Close a registered disability savings plan
There are three situations where a registered disability savings plan (RDSP) can be closed.
- An RDSP holder(s) can close a plan if it meets certain conditions.
- A financial institution must close an RDSP after the RDSP beneficiary’s death.
- A financial institution can close a disability savings plan if the Canada Revenue Agency deregisters the RDSP.
When an RDSP holder wants to close a plan
The holder(s) of an RDSP can close the plan only in one of the following situations:
- the RDSP beneficiary is no longer eligible for the disability tax credit
- there are no funds left in the plan
- the amount of grant and bond in the RDSP is more than the amount of contributions at the beginning of the year, and the only amount now left in the plan is the assistance holdback amount (For details: InfoCapsule 17: Assistance Holdback Amount.)
- RDSP payment rules allow the holder(s) to ask for a withdrawal of all funds (minus any assistance holdback amount) in the plan
The financial institution that administers the RDSP must consider and respect any associated trust laws and rules before closing an RDSP.
Before the financial institution closes it, they must repay the government any assistance holdback amount that is left in the plan. Any remaining amounts in the plan are then paid to the beneficiary as a disability assistance payment.
When an RDSP must close
When the RDSP beneficiary dies, the plan must close by the end of the calendar year after the year of death.
When the financial institution closes the RDSP, they must repay the government any assistance holdback amount that is left in the plan. They must then pay all remaining amounts in the plan to the beneficiary's estate as a disability assistance payment.
When an RDSP is deregistered
The Canada Revenue Agency will deregister an RDSP if it does not meet the conditions described by the law. To prevent the CRA from deregistering an RDSP, the plan must:
- meet the conditions under subsection 146.4(4) of the Income Tax Act (except the condition where the plan must be administered for the RDSP beneficiary's benefit)
- meet with conditions of the Canada Disability Savings Act or its regulations
- be administered in accordance with its plan terms
If the plan no longer meets any of these conditions, the CRA could deregister the RDSP.
Once an RDSP is deregistered, the plan becomes an inter-vivos trust. Any assistance holdback amount is repaid to the government. A financial institution administering an unregistered disability savings plan can close the plan or keep it open. If they close the plan, they must pay all remaining amounts in the plan as a disability assistance payment to the beneficiary.
If the financial institution keeps the plan open, any assistance holdback amount is repaid to the government. All amounts remaining in the plan immediately before deregistration are deemed to have been paid as a disability assistance payment to the beneficiary.
The financial institution should make sure that the holder(s) of the plan understands how the plan rules will change. For example:
- any contributions made to the unregistered plan will not attract government grant
- the unregistered plan will not receive bond
- any income earned in the unregistered plan trust will be taxed in the year that it is earned
- retirement savings rollovers and education savings rollovers cannot be made to the unregistered plan
The Minister of National Revenue may consider delaying or waiving the deregistration of a plan depending on the circumstances of the case.
For more information on deregistration please see paragraphs 103 to 105 in IC99-1R, Registered Disability Savings Plans.
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