Under a variety of proposals in the 2012 federal budget, Canadians with (RDSPs) will have greater flexibility to make plan withdrawals; the list of those eligible to be plan holders has also been temporarily expanded.
Here is a brief list of the RDSP changes:
Before those changes, when an RDSP was first established for an adult disabled beneficiary, the holder of the plan had to be the disabled beneficiary, unless that person was contractually incompetent, in which case the holder had to be their guardian or legal representative. Under the new measures, between now and December 31, 2016, certain family members (a spouse, common-law partner, or parent of the disabled individual) may become RDSP plan holders for an adult whose capacity to enter into a contract is in doubt.
Reduction in the clawback amount to make it proportional
Under the previous rules, when an amount was withdrawn from an RDSP, all the Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs) paid into an RDSP in the preceding 10 years had to be repaid to the government. A proportional repayment rule is now in place that applies when a withdrawal is made from an RDSP in 2014 or later.
For every $1 withdrawn from an RDSP, $3 of any CDSGs or CDSBs paid into the plan in the 10 years preceding the withdrawal must be repaid, up to the maximum of the assistance holdback amount — which is generally defined as the total amount of bonds and grants paid into an RDSP within a particular 10-year period.
Increased maximum annual withdrawals
Currently, when government contributions (CDSGs and CDSBs) were greater than personal plan contributions, the maximum amount that can be withdrawn from the plan each year is determined by the Lifetime Disability Payment Formula (LDAP Formula). Beginning in 2014, the withdrawal limit will increase to the greater amount determined by the LDAP Formula and 10 per cent of the fair market value of plan assets at the beginning of a calendar year.
Increased minimum annual withdrawals
Currently, when personal plan contributions exceed government contributions, withdrawals must begin in the year the beneficiary turns 60 and they can be as little as $1 a year. Beginning in 2014, beneficiaries 60 or older will be required to withdraw at least the amount determined by the LDAP Formula.
Rollover of RESP eligible investment income
Beginning in 2014, income from investments held within a Registered Educational Savings Plan (RESP) for a child with a disability can be rolled over to that child’s RDSP on a tax-deferred basis. All Canada Education Savings Grants (CESGs) and Canada Learning Bonds (CLBs)* must be repaid and the RESP must be terminated. The amount applied to the RDSP will be ineligible to receive CDSGs.
Extended termination date
Currently, if an RDSP beneficiary becomes ineligible for the federal Disability Tax Credit (DTC), their plan has to be terminated by the end of the following year. Beginning in 2014, a plan holder can elect to extend the termination date (with medical certification) if it seems likely the beneficiary’s condition will once again become DTC-eligible in the foreseeable future.
To more fully understand what these RDSP changes mean to you and your beneficiary, seek advice from your professional adviser.
* The Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB) are provided by the Government of Canada. CLB eligibility depends on family income levels. Some provinces make education savings grants available to their residents.
The Canada Disability Savings Grant (CDSG) and the Canada Disability Savings Bond (CDSB) are provided by the Government of Canada. Eligibility depends on family income levels. Speak to an Investors Group Consultant about RDSP’s special rules; any redemption may require repayment of the CDSG and CDSB.
J. Kevin Dobbelsteyn is a certified financial planner with Investors Group Financial Services Inc. His column appears weekly.