Tax payable
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When a DAP is made from an RDSP, the part of the payment that includes proceeds from a rolled over amount, the grants and bonds paid into the plan and all investment income earned in the RDSP, such as interest, is taxable.
That part of the payment is included in the income of the beneficiary for the year in which the payment is made. If the beneficiary is deceased when the payment is made, the amount is included in the income of the beneficiary's estate for the year of the payment.
Note
The taxable portion (or RDSP income) is excluded from income when calculating various income-tested benefits, such as the GST/HST credit, the Canada child benefit (CCB), and the Canada workers benefit (CWB). It is also excluded when calculating the social benefit repayment and the refundable medical expense supplement.
RDSP issuers will have to withhold income tax at source once the taxable portion of a beneficiary’s lump sum DAPs and LDAPs exceed the total of the following two federal non-refundable tax credits (NRTCs):
- the maximum basic personal amount (BPA)
- the disability amount (DA)
NRTCs help to reduce a taxpayer’s total income tax liability at the end of the year. There are many federal and provincial NRTCs that individuals may be eligible to claim when filing their personal income tax and benefit returns. However, only the federal maximum BPA of $15,000 and federal DA ($9,428 in 2023) are to be used to calculate the taxable income from which to withhold income tax at source. This is because all RDSP beneficiaries are eligible for these two NRTCs.
Using the chart on this page, with the 2023 tax year for example, a beneficiary can receive up to $24,428 (BPA of $15,000 + DA of $9,428) in taxable lump sum DAPs and LDAPs before the RDSP issuer has to withhold income tax at source. For the 2022 tax year, this amount was $23,268.
| Year | 2023 | 2022 |
|---|---|---|
| Federal maximum Basic Personal Amount (BPA) | $15,000 | $14,398 |
| Federal Disability Amount (DA) | $9,428 | $8,870 |
| Total | $24,428 | $23,268 |
Once this amount is reached, income tax must be deducted from the taxable portion of all remaining payments in the year using the lump-sum tax withholding rate displayed below.
Note
NRTCs are adjusted annually to allow for inflation and other factors.
The taxable portion of a beneficiary’s lump sum DAPs and LDAPs are the total of:
- the Canada disability savings grants
- the Canada disability savings bonds
- the investment income earned in the plan, such as interest
- proceeds from rollovers of other plans (RRSPs or RESPs for example)
Note
Individual or private contributions, or an amount in respect of which a holder of the plan pays the advantage tax (unless this tax is waived, cancelled or refunded, or has previously been included in the non-taxable portion of a DAP made to the beneficiary) are not taxable.
RDSP issuers will use the lump-sum withholding rate that corresponds to either the:
- total taxable portion of all LDAPs expected to be paid in the year, or
- taxable portion of each lump sum DAP when requested
The lump-sum withholding rates are:
- 10% (5% for Quebec) on amounts up to and including $5,000
- 20% (10% for Quebec) on amounts over $5,000, and up to $15,000
- 30% (15% for Quebec) on amounts over $15,000
Note
The above rates are a blend of the federal and provincial rates. The Quebec rates represent only the federal rates. For more information on the provincial rates for the province of Quebec, go to Revenue Québec.
If the RDSP trust acquired property that is not a qualified investment, or, the property within the RDSP becomes a non-qualified investment.
Note
The issuer of an RDSP must exercise the care, diligence and skill of a reasonably prudent person to minimize the possibility that a trust governed by the plan holds a non-qualified investment. If the issuer fails to comply with this obligation, the issuer is liable to a penalty under the Income Tax Act. The issuer is also required to notify the holder of the RDSP, in prescribed form and manner before March of a calendar year, if at any time in the preceding year the RDSP trust acquired or disposed of a non-qualified investment, or if an investment became or ceased to be a non-qualified investment.
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Amount of tax payable
The amount of tax payable for a non-qualified investment is:
- for property acquired that is a non-qualified investment, 50% of the FMV of the property when it was acquired
- for property that ceased to be a qualified investment, 50% of the FMV of the property immediately before it stopped being a qualified investment for the trust
Each person who is a holder of an RDSP is jointly liable for the tax.
The holder is also liable for the 100% advantage tax on specified non-qualified investment income if this income is not withdrawn promptly.
Notes
Any increase in the value of a non-qualified investment, at the time of disposition is not reported on the Form RC339, Individual Return for Certain Taxes for RRSPs, RRIFs, RESPs or RDSPs.
Income earned and capital gains realized by an RDSP trust on non-qualified investments are taxable to the Trust. The Trust must file Form T3RET, T3 Trust Income Tax and Information Return and is liable to pay any tax owing.
Any changes or fees that the financial institution has passed on to the annuitant as a result of the T3 Return having been filed is a matter between the annuitant and the financial institution.
If an investment is both a non-qualified investment and a prohibited investment, it is treated as a prohibited investment only and the trust is not subject to tax on the investment earnings.
The tax payable on non-qualified investments is refundable in certain circumstances.
For more information, see Income Tax Folio S3-F10-C1, Qualified Investments – RRSPs, RESPs, RRIFs, RDSPs and TFSAs.
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Payment of tax
If the RDSP holder is liable for taxes on non-qualified investments, the holder must files Form RC339, Individual Return for Certain Taxes for RRSPs, RRIFs, RESPs or RDSPs, with a payment for any balance due no later than June 30 following the end of the calendar year.
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Refund of tax
If the RDSP trust disposes of the non-qualified investment before the end of the calendar year following the calendar year in which the tax arose, the persons who are liable for the tax may be entitled to a refund of the lesser of:
- the amount of the tax paid
- the proceeds of disposition of the property
However, no refund will be issued if it is reasonable to expect that those persons knew or should have known, when the property was acquired by the RDSP trust, that the property was, or would become, a non-qualified investment.
The tax payable for inadequate consideration is repealed effective after March 22, 2017.
If the holder or a person not dealing at arm's length with the holder (including the RDSP itself) was provided with an advantage in relation to their RDSP during the year a 100% tax is payable, which is:
- in the case of a benefit, the fair market value (FMV) of the benefit
- in the case of a loan or a debt, the amount of the loan or debt
- in the case of a registered plan strip, the amount of the registered plan strip
For taxes payable on an advantage, you must file using Form RC339, Individual Return for Certain Taxes for RRSPs, RRIFs, RESPs or RDSPs.
When an advantage is extended by the issuer of an RDSP, the issuer, and not the holder, is liable for the tax. The issuer must file Form RC298, Advantage Tax Return for RRSP, TFSA, FHSA, or RDSP issuers, RESP promoters or RRIF carriers, with a payment for any balance due, no later than June 30 following the end of calendar year.
For more information, see Income Tax Folio S3-F10-C3, Advantages – RRSPs, RESPs, RRIFs, RDSPs, and TFSAs.
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Payment of tax
Each person who is a holder of an RDSP is jointly liable for the taxes on prohibited investments, non-qualified investments and advantages described below. Where two or more holders of an RDSP are jointly liable to pay such a tax only one return needs to be filed on behalf of all the holders that are liable for the tax.
Note
When an advantage is extended by the issuer of an RDSP, the issuer, and not the holder, is liable for the tax. The issuer must file the RC298, Advantage Tax Return for RRSP, TFSA, FHSA, or RDSP issuers, RESP promoters or RRIF carriers with payment for any balance due, no later than June 30 following the end of calendar year.
The tax payable for use of property as security is repealed effective after March 22, 2017.
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Amount of tax payable
The amount of tax payable is equal to the FMV of the property when the property started being used as security.
Exceptions
The advantage rules will not apply to benefits related to a swap transaction if the transaction:
- after 2021, in relation to a swap transaction undertaken to remove a property from an RDSP if it is reasonable to conclude that tax would be payable under Part XI.01 of the Act if the property were retained in the RDSP
- after 2027, in relation to a swap transaction undertaken to remove a transitional prohibited property from an RDSP if it is reasonable to conclude that tax would be payable under Part XI.01 of the Act if the property were retained in the RDSP
- in any other case, after June 2017
Note
A swap transaction is any transfer of property between the RDSP and its holder (or a non-arm’s length person). Exceptions are provided for contributions to and distributions from the RDSP, purchase and sale transactions between the RDSP, and another RDSP of the holder, and transactions relating to insured mortgages.
The RDSP issuer must file Form RC298, Advantage Tax Return for RRSP, TFSA, FHSA, or RDSP issuers, RESP promoters or RRIF carriers, with a payment for any balance due no later than June 30 of the year following the end of the calendar year.
If the RDSP trust acquires a prohibited investment or if previously acquired property becomes prohibited, the investment will be subject to a special tax equal to 50% of the fair market value (FMV) of the investment, and the holder must file Form RC339, Individual Return for Certain Taxes for RRSPs, RRIFs, RESPs or RDSPs with a payment for any balance due, no later than June 30 following the end of the calendar year.
The tax is refundable in certain circumstances. For more information, see Refund of taxes paid on non-qualified or prohibited investments on this page.
If the prohibited investment ceases to be a prohibited investment while it is held by the RDSP trust, the RDSP trust is considered to have disposed of and immediately re-acquired the property at its FMV.
The holder is also liable for the 100% advantage tax on income earned and capital gains realized on prohibited investments.
The 100% advantage tax applies to income earned and the portion of any realized capital gain that accrued, after March 22, 2017, regardless of when the prohibited investment generating the income or gain was acquired.
If an investment is both a non-qualified investment and a prohibited investment, it is treated as a prohibited investment only.
For more information, see Income Tax Folio S3-F10-C2, Prohibited Investments – RRSPs, RESPs, RRIFs, RDSPs and TFSAs.
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Refund of taxes paid on non-qualified or prohibited investments
You may be entitled to a refund of the 50% tax on non-qualified or prohibited investments if the investment was disposed of, or ceased to be a non-qualified or prohibited investment, before the end of the calendar year after the year in which the tax arose (or such later time as is permitted by the Minister of National Revenue).
However, no refund will be issued if it is reasonable to expect that the holder knew, or should have known, that the investment was or would become a non-qualified or prohibited investment.
The refund applies to the 50% tax on non-qualified or prohibited investments but not to the 100% tax on advantages.
Note
If the 50% tax on non-qualified or prohibited investments, and the entitlement to the refund of that tax, arose in the same calendar year then a remittance of the tax is not required. For example, no remittance of tax would be required if an RDSP trust acquired and disposed of a non-qualified investment in the same calendar year. -
How to claim a refund
To claim a refund, you must:
- send your request in writing (you can attach it to Form RC339).
- attach the appropriate documents detailing the information relating to the acquisition and disposition of the non-qualified or prohibited property (you can attach the written request and supporting documents to Form RC339).
The documents must contain the following:
- name and description of the property
- number of shares or units
- date the property was acquired or became non-qualified or prohibited property
- date of the disposition or the date that the property became qualified or ceased to be prohibited.
We may waive or cancel all or part of any of the taxes if we determine it is fair to do so after reviewing all factors, including whether:
- the tax arose because of a reasonable error
- the extent to which the transaction or series of transactions that gave rise to the tax also gave rise to another tax under the Income Tax Act
- the extent to which payments have been made from the RDSP
A waiver refers to penalties and interest otherwise payable by a taxpayer for which relief is granted by the CRA before these amounts are assessed or charged to the taxpayer. A cancellation refers to penalties and interest amounts that were assessed or charged to the taxpayer for which relief is granted by the CRA.
Send your letter to one of the following addresses:
| If your residential address is based in: | Send your request to: |
|---|---|
| Ontario, Prince Edward Island, Newfoundland and Labrador, Yukon, Nunavut, Northwest Territories, as well as the following cities in the province of Québec (Montréal, Quebec City, Laval, Sherbrooke, Gatineau, and Longueuil). | Canada Revenue Agency Sudbury Tax Centre Pension Workflow Team Post Office Box 20000, Station A Sudbury ON P3A 5C1 |
| Manitoba, Saskatchewan, Alberta, British Columbia, Nova Scotia, New Brunswick, and the remaining areas in the province of Québec not listed under the Sudbury Tax Centre. | Canada Revenue Agency Winnipeg Tax Centre Pension Workflow Team Post Office Box 14000, Station Main Winnipeg MB R3C 3M2 |
Forms and publications
- Guide RC4460, Registered Disability Savings Plan
- Form RC4532, Individual Tax Return for Registered Disability Savings Plan (RDSP)
- Form T3GR, Group Income Tax and Information Return for RRSP, RRIF, RESP, or RDSP Trusts
- Information circular IC07-1R1, Taxpayer Relief Provisions
- Income Tax Folio S3-F10-C1, Qualified Investments – RRSPs, RESPs, RRIFs, RDSPs, and TFSAs
- Income Tax Folio S3-F10-C2, Prohibited Investments – RRSPs, RRIFs and TFSAs
- Income Tax Folio S3-F10-C3, Advantages – RRSPs, RESPs, RRIFs, RDSPs, and TFSAs
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