When it comes to RDSP, there’s a lot to think about, right? I recently had some families come to me with a pretty important question: what happens to their RDSP if they no longer qualify for the Disability Tax Credit (DTC)?
There could be many different reasons why the Disability Tax Credit is no longer approved – for example, the beneficiary’s disability condition is significantly improved, a doctor refuses to fill out the T2201 form, the CRA approval criteria changes.
Anyhow, since the RDSP already has many complex rules, losing the DTC eligibility definitely throws a bit of a curveball into the mix. So, let me go over what has happened, and what the current rules are regarding this.
A few years back, if someone lost their DTC, they were basically in a bit of a bind. They’d either have to close their RDSP or go through the hassle of obtaining a medical certification to apply for an extension. Not the easiest thing to do.
But, here’s the good news – things have changed for the better now. If someone loses their DTC eligibility, they don’t have to shut down their RDSP anymore. The catch, though, is that while they’re not eligible for the DTC, they can’t put any new contributions into their RDSP, nor can they get grants or bonds.
It’s a bit of a pause button on the account, but at least it doesn’t mean having to close it entirely, which is a big relief for a lot of folks. It keeps the RDSP as part of their financial planning without the pressure of having to make a quick decision if their DTC status changes.
a transfer may be permitted from a deceased parent’s or grandparent’s RRSP, RRIF or RPP on a tax-deferred basis to the RDSP until the end of the fifth calendar year following the loss of the DTC
Quote from Mackenzie Investments- Federal Government Introduces New RDSP Rules
So what are the withdrawal options when the RDSP beneficiary loses the DTC eligibility?
Option#1: The beneficiary who loses DTC eligibility could wait until age 60 to start making withdrawals. This method could prevent any claw back of the Canada Disability Savings Grants (CDSG) / Canada Disability Savings Bonds (CDSB). And it’s the most straightforward way.
Option#2: If the beneficiary who loses DTC eligibility makes a withdrawal under the age of 50, then they are required to repay the lesser of:
- All the grants and bonds they received in the 10 years leading up to the date in which they were DTC-ineligible (10-year repayment rule)
- Or 3 times the amount withdrawn (in grants and bonds)
Option#3: If a beneficiary who loses DTC eligibility makes a withdrawal between the ages of 50 and 60 makes a withdrawal, the 10-year repayment rule still applies except it would reduce every year as they age towards 60.
For example, at age 53, it would become 7-years of repayment and at age 60 it would be 0.
Image for illustration purposes only, not an actual depiction of John
Closing Insights:
As you can see, when a beneficiary loses their DTC eligibility, the results can vary depending on their age at the time of withdrawal. For those interested in a more detailed review of the withdrawal rules, here are two highly informative whitepapers from Mackenzie:
But in short, if your goal is to avoid any clawback of government grants and bonds, you should wait until age 60 to start withdrawals. By then, you can withdraw the amount based on the LDAP formula.
However, if possible, you should consider re-applying for the Disability Tax Credit. After all, you may re-qualify to receive the matching grants and bonds. (Note: The Canada Disability Savings Grant (CDSG) and the Canada Disability Savings Bond (CDSB) are payable until the end of the year in which the beneficiary turns 49. There are maximum limits for CDSG and CDSB per beneficiary).
Additionally, the DTC can be used to reduce income tax. If you need more guidance in applying for the Disability Tax Credit, here’s a guide with helpful explanation videos.
So I hope you find this post helpful. If so, please share it with other families who could benefit from it. Also, if you have any RDSP-related questions, you are welcome to send me a private email at Samuel@SamueConsultant.com.
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Sources:
- Canada.ca – Registered Disability Savings Plan
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