Cessation of disability or death of a beneficiary
What happens if the beneficiary is no longer eligible for the DTC?
Unless an election is filed with the issuer, the RDSP must be terminated and all amounts paid out of the plan by December 31 of the year following the first calendar year throughout which the beneficiary is no longer considered to have a severe or prolonged impairment in physical or mental functions that made them eligible for the DTC.
Any funds remaining in the RDSP after any required repayments of government grant and bond will be paid to the beneficiary. The taxable portions of the disability assistance payment (DAP) will be included in the income of the beneficiary in the year the payment is made to the beneficiary.
A beneficiary who stops being eligible for the DTC, might, due to the nature of their medical condition, be eligible again for the disability tax credit (DTC) for some later year. Since January 1, 2014, subject to the Election conditions discussed below, an election may be made if the RDSP holder wishes to postpone closing the plan. In these circumstances, contribution room and repaid grants and bonds are not restored.
Under proposed changes, for 2021 and subsequent tax years, the existing time limitation on the period that an RDSP may remain open after a beneficiary becomes ineligible for the disability tax credit (DTC) will be removed. The requirement for a licensed medical doctor or nurse practitioner to certify in writing that the beneficiary is likely to become DTC-eligible in future in order for the plan to remain open will also be eliminated.
The RDSP plan holder will be required to:
- have a licensed medical doctor or nurse practitioner certify in writing that the beneficiary will likely become eligible for the DTC at some point in the future
- make an election to keep the plan open by providing the medical certificate to the issuer
The RDSP issuer will then be required to notify ESDC that the election has been made. The election must be made on or before December 31st of the year following the first year for which the beneficiary is no longer eligible for the DTC.
An election will generally be valid until the end of the fourth calendar year following the first full calendar year for which a beneficiary is no longer eligible for the DTC.
The RDSP must be terminated by:
- the end of the year following the first year for which there is no longer a valid election
- the end of the year following the 5th year where there is no longer a continuous eligibility for the DTC
If a beneficiary becomes eligible for the DTC while an election is valid, the usual RDSP rules will apply commencing with the year for which the beneficiary becomes eligible.
Results of an election when the beneficiary is no longer eligible for the DTC
Where an election is made, the following rules will apply commencing with the first year for which the beneficiary is DTC-ineligible:
- no contributions to the RDSP will be permitted, including the rollover of RESP investment income; however, a rollover of proceeds from a deceased individual's RRSP or RRIF to the RDSP of a financially dependent infirm child or grandchild will still be permitted
- no new grant, bond, or designated provincial payments will be paid into the RDSP
- no new entitlements will be generated for the purpose of the carry forward of grants and bonds
- withdrawals from the RDSP will be permitted and will be subject to the proportional repayment rule and the maximum and minimum withdrawal rules
- if a beneficiary dies after an election has been made, the former 10-year repayment rule will apply
The assistance holdback amount will be equal to the amount of the assistance holdback amount immediately preceding the moment the beneficiary is no longer eligible for the DTC less any subsequent repayments.
For more information on how much the repayment will be, contact the issuer of your RDSP or go to Employment and Social Development Canada (ESDC).
What happens if the beneficiary dies?
The RDSP must be closed and all amounts remaining in the plan must be paid out to the beneficiary's estate by December 31st of the year following the calendar year in which the beneficiary dies. Any funds remaining in the RDSP, after any required repayment of government grants and bonds, will be paid to the estate. If a DAP had been made and the beneficiary is deceased, the taxable portion of the DAP must be included in the income of the beneficiary's estate in the tax year in which the payment is made.
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