Tax deduction at source
Tax deduction at source
RDSP issuers have to withhold income tax at source once the taxable portion of a beneficiary’s DAPs and LDAPs exceed the total of the two non-refundable tax credits (NRTCs), the basic personal amount (BPA) and 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 BPA ($11,635 in 2017) and federal DA ($8,113 in 2017) will 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 2017 tax year for example, a beneficiary can receive up to $19,748 (BPA of $11,635 + DA of $8,113) in taxable DAPs and LDAPs before the RDSP issuer has to withhold income tax at source. For the 2016 tax year, this amount was $19,475.
|Federal Basic Personal Amount (BPA)||$11,635||$11,474|
|Federal Disability Amount (DA)||$7,113||$8.001|
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.
NRTCs are adjusted annually to allow for inflation and other factors.
The taxable portion of a beneficiary’s 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).
Individual or private contributions, and effective after March 22, 2017, 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 the:
- total taxable portion of all LDAPs expected to be paid in the year
- taxable portion of each individual 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.
Joey received an LDAP of $3,500 per month from his RDSP in 2017 or $42,000 ($3,500 x 12) for the year. The taxable portion of each monthly LDAP was $2,000 for a yearly total of $24,000 ($2,000 x 12). The lump-sum withholding rate on $24,000 is 30%.
Joey’s RDSP issuer reduced the total BPA and DA ($19,748) by the taxable part of each LDAP as it was paid and by the end of September, $18,000 ($2,000 x 9) of the $19,748 had been used.
In October, his RDSP issuer reduced his LDAP of $2,000 by the remaining BPA and DA of $1,428 ($19,428 - $18,000) and deducted $75.60 in income tax from the difference calculated as (($2,000 - $1,748) x 30%). Joey also had income tax deducted from his November and December LDAPs of $600 ($2,000 x 30%) per month.
In summary, in 2017, Joey received $42,000 in LDAPs and had $1,275.60 income tax deducted (October payment of $75.60 + $1,200 ($600 for both November and December).
Using the previous example, Joey received a DAP of $10,000 at the end of July. The taxable portion of that DAP was $6,000. The lump-sum withholding rate on $6,000 is 20%.
Remember that Joey’s RDSP issuer reduced the total BPA and DA ($19,748) by the taxable portion of each LDAP when they were paid. After paying Joey his July LDAP, $14,000 ($2,000 x 7) of the $19,748 had been used.
Since Joey’s remaining BPA and DA is $5,748 ($19,748 - $14,000) his RDSP issuer deducted $50.40 in income tax calculated as (($6,000 - $5,748) x 20%). Joey also had $600 ($2,000 x 30%) in income tax deducted from his August to December LDAPs.
In summary, in 2017, Joey received $42,000 in LDAPs and had $3,000 ($600 x 5) in income tax deducted. He also received a DAP of $10,000 with $450.40 in income tax deducted. The total tax deducted was $4,050.40.
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