Changes to RDSPs will create more options for clients

RDSPs, which became available in 2008, aim to ensure the long-term financial security of children with severe disabilities. Annual contributions to the plans attract Canada Disability Savings Grants worth 100%, 200% or 300% of the contribution amounts, depending on the beneficiary’s family income and the amount contributed, up to a lifetime maximum of $70,000.

The government also provides up to $1,000 in Canada Disability Savings Bonds annually to RDSPs established by low- and modest-income families, up to a lifetime maximum of $20,000.

As the program is designed to encourage long-term savings, individuals who withdraw any amount from their RDSP must repay all of the CDSGs and CDSBs paid into the RDSP in the preceding 10 years, under the current rules.

Access to small withdrawals

To provide greater access to RDSP savings for small withdrawals, Budget 2012 proposes changing this rule, which has attracted much criticism.

“I found the 10-year repayment rule very punitive,” says Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management.

The budget proposes replacing the 10-year repayment rule with a proportional repayment rule, which would require that for each $1 withdrawn from an RDSP, $3 of any CDSGs or CDSBs paid into the plan in the 10 years preceding the withdrawal be repaid.

That would allow individuals who make small withdrawals to keep much more of their savings in the plan.

“That’s very positive,” says Golombek. “This will allow beneficiaries who need access to the RDSP funds to be able to withdraw the funds without being severely penalized.”

Greater maximum withdrawals

Another proposed change in budget 2012 increases the annual limit on the amount individuals can withdraw from their RDSPs, in cases where the CDSGs and CDSBs paid into the plan exceed private contributions made to the plan. Under the current rules, the maximum amount that can be withdrawn from the RDSP each year is determined by a formula based on the age of the beneficiary and the fair market value of the assets in the RDSP.

The budget proposes to increase the withdrawal limit to the greater of the amount determined by the formula and 10% of the fair market value of plan assets at the beginning of the calendar year.

“That’s a very favourable change that allows the disabled beneficiary to access more of the funds when needed,” says Golombek.

Rollover of RESP investment income

Another measure in the budget aims to provide greater flexibility for parents who save in a registered education savings plan for a child with a disability. Under the proposal, if the beneficiary of an RESP has a severe and prolonged mental impairment that prevents them from pursuing post-secondary education, the investment income earned in the RESP could be transferred on a tax-free, or “rollover”, basis to the beneficiary’s RDSP.

Those who complete the rollover would have to repay Canada Education Savings Grants and Canada Learning Bonds in the RESP, and the plan must be terminated.

This measure will apply to rollovers of RESP investment income made after 2013.

Fewer barriers to establishing RDSPs

The budget also addresses the legal representation issues associated with opening an RDSP.

The government’s review showed that some Canadians with disabilities have experienced difficulties establishing an RDSP because their capacity to enter into a contract is in doubt. In many provinces, the only way an RDSP can be opened in these cases is for the individual to be declared legally incompetent and have someone named as his or her legal guardian – a long and expensive process with significant repercussions.

The federal government is urging these provinces to develop more appropriate, long-term solutions to address RDSP legal representation issues.

In the meantime, however, 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 may be unable to enter into a contract.

This measure will ensure that individuals in all provinces and territories who are not contractually competent and who do not have a legal guardian may still benefit from RDSPs, according to the budget. The temporary measure will apply from the date of Royal Assent until the end of 2016.

Greater continuity in long-term saving

The budget also aims to reduce the administrative burden on certain beneficiaries.

RDSPs can be established only for individuals who are eligible for the Disability Tax Credit, and if their condition improves such that they don’t qualify for the DTC for a taxation year, the RDSP must be terminated by the end of the following year, with the CDSGs and CDSBs repaid.

The same individual might once again become eligible for the DTC in another year, allowing them to establish a new RDSP; however 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, the federal budget proposes to extend, in certain circumstances, the period for which an RDSP may remain open when a beneficiary becomes DTC-ineligible.

To qualify, a medical practitioner must certify in writing that due to the nature of the beneficiary’s condition, they will likely be eligible for the DTC in the foreseeable future.