Click on the following orange link to download a copy of CRA’s RDSP taxation sheet and learn how government contributions and investment growth will be taxed in your RDSP. Also copied below.
QSAs – Tax withholding on payments from registered disability savings plan
Tax withholding on payments from registered disability savings plan
Q.1 What is a registered disability savings plan (RDSP)?
A.1 An RDSP is a registered savings plan to help Canadians with disabilities and their families save for the future.
Q.2 Who is eligible for an RDSP?
A.2 To be eligible for an RDSP the beneficiary must:
- be eligible to claim the disability amount;
- have a valid social insurance number;
- be a resident in Canada when the plan is entered into; and
- be under the age of 60.
The age limit does not apply when a beneficiary’s RDSP is opened as a result of a transfer from the beneficiary’s former RDSP.
Q.3 Who can open an RDSP?
A.3 If the beneficiary has reached the age of majority and is legally able to enter into a contract, then an RDSP can be established by the beneficiary for his or her own benefit and/or by the legal parent who is, when the plan is established, a holder of a pre-existing RDSP of the beneficiary.
If the beneficiary is a minor, another person can open an RDSP for the beneficiary and become a holder if that person is:
- a legal parent of the beneficiary;
- a guardian, tutor, or curator of the beneficiary, or an individual who is legally authorized to act for the beneficiary; or
- a public department, agency, or institution that is legally authorized to act for the beneficiary.
Q.4 What is a Canada disability savings grant (CDSG)?
A.4 A CDSG is an amount deposited by the Government of Canada into an individual’s RDSP to help them save. The Government provides matching grants of up to 300%, depending on the amount contributed and the beneficiary’s family income. The maximum amount is $3,500 per year, with a limit of $70,000 over the beneficiary’s lifetime.
Q.5 What is a Canada disability savings bond (CDSB)?
A.5 A CDSB is money that the Government of Canada deposits into the RDSP of a qualified beneficiary. People who qualify for the bond can receive up to $1,000 per year from the Government, with a limit of $20,000 over a lifetime. Contributions do not need to be made to an RDSP in order to receive the bond.
Q.6 What are the payments that can be made from an RDSP?
A.6 There are two types of payments that can be paid to a beneficiary from an RDSP:
- Disability assistance payment (DAP) – A DAP is a single payment requested by the beneficiary as needed. It can also be an amount that is paid to the beneficiary’s estate after death or to the beneficiary when the plan must close because the beneficiary is no longer eligible to claim the disability amount.
- Lifetime disability assistance payments (LDAPs) – LDAPs are paid as a series. Once started, they must be paid at least annually until the plan is ended or the beneficiary has died. Payments must begin by the end of the calendar year when the beneficiary turns 60.
Q.7 Are the payments from an RDSP to a beneficiary taxable?
A.7 Yes—part of the payments are taxable and must be reported as income.
Q.8 What is the taxable part of payments from an RDSP?
A.8 The following amounts are taxable as income when a payment is made from the plan:
- Canada disability savings grants
- Canada disability savings bonds
- investment income earned in the plan
Individual contributions are not taxable.
Q.9 What are the planned changes for RDSPs in January 2014?
A.9 Starting on January 1, 2014, financial institutions that administer RDSPs will begin withholding income tax at source on the taxable part of a beneficiary’s RDSP payments, using lump-sum withholding rates.
The withholding requirements will be applied to all beneficiaries who receive or continue to receive payments from an RDSP on or after January 1, 2014.
Q.10 Why is the CRA requiring withholding of income tax at source on RDSP payments?
A.10 Beneficiaries are more likely to owe tax at the end of the year when they receive large payments from an RDSP. In many instances, income tax withheld at source allows beneficiaries to reduce or eliminate the amount of tax owing when they file their income tax and benefit return.
The practice of withholding taxes from lump-sum payments is not new—it is already applied to withdrawals from registered retirement income funds, where the part of each payment that is in excess of a predetermined minimum is subject to withholding.
Q.11 What are the lump-sum withholding rates?
A.11 The lump-sum withholding rates are as follows:
- 10% (5% for Quebec) on lump-sum amounts up to and including $5,000;
- 20% (10% for Quebec) on lump-sum amounts over $5,000, and up to $15,000; and
- 30% (15% for Quebec) on lump-sum amounts over $15,000.
Q.12 How does a financial institution apply the withholding requirements on RDSP payments?
A.12 A financial institution will apply the withholding requirements on RDSP payments as follows:
For lifetime disability assistance payments (LDAPs):
- A projection is made of the total of LDAPs expected to be made during the year.
- The taxable part of the LDAPs is determined.
- The withholding rate is determined according to the amount of the taxable part of the projected amount.
- The withholding rate is applied on the taxable part of the LDAP payment, less the yearly basic personal amount (BPA) and disability amount (DA).
12 LDAPs of $5,000 $60,000
Bond amount $0
Grant amount $20,000
Earned investment $4,000
To find the withholding rate:
12 LDAPs $60,000
Minus contributions $36,000
Equals the taxable amount $24,000
Therefore, applicable withholding tax rate is: 30%
To find the amount of tax withheld:
Taxable amount $24,000
Minus the basic personal amount and disability amount $18,735
Equals amount subject to withholding $5,265
Therefore, tax withheld at 30% $1,580
For a disability assistance payment (DAP):
- The DAP is determined (withholding is done on every payment).
- The taxable part of the DAP is determined.
- The withholding rate is determined according to the amount of the taxable part of the DAP.
- The withholding rate is applied on the taxable part of the DAP, less the yearly basic personal amount (BPA) and disability amount (DA).
To find the withholding rate:
1 DAP $65,000
Minus contributions $40,000
Equals the taxable amount $25,000
Therefore, applicable withholding tax rate is $30%
To find the amount of tax withheld:
Taxable amount $25,000
Minus the BPA and DA $18,735
Equals amount subject to withholding $6,265
Therefore, the applicable 30% tax is: $1,880
If a beneficiary receives both LDAPs and DAPs, the withholding rate is determined separately for each type of payment.
Q.13 Will the withholding requirement apply to payments made from an RDSP before January 1, 2014?
A.13 No. Payments made from an RDSP before January 1, 2014, will not be affected.
Q.14 Do I report RDSP payments when I file my income tax and benefit return?
A.14 Yes, beneficiaries must report the income received from an RDSP and the tax withheld at source when they file their income tax and benefit return.
Q.15 How will the change apply to me if I am employed and receiving payments from an RDSP?
A.15 The same withholding requirements will apply to an employed beneficiary receiving RDSP payments. A T4A slip will be provided to the beneficiary, indicating the taxable part of RDSP payments and the amounts withheld at source.
Working RDSP recipients may not have enough tax withheld when receiving RDSP payments. Beneficiaries who want to increase the tax withheld at source can complete Form TD1, Personal Tax Credits Return, and enter an amount at “Additional tax to be deducted” on the second page of the form. You can get a copy of Form TD1 at www.cra.gc.ca/deductmore or by calling the Canada Revenue Agency at 1-800-959-8281.
Q.16 How will the withholding requirement be applied on non-resident beneficiaries?
A.16 A 25% withholding rate must be applied on each payment made to a non-resident of Canada. An NR4 slip will be given to the beneficiary by the financial institution.
For more information, non-residents can call the International Tax Services Office at 1-855-284-5942 (for service in English) or 1-855-284-5943 (for service in French) from anywhere in Canada and the United States. Non-residents outside Canada and the United States can call collect at 1-613-940-8495.
Q. 17 Where can I get more information about RDSPs?
A. 17 Information for beneficiaries is available at www.cra.gc.ca/rdsp, and information for plan administrators is available at www.cra.gc.ca/tx/rgstrd/rdsp. Information about RDSPs is also available on the Web site of Human Resources and Skills Development Canada at www.disabilitysavings.gc.ca.