Canada Revenue Agency recently released new rules concerning Registered Disability Savings Plan (RDSP) and the taxation of withdrawals from the plan. In a five-part series, Knowledge Bureau Report will examine RDSPs and explore the tax implications of the new rules. In this first report, Greer Jacks looks at what payments from RDSPs are taxable.
Contributions. A plan holder(s) is the person or persons who opens the account on behalf of the disabled person, who becomes the plan’s beneficiary. There is no limit to the amount the plan holder(s) can contribute annually to an RDSP, but the overall lifetime limit for a beneficiary is $200,000. Plans can qualify for a Canada Disability Savings Grant and the Canada Disability Savings Bond, as well as designated provincial programs, which are outside the contribution limit.
Contributions can be made to the plan until the end of the year in which the beneficiary turns 59.
A beneficiary can only have one RDSP at any given time, although the RDSP can have multiple plan holders throughout its existence.
Payments. Three types of payments can be made from an RDSP: disability assistance payments (DAPs), repayments of grants and bonds to the government, and transfers of all property from the beneficiary’s current RDSP to a new RDSP for the same beneficiary. Only the beneficiary or the beneficiary’s legal representative acting on the beneficiary’s behalf can receive DAPs, which is the only type of payment that is taxable. The beneficiary must include those amounts in his or her annual income.
Reporting the income. When payments are from the RDSP, RDSP issuers report the taxable part of the payments from the plan in box 131 of the T4A slip, located in the “Other information” area, and send two copies of the slip to the beneficiary or the beneficiary’s legal representative. The beneficiary must include this amount as income on line 125 of his or her tax return for the year in which he or she receives it.
Canada Revenue Agency recently released new rules concerning Registered Disability Savings Plan (RDSP) and the taxation of withdrawals from the plan. In the second of a five-part series, Greer Jacks looks at the concept of “advantage” and how it applies to RDSPs.
Taxes payable on an “advantage.” Another time when taxes take a bite out of RDSPs is when an “advantage” is attained. An advantage is a benefit or loan that depends on the existence of the RDSP. So, if you have an RDSP and secure a loan as a result of the existence of the RDSP, then an advantage has been attained. The advantage will be valued and taxed according to its ascertainable “fair market value.”
The recipient of the advantage is liable for taxes. This could be the beneficiary if, in a calendar year, an advantage is extended to the beneficiary, or any person who does not deal at arms’ length with a beneficiary or a holder of the plan.
Generally, an advantage does not include disability assistance payments, contributions to the RDSP made by or with the consent of a plan holder, RDSP to RDSP transfers, government grants and bonds, payments of administrative and investment services associated with an RDSP, or loans used to make contributions to an RDSP.
Amount of tax payable. The amount of taxes payable for an advantage is, in the case of a benefit, the fair market value of the benefit and, in the case of a loan, the amount of the loan.
Payment of taxes. The recipient of the loan or benefit must file Form RC4532, Individual Tax Return for Registered Disability Savings Plans, with a payment for any balance due no later than 90 days after the end of the calendar year.
Lifetime disability assistance payments (LDAP), says the CRA, are DAPs that, once started, must be paid at least annually until either the plan is terminated or the beneficiary dies. These payments must begin by the end of the year in which the beneficiary turns 60 and, unless the year is a specified year, are subject to an annual maximum withdrawal limit determined by the formula described below.
If a RDSP is opened in the year in which the beneficiary is 60 years of age or older (which could occur only if one RDSP is being wound up and funds transferred to a new RDSP for the same beneficiary), LDAPs must start in the calendar year following the year in which the plan is opened.
A LDAP is a DAP that is identified as such in the RDSP. An RDSP must specify whether payments other than LDAPs are permitted within the plan.
LDAP maximum formula. The total amount of LDAPs that can be paid in any calendar year (other than a specified year) cannot exceed the following formula: the FMV of the plan’s assets at the beginning of the year, divided by the greater of 80 or the beneficiary’s age at the beginning of the calendar year for which the limit is being determined, minus the beneficiary’s age at the beginning of the year which the limit is being determined.
For example, suppose the FMV of the plan’s assets is $150,000 at the beginning of the calendar year and the beneficiary is 82 years old. Then, $150,000 is divided by 82 (not 80, because the beneficiary is older than 80), minus 82, equals $1,747.
If the plan holds a locked-in annuity contract at the beginning of the calendar year, then the total amount of the periodic payments received by the plan in the calendar year must be added to the calculation of the formula. If the plan disposed of the right to such payments in the year for which the limit is being determined, then this variable is an estimate of the payments that the trust would have received.
Taxes payable on DAPs, including LDAPs. When a payment is made from an RDSP, the part that includes the grants and bonds paid into the plan as well as all investment income earned in the RDSP, such as interest, is taxable. It is included in the income of the beneficiary for the year in which the payment is made.
Note that RDSP income (the taxable part) is excluded from income when calculating various benefits, such as the GST/HST credit, the Canada child tax benefits (CCTB), and the Working income tax benefit (WITB). It is also excluded when calculating the social benefit repayment and the refundable medical expense supplement.
Canada Revenue Agency recently released new rules concerning Registered Disability Savings Plan (RDSP) and the taxation of withdrawals from the plan. In the fourth of a five-part series,Knowledge Bureau Report looks at RDSPs and assistance holdback amounts (AHAs).
The Government of Canada supports RDSPs through Canada Disability Savings Grants and Canada Disability Savings Bonds. Each year, it will make matching grants to an RDSP of 100%, 200% or 300% of the amount contributed, depending on the income of the beneficiary’s family.
The government will also pay bonds of up to$1,000 a year directly to the RDSPs of low-income Canadians — regardless of whether a contribution is made — until the year in which a beneficiary turns 49. The lifetime limit is$20,000.
But there are circumstances in which the grants and bonds may have to be repaid (seehttp://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rdsp-reei/menu-eng.html) and this is where the assistance holdback amount (AHA) comes in.
The AHA is, at a particular time, the total amount of grants and bonds paid into an RDSP within the 10-year period before that particular time, less any amount of grant or bond paid in that 10-year period that has already been repaid to the government.
A disability assistance payment (DAP) can be made from a RDSP but only if the fair market value (FMV) of the plan’s assets after the payment does not fall below the AHA. This condition ensures the plan has sufficient assets to satisfy any potential repayment obligations under the Canada Disability Savings Regulations.
When a RDSP makes a payment, the grants and bonds paid into the plan as well as the investment income earned in the plan become taxable in the hands of the beneficiary. The AHA is used to determine the non-taxable portion of a DAP.
RDSP income is excluded from income when calculating various income-based benefits, such as the GST/HST credit, the Canada Child Tax Benefit (CCTB), and the Working Income Tax Benefit (WITB). Exclusion of RDSP income continues when calculating social benefit repayments and the refundable medical expense supplement.
Lastly, the AHA is required in certain DAP calculations when an RDSP becomes non-compliant.
Non-compliance: If, at any time, an RDSP becomes non-compliant, it loses its registered status. When registered status is lost, a payment is deemed to have been made from the plan to the beneficiary or the beneficiary’s estate. This deemed payment will be equal to the amount by which the FMV of the property held by the plan exceeds the AHA.
If a plan loses registered status because a DAP decreases the FMV of the property in the plan to less than the AHA, an additional DAP is deemed to have been made to the beneficiary at that time. This deemed payment is equal to the amount by which the lesser of the AHA and the FMV of the property held by the RDSP at the time of payment exceeds the FMV of the property held by the plan immediately after the payment.
The non-taxable portion of this additional payment will be deemed to be nil.
Finally, the AHA is nil if the RDSP is converted to a Specified Disability Savings Plan (SDSP). A RDSP becomes an SDSP when a medical doctor certifies in writing that the beneficiary of an RDSP is unlikely to survive more than five years.