New rules concerning RDSP withdrawals, Part 4
Canada Revenue Agency recently released new rules concerning Registered Disability Savings Plan (RDSP) and the taxation of withdrawals from the plan. In the fourth of a five-part series, Knowledge Bureau Report looks at RDSPs and assistance holdback amounts (AHAs).
The Government of Canada supports RDSPs through Canada Disability Savings Grants and Canada Disability Savings Bonds. Each year, it will make matching grants to an RDSP of 100%, 200% or 300% of the amount contributed, depending on the income of the beneficiary's family.
The government will also pay bonds of up to$1,000 a year directly to the RDSPs of low-income Canadians — regardless of whether a contribution is made — until the year in which a beneficiary turns 49. The lifetime limit is$20,000.
But there are circumstances in which the grants and bonds may have to be repaid (see http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rdsp-reei/menu-eng.html) and this is where the assistance holdback amount (AHA) comes in.
The AHA is, at a particular time, the total amount of grants and bonds paid into an RDSP within the 10-year period before that particular time, less any amount of grant or bond paid in that 10-year period that has already been repaid to the government.
A disability assistance payment (DAP) can be made from a RDSP but only if the fair market value (FMV) of the plan's assets after the payment does not fall below the AHA. This condition ensures the plan has sufficient assets to satisfy any potential repayment obligations under the Canada Disability Savings Regulations.
When a RDSP makes a payment, the grants and bonds paid into the plan as well as the investment income earned in the plan become taxable in the hands of the beneficiary. The AHA is used to determine the non-taxable portion of a DAP.
RDSP income is excluded from income when calculating various income-based benefits, such as the GST/HST credit, the Canada Child Tax Benefit (CCTB), and the Working Income Tax Benefit (WITB). Exclusion of RDSP income continues when calculating social benefit repayments and the refundable medical expense supplement.
Lastly, the AHA is required in certain DAP calculations when an RDSP becomes non-compliant.
Non-compliance: If, at any time, an RDSP becomes non-compliant, it loses its registered status. When registered status is lost, a payment is deemed to have been made from the plan to the beneficiary or the beneficiary's estate. This deemed payment will be equal to the amount by which the FMV of the property held by the plan exceeds the AHA.
If a plan loses registered status because a DAP decreases the FMV of the property in the plan to less than the AHA, an additional DAP is deemed to have been made to the beneficiary at that time. This deemed payment is equal to the amount by which the lesser of the AHA and the FMV of the property held by the RDSP at the time of payment exceeds the FMV of the property held by the plan immediately after the payment.
The non-taxable portion of this additional payment will be deemed to be nil.
Finally, the AHA is nil if the RDSP is converted to a Specified Disability Savings Plan (SDSP). A RDSP becomes an SDSP when a medical doctor certifies in writing that the beneficiary of an RDSP is unlikely to survive more than five years.
Greer Jacks is updating jurisprudence in the EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.