Commencing with the introduction of registered retirement savings plans ("RRSPs") in 1957, registered plans have generally become an integral part of the estate planning process. Although registered plans play an important role in both the financial and estate planning of many Canadians, the tax treatment of such plans can vary depending on the type of plan in question and the family dynamics involved. This blog post will consider registered disability savings plans ("RDSPs") in particular.
In 1957, the same year RRSPs were introduced, Fraser Deacon delivered a special lecture to the Law Society of Upper Canada in the area of estate planning and, citing Dr. Andrew Lawson, then-minister of Toronto's largest United Church, Timothy Eaton Memorial, he shared a quote:
I have a conviction about what I have to sell. I think it is the most important thing in the world and that people's lives are poor and starved without it. You have a perfect right to think this way about what you have to sell.
Registered plans undoubtedly fall into this category for many
estate planning professionals – "the most important
thing in the world". Although such plans do not represent
assurance of eternal salvation, like Dr. Lawson's sale, or
"guarantee[d] payment in cash of a
predetermined amount at the precise time when the need for which it
was purchased arises [emphasis as in original]", like Mr.
Deacon's sale, they serve as an important tax and estate
planning tool.
We will explore, in particular, how through RDSPs people's
lives need not be quite so "poor and starved".
Registered Disability Savings Plans (RDSPs)
RDSPs were first introduced in Canada in 2008 with the intent of
assisting individuals with disabilities to save for their future
financial needs. The advantages such plans afford include access to
government grants and tax-deferred income.
Under the Income Tax Act, any individual can
contribute a portion of their after-tax income to an RDSP to allow
growth within the RDSP on a tax-deferred basis until the
beneficiary turns 59 years of age, although such beneficiaries will
only receive grant and bond amounts up until the year in which they
turn 49 years old.
The contributions made to an RDSP are not deductible from the
individual's taxable income for the year in which they are
made. Moreover, the investment income earned within the RDSP is
tax-sheltered, meaning that it grows tax-free as long as it remains
within the plan. Withdrawals from an RDSP, other than withdrawals
of original contributions, are taxed at the beneficiary's
marginal tax rate in the year in which they are withdrawn.
The idea behind this taxation scheme is that those "markedly restricted" individuals
eligible to be beneficiaries of an RDSP are expected to remain at a
lower marginal tax rate throughout their lifetimes.
It is important to note that an RDSP is an asset from which only
the beneficiary is entitled to receive payments. Only one (1) RDSP
may be established per qualifying individual.
To open an RDSP, certain requirements must be met, including that
the intended beneficiary must:
- be eligible for the Disability Tax Credit;
- be 49 years of age or younger as at December 31st of the current year;
- be a resident of Canada; and,
- have a valid Social Insurance Number.
In most cases, an RDSP should not affect the ability of the
beneficiary to access provincial disability benefits, Old Age
Security ("OAS") pension, or GST/HST credits.
An RDSP must be established by the intended beneficiary, unless he
or she lacks mental capacity to do so, in which case a qualifying
family member, including a spouse, common law partner, parent, or
brother or sister, may do so. Once established, anyone willing to
contribute to the RDSP on behalf of the beneficiary may do so with
the written permission of the plan holder.
As a matter of succession planning, it behooves the plan holder of
the RDSP to explore options for a successor holder to maintain the
RDSP for the benefit of the beneficiary if and when the existing
plan holder is no longer able to do so. Moreover, such plan holder
should consider the impact of RDSP withdrawals on government
benefits and plan accordingly to maximize overall financial support
for the beneficiary.
The foregoing having been said, an RDSP is not an alternative to
trust planning for a person with a disability, and should instead
supplement other planning tools, including Henson trusts, insurance
products, segregated funds, and lifetime benefit trusts. In
particular, although there is no annual limit on amounts that can
be contributed to an RDSP, it is important to note that the
lifetime contribution limit for a particular beneficiary is
$200,000.
When the beneficiary of an RDSP dies, the RDSP must be closed by
the end of the calendar year following the year of death of such
beneficiary, and any Canada Disability Savings Grant or Canada
Disability Savings Bond amounts must be repaid to the federal
government. The taxable portion of any disability assistance
payments, meanwhile, is to be included as income in the deceased
beneficiary's terminal T1 tax return, subject to the 10-year
assistance holdback amount rule, where the assistance holdback
amount is comprised of all the Canada Disability Savings Grant and
Canada Disability Savings Bond amounts which have been paid into
the RDSP within a 10 calendar year period, less any amounts
previously repaid.
There is no question RDSPs serve as an important tax and estate
planning tool for those with disabilities. To optimize the outcomes
for those "markedly restricted" individuals in your own
life, entrust your planning with qualified legal professionals.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
