 announced the strengthening of anti-avoidance rules to help prevent aggressive tax planning strategies, including those that purport to enable RDSP holders and RESP subscribers to access the plan’s funds without including these amounts in income.
1. What are anti-avoidance rules?
Anti-avoidance rules are rules of wide application that counter aggressive tax planning undertaken to circumvent the overall spirit of the law.
2. What are the new anti-avoidance rules proposed by the budget in respect of RDSPs and RESPs?
The budget proposes to introduce new anti-avoidance rules for RDSPs and RESPs similar to the rules already in place for registered retirement income funds (RRIFs), registered retirement savings plans (RRSPs), and tax-free savings accounts (TFSAs). The rules provide for a special tax on certain tax advantages that unduly exploit the tax attributes of an RDSP/RESP, as well as special taxes on prohibited investments and on non-qualified investments. In all these cases, the Minister of National Revenue may waive or refund all or a portion of the tax depending on the circumstances.
What is an advantage?
An advantage may generally be described as a benefit obtained from a transaction that is intended to unduly exploit the tax attributes of an RDSP/RESP, which could include a reduction in the value of an RDSP/RESP without a corresponding income inclusion. An advantage also includes certain other transactions including benefits from "swap transactions". These advantages will be subject to a tax that is generally equal to their fair market value, representing a 100% tax. As well, an advantage includes income earned on a prohibited investment after March 22, 2017.
What is a prohibited investment?
A prohibited investment generally includes debt of the RDSP holder or RESP subscriber and investments in entities in which the holder/subscriber or a non-arm’s length person has a significant interest (generally 10% or more) or with which the holder/subscriber does not deal at arm’s length. A special tax equal to 50% of the fair market value of the investment will apply to an RDSP holder or RESP subscriber on acquisition of a prohibited investment by the RDSP/RESP (or at the time that an investment becomes prohibited). This tax may be refundable under certain circumstances.
What is a non-qualified investment?
A non-qualified investment is property that is not a qualified investment as described in the Income Tax Act and the Income Tax Regulations. Holders of RDSPs and subscribers of RESPs that own non-qualified investments will be subject to a special tax of 50% of the fair market value of the non-qualified investment. The tax liability will apply at the time that a non-qualified investment is acquired by the RDSP/RESP or at the time an investment becomes non-qualified. This tax may be refundable under certain circumstances.
3. When are these new rules effective?
The new rules are effective for transactions occurring, income earned, capital gains accruing and investments acquired by an RDSP/RESP after March 22, 2017.
4. Are there any exceptions to these new anti-avoidance rules for advantages?
The new anti-avoidance rules will not apply to benefits related to swap transactions if the transaction is completed before July 2017. This exception also applies to benefits related to swap transactions if either
- the transaction is completed before 2022 and is undertaken to remove an investment from an RDSP/RESP that would otherwise give rise to a special tax if it were retained in the RDSP/RESP; or
- the transaction is completed before 2028 and is undertaken to remove an investment from an RDSP/RESP that was a prohibited investment held by the RDSP/RESP on March 23, 2017.
Budget 2017 also announced that if an RDSP/RESP held a prohibited investment on March 23, 2017, and the RDSP holder or RESP subscriber filed an election with the CRA before April 2, 2018, the new anti-avoidance rules would not apply to benefits related to income (including capital gains) derived from the prohibited investment, provided the holder/subscriber withdrew the income from the RDSP/RESP within 90 days after the end of the year it is earned. As a result of the proposed changes released by the Department of Finance on September 8, 2017, an RDSP holder or RESP subscriber will no longer be able to file such election.
5. What should I do if I participated in an inappropriate transaction involving my RDSP/RESP?
To correct previous omissions or errors, you can do so through the CRA's Voluntary Disclosures Program. If you make a full disclosure before any compliance enforcement action is started, you may only have to pay the taxes owing plus interest. Go to the Voluntary Disclosures Program for more information.
6. Where can I obtain more information on the new RDSP/RESP anti-avoidance rules?
The CRA is committed to providing taxpayers with up-to-date information. The CRA encourages taxpayers to check its Web pages often. All new forms, policies, and guidelines will be posted as they become available.
In the meantime, please consult the Department of Finance Canada's Budget 2017 documents for details.
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