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.
To read more on disability planning
Refer to our previous blog post entitled “Special Needs, Special Trusts”
and
our Advisory entitled “Estate Planning to Benefit Family Members with Special Needs”.
— Michael G. von Keitz