Review of the Registered Disability Savings Plan
Economic Action Plan 2012 proposes measures to ensure that Registered Disability Savings Plans continue to meet the needs of Canadians with severe disabilities and their families.
In July 2006, the Minister of Finance appointed the Expert Panel on Financial Security for Children with Severe Disabilities to consider how best to ensure the financial security of children with severe disabilities. The Panel submitted its report, A New Beginning, in December 2006.
The Government acted on the Panel’s recommendations by announcing the introduction of a new tax-assisted Registered Disability Savings Plan (RDSP) in Budget 2007, which became available in December 2008.
The RDSP is widely regarded as a major policy innovation and positive development in helping to ensure the long-term financial security of children with severe disabilities. Since becoming available in 2008, nearly 55,000 RDSPs have been opened. This is due in part to the considerable efforts of financial institutions to make these plans available to Canadians. RDSPs are offered by 11 different financial institutions across the country, all of which have made a significant investment to offer the program.
Beneficiaries, their families and others have contributed over $220 million to these plans, and the Government has provided approximately $450 million in support through Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs). In July 2006, the minister of Finance appointed the Expert Panel. In Budget 2011, the Government announced that it would undertake a review of the RDSP program in 2011, consistent with the commitment in Budget 2008 to review the program in three years to ensure that RDSPs are meeting the needs of Canadians with severe disabilities and their families.
The RDSP review was launched in October 2011. As part of the review a consultation paper was released, which included a number of questions on which Canadians were invited to provide feedback. In response, the Government received more than 280 submissions from individuals and organizations. In addition, consultations were held with representatives from disability groups, financial institutions, and provincial and territorial governments, including public guardians and trustees. The Government wishes to thank those who participated in the review for their thoughtful input and suggestions.
Based on the feedback received during the review, Economic Action Plan 2012 proposes a number of measures to improve the RDSP. These measures will:
- Provide greater access to RDSP savings for small withdrawals by replacing the requirement to repay any CDSGs and CDSBs paid into an RDSP within the 10 years preceding a withdrawal from the plan with a requirement to repay CDSGs and CDSBs at a fixed ratio to the amount withdrawn.
- Provide greater flexibility to make withdrawals from certain RDSPs by increasing the annual maximum withdrawal limit that applies to these RDSPs, and ensure that RDSP assets are used to support a beneficiary during their lifetime by requiring a minimum amount to be withdrawn from all RDSPs beginning the year a beneficiary attains 60 years of age.
- Provide greater flexibility for parents who save in Registered Education Savings Plans (RESPs) for children with disabilities by allowing investment income earned in an RESP to be transferred on a tax-free basis to an RESP beneficiary’s RDSP.
- Provide greater continuity for long-term saving by RDSP beneficiaries who cease to qualify for the Disability Tax Credit in certain circumstances by extending the period that their plans may remain open.
- Improve the administration of the RDSP for financial institutions and beneficiaries by amending certain RDSP administrative rules.
Establishing Plans and Legal Representation
The RDSP has been highly successful due in part to the cooperation of provinces and territories in ensuring that RDSP benefits are not clawed back by reductions in social assistance payments. However, a number of adults with disabilities have experienced problems in establishing a plan because their capacity to enter into a contract is in doubt.
Questions of appropriate legal representation in these cases are a matter of provincial and territorial responsibility. In many provinces and territories, the only way that an RDSP can be opened in these cases is for the individual to be declared legally incompetent and have someone named as their legal guardian-a process that can involve a considerable amount of time and expense on the part of concerned family members, and that may have significant repercussions for the individual.
Some provinces and territories have instituted more streamlined processes to allow for the appointment of a trusted person, such as a parent, other relative, or friend, to manage resources on behalf of an individual with a disability, or have otherwise indicated that their system already provides sufficient flexibility to address these concerns. The Government of Canada recognizes and appreciates the leadership shown by the Governments of British Columbia, Saskatchewan, Manitoba, Newfoundland and Labrador, and Yukon in this regard. In addition, the Government of Canada is pleased that the Government of Alberta has recently indicated that it will examine ways to simplify access to the RDSP program.
The Government of Canada continues to encourage the Governments of Ontario, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, the Northwest Territories and Nunavut to examine whether streamlined processes would be suitable for their jurisdiction.
Given the importance of this issue to the success of the RDSP program, the Government of Canada will work with provinces and territories to develop a standardized, streamlined process that provinces and territories could adopt in order to facilitate and simplify the process of opening RDSPs for beneficiaries who lack contractual competence.
In the interim, while these processes are being developed, Economic Action Plan 2012 proposes to temporarily expand the definition of who may be the plan holder of an RDSP. Specifically, a beneficiary’s spouse, common-law partner, or parent will be able to become the plan holder and open an RDSP on behalf of an adult who might not be able to open a plan due to concerns about their ability to enter into a contract. These rules will be in place until the end of 2016, to provide provinces and territories time to develop more appropriate, long-term solutions to address RDSP legal representation issues. The changes to the RDSP will cost $3 million in 2012-13 and $6 million in 2013-14.
Registered Disability Savings Plans
To ensure the ongoing effectiveness of Registered Disability Savings Plans (RDSPs), and in response to stakeholder comments received during the recent review of the RDSP, Budget 2012 proposes a number of changes to the rules governing these plans.
An RDSP may be established for an individual who is eligible for the Disability Tax Credit (DTC). The individual eligible for the DTC is the plan beneficiary. The plan holder is the individual who generally opens the RDSP and makes decisions regarding contributions, investments, and withdrawals. The plan holder can be the beneficiary or, if the plan is opened for a minor child, a parent. The plan holder can also be a legal representative of the beneficiary.
Parents, beneficiaries and others wishing to save on behalf of the beneficiary are allowed to contribute to an RDSP. Contributions to an RDSP are limited to a lifetime maximum of $200,000. Contributions are permitted until the end of the year in which a beneficiary attains 59 years of age.
Annual RDSP contributions attract Canada Disability Saving Grants (CDSGs) at matching rates of 100, 200, or 300 per cent, depending on the beneficiary’s family income and the amount contributed, up to a lifetime maximum of $70,000. An RDSP is eligible to receive CDSGs until the end of the year in which the beneficiary attains 49 years of age. The Government also provides up to $1,000 in Canada Disability Savings Bonds (CDSBs) annually to RDSPs established by low- and modest-income families, up to a lifetime maximum of $20,000. CDSBs are paid into RDSPs until the end of the year in which the beneficiary attains 49 years of age.
Contributions to an RDSP are not deductible and are not included in the beneficiary’s income when withdrawn. Investment income earned in an RDSP grows tax-free. CDSGs, CDSBs and investment income earned in an RDSP are included in the beneficiary’s income for tax purposes when withdrawn from the RDSP. Each withdrawal from an RDSP comprises a taxable portion and a non-taxable portion based on the relative proportion of taxable assets (including CDSGs, CDSBs, and investment income) and non-taxable assets (private contributions) in the plan. RDSP withdrawals must commence by the end of the year in which the beneficiary attains 60 years of age.
Under current rules, when an RDSP is established for a beneficiary who has attained the age of majority, the plan holder must be either the beneficiary or, if the beneficiary lacks the capacity to enter into a contract, the beneficiary’s guardian or other legal representative. However, a number of adults with disabilities have experienced difficulties in establishing a plan because their capacity to enter into a contract is in doubt.
Questions of appropriate legal representation in these cases are a matter of provincial and territorial responsibility. In many provinces and territories, the only way that an RDSP can be opened in these cases is for the individual to be declared legally incompetent and have someone named as their legal guardian – a process that can involve a considerable amount of time and expense on the part of concerned family members, and that may have significant repercussions for the individual.
While these provinces and territories develop more appropriate, long term solutions to address RDSP legal representation issues, Budget 2012 proposes to allow, on a temporary basis, certain family members to become the plan holder of the RDSP for an adult individual who might not be able to enter into a contract. This measure will ensure that individuals in all provinces and territories who might not be contractually competent and who do not have a legal representative may still benefit from RDSPs.
Specifically, where, in the opinion of an RDSP issuer, an individual’s ability to enter into a contract is in doubt, the spouse, common-law partner, or parent of the individual will be considered a “qualifying family member” and will be eligible to establish an RDSP for the
individual (i.e., be the plan holder of the RDSP). Budget 2012 also proposes to provide that no action will lie against an RDSP issuer who, being of the opinion that a beneficiary’s ability to enter into a contract is in doubt, allows a qualifying family member to establish and become the holder of an RDSP for the beneficiary.
RDSP issuers will be required to notify an individual when a qualifying family member establishes an RDSP for which the individual is the beneficiary. If, subsequently, the issuer no longer has doubt regarding the individual’s contractual competence, or the individual is determined to be contractually competent by a public agency or tribunal authorized to make such a determination in the relevant jurisdiction, the individual may replace the qualifying family member as plan holder.
If, after an RDSP has been opened by a qualifying family member, a legal representative (i.e., a guardian, tutor, curator or other person who is legally authorized to act on behalf of the individual) is named in respect of an individual, the legal representative will replace the qualifying family member as plan holder.
This measure will not apply in circumstances where an RDSP has already been established for an individual or where an individual already has a legal representative. This measure will apply from the date of Royal Assent to the enacting legislation until the end of 2016. A qualifying family member who becomes a plan holder under this measure will be able to remain the plan holder after 2016.
Proportional Repayment Rule
Under current rules, any CDSGs and CDSBs paid into an RDSP in the preceding 10 years generally must be repaid to the Government on any of the following events:
- any amount is withdrawn from the RDSP;
- the RDSP is terminated or deregistered; or
- RDSP beneficiary ceases to be eligible for the DTC or dies.
This is known as the “10-year repayment rule”. To ensure that RDSP funds are available to meet potential obligations under this rule, RDSP issuers must set aside an “assistance holdback amount” equal to the total CDSGs and CDSBs paid into the RDSP in the preceding 10 years less any CDSGs and CDSBs already repaid in respect of that 10-year period. When one of the events described above occurs, the required repayment is equal to the amount of the assistance holdback amount immediately preceding the event.
To provide greater access to RDSP savings for small withdrawals, while still supporting the long-term savings objective of these plans, Budget 2012 proposes to introduce a proportional repayment rule that will apply when a withdrawal is made from an RDSP. This rule will replace the 10-year repayment rule only in respect of RDSP withdrawals. The existing 10-year repayment rule will continue to apply where the RDSP is terminated or deregistered, or the RDSP beneficiary ceases to be eligible for the DTC or dies.
The proportional repayment rule will require that, for each $1 withdrawn from an RDSP, $3 of any CDSGs or CDSBs paid into the plan in the 10 years preceding the withdrawal be repaid, up to a maximum of the assistance holdback amount. Repayments will be attributed to CDSGs or
CDSBs that make up the assistance holdback amount based on the order in which they were paid into the RDSP, beginning with the oldest amounts. This measure will apply to withdrawals made from an RDSP after 2013. The following is an example:
Jeff opens an RDSP in 2009 and contributes $1,500 to his plan annually, attracting the maximum amount of CDSGs ($3,500) each year. In 2014, the assistance holdback amount for his plan equals $21,000.
In 2014, Jeff withdraws $600 from his RDSP. Under the 10-year repayment rule, the entire assistance holdback amount ($21,000) would have to be repaid. Under the proportional repayment rule, $1,800 of the assistance holdback amount will be repaid (approximately 9 per cent of the repayment required under the 10-year repayment rule). The $1,800 repayment will come from CDSGs paid into Jeff’s RDSP in 2009 and the plan’s assistance holdback amount will be reduced to $19,200.
Maximum and Minimum Withdrawals
Budget 2012 proposes changes to the rules governing maximum and minimum withdrawals from RDSPs. These changes will provide greater flexibility in making withdrawals from an RDSP and ensure that RDSP assets are used to support the RDSP beneficiary during their lifetime.
There are two types of withdrawals that may be made from an RDSP: a discretionary disability assistance payment, which may be made at any time, subject to the plan terms and certain restrictions under the tax rules; and a lifetime disability assistance payment (LDAP), which provides an ongoing stream of payments from the RDSP for a beneficiary.
LDAPs may commence at any time. Once started, they must be paid at least annually until either the RDSP is terminated or the beneficiary dies. LDAPs must begin no later than the end of the year in which the beneficiary attains 60 years of age, so that the assets in the plan provide for the long-term financial security of the beneficiary during their lifetime. The maximum LDAP that can be withdrawn from the RDSP each year is determined by a formula (the LDAP formula) that is based on the age of the beneficiary and the fair market value of the assets held in the RDSP.
Specific rules limit the maximum amount that may be withdrawn annually from RDSPs where CDSGs and CDSBs paid into the plan exceed private contributions made to the plan. Such RDSPs are known as primarily government-assisted plans (PGAPs). Total withdrawals from a PGAP in a calendar year may not exceed the amount determined by the LDAP formula for the year. No such maximum withdrawal limits apply to non-PGAPs.
Budget 2012 proposes to increase the maximum annual limit for withdrawals from PGAPs to the greater of the amount determined by the LDAP formula and 10 per cent of the fair market value of plan assets at the beginning of the calendar year. A PGAP beneficiary will continue to be eligible for the existing exemption from the maximum annual limit for withdrawals if a medical doctor certifies in writing that the beneficiary’s state of health is such that, in the doctor’s opinion, the beneficiary has a life expectancy of five years or less.
PGAPs are also subject to a minimum annual withdrawal requirement commencing with the calendar year in which the beneficiary attains 60 years of age. For that calendar year and subsequent years, the total withdrawals from a PGAP must be at least equal to the amount determined by the LDAP formula for the year. For other RDSPs, there is no specified minimum withdrawal amount.
Budget 2012 proposes to extend to all RDSPs the minimum annual withdrawal requirement that currently applies only to PGAPs. Accordingly, once an RDSP beneficiary attains 60 years of age, the total withdrawals from the RDSP in a calendar year must be at least equal to the amount determined by the LDAP formula for the year. These measures will apply after 2013.
Rollover of RESP Investment Income
To provide greater flexibility for parents who save in a Registered Education Savings Plan (RESP) for a child with a severe disability, Budget 2012 proposes to allow investment income earned in an RESP to be transferred on a tax-free (or “rollover”) basis to an RDSP if the plans share a common beneficiary. In order to qualify for this measure, the beneficiary must meet the existing age and residency requirements in relation to RDSP contributions. As well, one of the following conditions must be met:
a) the beneficiary has a severe and prolonged mental impairment that
can reasonably be expected to prevent the beneficiary from pursuing
b) the RESP has been in existence for at least 10 years and each
beneficiary is at least 21 years of age and is not pursuing post-secondary
c) the RESP has been in existence for more than 35 years.
These are the existing conditions for receiving an accumulated income payment (AIP) from an RESP. An AIP is a lump-sum distribution of investment income earned in an RESP to the RESP subscriber, generally made in circumstances where the RESP beneficiary does not pursue post-secondary education and the RESP is being terminated. The AIP is included in the income of the RESP subscriber for regular income tax purposes and is also subject to an additional 20-per-cent tax. An RESP subscriber may reduce the amount of the AIP subject to tax by contributing a portion of the AIP to a Registered Retirement Savings Plan under specified conditions.
Under this proposal, when RESP investment income is rolled over to an RDSP, contributions in the RESP will be returned to the RESP subscriber on a tax-free basis. The subscriber can contribute these amounts to the RDSP (immediately or over time) if they so choose, potentially attracting CDSGs.1 In addition, Canada Education Savings Grants and Canada Learning Bonds in the RESP will be required to be repaid to the Government and the RESP terminated by the end of February of the year after the year during which the rollover is made. As in the case of a contribution of an AIP to a Registered Retirement Savings Plan, the rollover amount will not be subject to regular income tax or the additional 20-per-cent tax.
- The carry forward of RDSP grants and bonds introduced in Budget 2010 allows RDSP beneficiaries to claim unused entitlements for CDSGs and CDSBs for the preceding 10 years (starting from 2008, the year RDSPs became available).
- The amount of RESP investment income rolled over to an RDSP may not exceed, and will reduce, the beneficiary’s available RDSP contribution room. The rollover amount will be considered a private contribution for the urpose of determining whether the RDSP is a PGAP, but will not attract CDSGs. The rollover amount will be included in the taxable portion of RDSP withdrawals. This measure will apply to rollovers of RESP investment income made after 2013.
Termination of an RDSP following Cessation of Eligibility for the DTC
An RDSP may be established only for a beneficiary who is eligible for the Disability Tax Credit (DTC). If a beneficiary’s condition factually improves such that the beneficiary does not qualify for the DTC for a taxation year (i.e., the beneficiary is DTC-ineligible throughout a full calendar year), the RDSP must be terminated by the end of the following year. No contributions may be made to, and no CDSGs or CDSBs may be paid into, the RDSP once the beneficiary is DTC-ineligible. In addition, the 10-year repayment rule applies (with the required repayment being equal to the amount of the assistance holdback amount immediately preceding the beneficiary becoming DTC-ineligible) and any assets remaining in the RDSP must be paid to the beneficiary.
A beneficiary who becomes DTC-ineligible might, due to the nature of their condition, be eligible for the DTC for some later year and would be able to establish a new RDSP. Contribution room and repaid CDSGs and CDSBs are not restored in these circumstances.
To reduce the administrative burden on these beneficiaries and ensure greater continuity in their long-term saving, Budget 2012 proposes to extend, in certain circumstances, the period for which an RDSP may remain open when a beneficiary becomes DTC-ineligible.
This measure will apply to RDSPs where the beneficiary has become DTC-ineligible. In addition, a medical practitioner must certify in writing that the nature of the beneficiary’s condition makes it likely that the beneficiary will, because of the condition, be eligible for the DTC in the foreseeable future.
If an RDSP plan holder decides to take advantage of this measure, the plan holder will be required to elect in prescribed form and submit the election, along with the written certification, to the RDSP issuer. The RDSP issuer will then be required to notify Human Resources and Skills Development Canada that the election has been made. The election must be made on or before December 31st of the year following the first full calendar year for which the beneficiary is DTC-ineligible.
Results of an Election
Where an election is made, the following rules will apply commencing with the first full calendar year for which the beneficiary is DTC-ineligible.
- No contributions to the RDSP will be permitted, including under the proposed rule for the rollover of RESP investment income. However, a rollover of proceeds from a deceased individual’s Registered Retirement Savings Plan or Registered Retirement Income Fund to the RDSP of a financially dependent infirm child or grandchild will still be permitted.
- No new CDSGs or CDSBs will be paid into the RDSP. If a beneficiary dies after an election has been made, the existing 10-year repayment rule will apply (with the required repayment being equal to the amount of the assistance holdback amount immediately preceding the beneficiary becoming DTC-ineligible, less any repayments made during or after the first full calendar year for which the beneficiary is DTC-ineligible).
- No new entitlements will be generated for the purpose of the carry forward of CDSGs and CDSBs for years for which the beneficiary is DTC-ineligible.
- Withdrawals from the RDSP will be permitted, and will be subject to the proposed proportional repayment rule and the proposed maximum and minimum withdrawal rules as applicable. For years for which the beneficiary is DTC-ineligible, the assistance holdback amount will be equal to the amount of the assistance holdback amount immediately preceding the beneficiary becoming DTC-ineligible less any repayments made during or after the first full calendar year for which the beneficiary is DTC-ineligible. Neither the certification required for an election, nor the election itself, will have any bearing on any determination of an individual’s eligibility for the DTC. The sole purpose of the certification and election is to allow an RDSP to remain open for the years under election.
Duration of an Election
An election will generally be valid until the end of the fourth calendar year following the first full calendar year for which a beneficiary is DTC-ineligible. The RDSP must be terminated by the end of the first year for which there is no longer a valid election.
If a beneficiary becomes eligible for the DTC while an election is valid, the usual RDSP rules will apply commencing with the year for which the beneficiary becomes eligible. For example, contributions will be permitted and new CDSGs and CDSBs may be paid into the RDSP. Should the beneficiary become DTC-ineligible at some later time, a new election could be made.
This measure will apply to elections made after 2013. RDSPs, that under current rules would have to be terminated before 2014 because the beneficiary has become DTC-ineligible and that have not yet been terminated, will not be required to be terminated until the end of 2014. Plan holders of such RDSPs may take advantage of this measure if they obtain the required medical certification and make an election on or before December 31, 2014.
Under current rules, when an RDSP is established, the issuer of the plan must notify Human Resources and Skills Development Canada within 60 days. When an RDSP is transferred from one RDSP issuer to another, the transfer must be completed within 120 days of the new plan being established. Budget 2012 proposes to replace these deadlines with a requirement that an RDSP issuer act “without delay” in notifying Human Resources and Skills Development Canada or the establishment of transfer of an RDSP. The elimination of these deadlines is intended to give issuers greater flexibility in complying with their obligations.
When an RDSP is transferred to a new issuer, the issuer of the original plan is required to provide a large amount of information to the new issuer. Issuers are also required to file this information on a regular basis with Human Resources and Skills Development Canada. To reduce the administrative burden for issuers, Budget 2012 also proposes that Human Resources and Skills Development Canada, rather than the issuer of the original plan, be responsible for providing this information to the issuer of the new plan when an RDSP transfer occurs. These measures will apply on Royal Assent to the enacting legislation.
In addition, Budget 2012 proposes that the Canada Disability Savings Regulations be amended to eliminate the 180-day deadline for an RDSP issuer to submit an application for a CDSG or a CDSB. This measure will apply on and after the day that the regulation amending the
Canada Disability Savings Regulations is registered.
NOTICE OF WAYS AND MEANS MOTION TO AMEND THE INCOME TAX ACT
Registered Disability Savings Plans
(1) That the provisions of the Act relating to registered disability savings plans be modified in accordance with the proposals described in the budget documents tabled by the Minister of Finance in the House of Commons on Budget Day.