Written on March 18, 2016 – 9:00 am | by Darren Lund
My colleague, Katie Ionson, previously blogged about the new RDSP Income Tax Information Circular IC99-1R1, which the CRA released on February 10, 2016. The Circular contains useful guidance on a number of issues, including the requirements for an RDSP to be registered under the Income Tax Act (“ITA”). While some RDSP features are mandatory, other features are optional and are only available if the issuer has chosen to include them in the plan. These include the following:
- The “holder” of an RDSP is the person or entity that opens an RDSP and makes contributions (or provides written consent for another person to make contributions). The holder must be the beneficiary of the RDSP if the beneficiary is a capable adult. If the beneficiary is a minor, the holder must be: (1) a parent; (2) a person who is “legally authorized to act for the beneficiary” such as a guardian; or (3) a public department, agency or institution that is legally authorized to act for the beneficiary. If the beneficiary is an incapable adult, the holder must be either (2) or (3) above. However, if the terms of the RDSP so provide, a parent, spouse, or common-law partner of an adult beneficiary can be the holder if the issuer believes the beneficiary’s capacity to contract is in doubt and other requirements are met. This “qualifying family member” option will only be available until December 31, 2018.
- Payments out of an RDSP are referred to as “disability assistance payments” (“DAPs”). The “lifetime disability assistance payments” (“LDAPs”) must begin no later than the end of the year the beneficiary turns 60. Once they begin, the LDAPs must be paid to the beneficiary at least once a year until the beneficiary dies or the RDSP is closed. If the terms of the RDSP so provide, then in addition to the LDAPs a holder may request that additional DAPs be paid to the beneficiary, subject to the maximum withdrawal rules under the ITA.
- A beneficiary must be eligible for the disability tax credit (“DTC”) to open an RDSP. If a beneficiary later becomes ineligible for the DTC, the plan must close by December 31 of the following year. However, if the terms of the RDSP so provide, the beneficiary can make a “DTC election” which allows the RDSP to remain open, subject to restrictions, if a physician certifies that the beneficiary is likely to become DTC-eligible again. If the beneficiary does not become DTC-eligible within 5 years, the RDSP must then close on December 31 of the following year.
- The ITA contains rules and formulae for determining the minimum and maximum amounts that can be distributed to the beneficiary each year as DAPs. However, if a beneficiary is not expected to live for more than 5 years, the terms of the RDSP can permit certain designations to be made which will allow the beneficiary greater flexibility to access the funds in the RDSP.
- If certain dependency requirements are met, the ITA permits a deceased parent or grandparent to rollover the proceeds of an RRSP, RRIF, and certain pension plans to an RDSP for a surviving child or grandchild on a tax-deferred basis. In addition, if the ITA requirements are met, the income portion of an RESP can be rolled over to an RDSP for the beneficiary on a tax-deferred basis. However, the foregoing rollovers can only be made to a particular RDSP if the terms of the RDSP allow it to receive rollovers.
All of the optional features outlined above are potentially valuable, and it will often not be possible to anticipate with any degree of certainty which features a particular beneficiary might need. It is important, therefore, to read and understand the terms of the plan before the account is opened to ensure it meets the needs of the potential RDSP beneficiary.