As discussed in a previous issue of Breaking Tax and Investment news, the RDSP may be established for an individual who has a severe and prolonged physical or mental impairment and qualifies for the disability tax credit during the year of establishment, or would have if the restriction for the attendant care amount were disregarded. Contributions may not be made to the plan in years for which the individual is not DTC-eligible. In that case the plan must be terminated by the end of the year following the year in which the beneficiary ceases to the DTC-eligible. The deadline for contributions for the 2008 year is March 2, 2009 so don't miss out on the government sweeteners as outlined in our article on January 21st.
Some additional points to note regarding the Registered Disability Savings Plans are as follows:
The maximum annual CDSB contribution is $1,000 and is earned where family income does not exceed $21,278. The CDSB amount is phased out completely when family income is $37,885. Again, the limits are 2008 amounts and will be indexed annually.
There is a lifetime maximum of $20,000 for CDSBs. Like the CDSG, CDSBs will not be paid after the beneficiary of the RDSP turns 49.
Note: Repayments of all CDSGs and CDSBs will be required in the ten years preceding one of the following events: (a) a withdrawal from the plan, (b) loss of eligibility for the DTC or (c) death of the beneficiary.
Death or Cessation of Qualification Where the beneficiary dies, or ceases to qualify for a RDSP (presumably when the disability ceases), any CDSG or CDSB funded to the plan within the ten years preceding death, and the income
earned on such amounts, must be repaid. Amounts in excess of contributions, after taking into account the repayment, will be included in income of the beneficiary in the year of death (or cessation of disability).
It is not clear what happens if withdrawals and/or investment performance result in the RDSP having less than is required to be repaid. Presumably any shortfall represents a debt of the estate.
Impact on Other Means-tested Support RDSP withdrawals will not affect any other means-tested support delivered through the income tax system including, in particular, the OAS or Employment Insurance benefits. The Federal government intends to work with the provinces to ensure that the benefits of the RDSP are not eroded by a clawback of provincially provided support.
Director of the Plan. An RDSP may have one or more directors responsible for the principal decision making with respect to the plan including directing investments and the amount and timing of payments out of the plan. This could include, for example, the mother and father of the beneficiary, a parent and the beneficiary of the plan, once that beneficiary reaches the age of majority, a parent who is a successor director (in the event of the death of one parent); and an entity which acquires the rights of a director in the event of that director's death. Directors are jointly liable with the beneficiary or the beneficiary's estate for taxes arising in a non-compliant plan, described below.
Non-taxable Portion of RDSP Payments. The non-taxable portion is the same as the proportion that contributions to the plan is to the total value of the plan's assets, less the assistance holdback amount, described below.
Assistance Holdback Amount. A disability assistance payment will not be allowed to be made if the payment causes the fair market value of the plan's assets to fall below the ìassistance holdback amountî. This is the amount that could be required to be repaid under the Canada Disability Savings Actóthe total amount of grants and bonds paid into the plan by the government in the ten-year period preceding the disability assistance payment, plus associated investment income. Should the plan become ìnon-compliantî it will be automatically deregistered and the taxable portion will be included in income. If a repayment is subsequently made, a deduction is possible.
Repayments of amounts received under the Canada Disability Savings Act, effective the 2007 tax year will qualify for a deduction on Line 232. ITA Section 4(3)(a) and 60(z).
Withholding taxes. It is expected that the Regulations will allow $15,000 to be withdrawn annually without the requirement for withholding taxes. Payments over this amount will be subject to the same withholding rules as RRIFs. Only the taxable portion of the payment are taken into account for these purposes.
Interest on money borrowed. Amounts borrowed to make a contribution to a registered plan, including a RDSP is not deductible. Interest is usually deducted on Line 221 Carrying Charges for eligible investments. ITA Section 18(11).
Gains and Losses. Taxpayers who sell investments outside a registered plan to invest into one will be prohibited from claiming the losses on the disposition of the assets for that purpose. This rule is extended to the RDSP investor effective 2008. ITA Section 40(2)(g).
Attribution Rules. Contributions made to an RDSP will not be subject to the usual attribution rules which require that income from property transferred to a spouse or common law spouse or other individuals under 18 must be reported by the transferor. ITA 74.5(12)and 75(3)(a)
Tax Free Rollovers. A tax-deferred rollover of property may be accomplished when the transferor is a RDSP trust so that funds can move from one such plan to another on a tax free basis in cases where the beneficial ownership does not change. ITA 107.4(l)(j).
Trusts and Their Beneficiaries. The 21 year deemed disposition rule will not apply to RDSPs. ITA 108(1)
GST Credits. For the purpose of this refundable federal credit, the definition of adjusted income will exclude payments from an RDSP so as not to reduce GSTC payments, effective 2008. ITA 122.5(1)
Canada Child Tax Benefits. For the purpose of this refundable federal credit, the definition of adjusted income will exclude payments from an RDSP so as not to reduce CCTB payments, effective 2008. ITA 122.6
OAS Benefits. For the purpose of recovering OAS benefits, the definition of adjusted income will exclude payments from an RDSP from the base upon which the tax on OAS benefits is calculated. ITA 180.2
Changes in Residency. Beneficiaries of RDSPs will not be treated as having disposed of their rights under an RDSP upon immigration or emigration, similar to the rules in place now for RRSPs and other deferred income plans. ITA 128.1(10)