By: Jacqueline Power, assistant vice-president with Mackenzie Investments, March 3, 2020

The Registered Disability Savings Plan requires proper planning

The Registered Disability Savings Plan (RDSP) launched more than a decade ago, but there’s still confusion about some of the more intricate details.

One of the RDSP’s largest benefits is the “free” money that beneficiaries can receive from the government up until the end of the year they turn 49.

The Canada Disability Savings Grant is a matching program based on family net income. Until the year the beneficiary turns 19, family net income is based on the parents’ incomes; afterward, it’s based on the beneficiary’s income plus their spouse’s income.

These rules hold regardless of who the account holder is, whether the beneficiary is dependent on someone or where the beneficiary lives.

If the beneficiary qualifies for the maximum grant (family income is $95,259 or less), an annual contribution of $1,500 will provide an annual grant of $3,500, up to a maximum lifetime grant of $70,000.

For low-income families, the government also offers the Canada Disability Savings Bond. If a beneficiary qualifies for the maximum bond (family income is $31,120 or less), they receive $1,000 annually up to a lifetime maximum of $20,000, with no contribution required.

What is the assistance holdback amount?

The government wants RDSP accounts to be long-term investments. To discourage early withdrawals, it established the assistance holdback amount (AHA).

If an RDSP account is collapsed, the AHA applies, which means all the grant and bond amounts deposited to the account in the 10 years prior must be repaid to the government.

For partial RDSP withdrawals, the account holder repays $3 of any grant or bond received in the 10 years prior for every $1 withdrawn.

This holdback amount is often misinterpreted. People generally assume they can access the grant or bond they received more than 10 years ago that it’s no longer subject to the AHA. This is not true. While the grant or bond received more than 10 years ago belongs to the beneficiary, they’re unable to access it unless the entire account is collapsed, or no grant or bond has been deposited to the account in the 10 years prior to the withdrawal.

When can an RDSP be collapsed?

If a beneficiary passes away or loses the Disability Tax Credit, an RDSP can be collapsed.

Many advisors and investors believe the RDSP account can be collapsed at any time, but this may not be the case.

If the account has more private contributions than government money, there’s no limit to the maximum amount that can be withdrawn.

If the RDSP is a primarily government-assisted plan (government grant and bond payments exceed private contributions), the maximum amount that can be withdrawn annually is the greater of 10% of the account or the lifetime disability assistance payment (LDAP) formula. Below is an example of the LDAP formula.

LDAP withdrawal = A ÷ (3 + B − C)

A = fair market value of the plan at the beginning of the year

B = greater of 80 and the beneficiary’s age at the beginning of the year

C = beneficiary’s age at the beginning of the year

If the beneficiary is age 60 and has $400,000 in the account at the beginning of the year, the LDAP withdrawal amount would be:

$400,000 ÷ (3 + 80 − 60) = $17,391.

In this case, 10% of the account is greater than the LDAP withdrawal amount.

Can a beneficiary designation be added to an RDSP?

It’s not possible to add a beneficiary designation to an RDSP account. When an RDSP beneficiary passes away, the RDSP is paid out to the beneficiary’s estate. As mentioned above, if the grant or bond was contributed to the account in the 10 years prior to the closure, it must be repaid to the government. The balance is paid to the beneficiary’s estate.

If the beneficiary has capacity and is age of majority, they would be well advised to write a will as a way to determine how the proceeds of the account will be distributed. This may also be a great time to discuss powers of attorney.

If they don’t have a will, account proceeds will be distributed as per the provincial rules of intestacy. Note that, since account proceeds are paid to the estate, it’s not possible to avoid probate on an RDSP account.

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For more information about RDSPs, or financial planning for someone with a disability, contact me.
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We’ve put together the key measures for:

• Individuals and Families
• Business Owners and Executives
• Retirement and Retirees
• Farmers and Fishers

Individuals & Families

Home Buyers’ Plan

Currently, the Home Buyers’ Plan allows first time home buyers to withdraw $25,000 from their Registered Retirement Savings Plan (RRSP), the budget proposes an increase this to $35,000.

First Time Home Buyer Incentive

The Incentive is to provide eligible first-time home buyers with shared equity funding of 5% or 10% of their home purchase price through Canada Mortgage and Housing Corporation (CMHC).

To be eligible:

• Household income is less than $120,000.
• There is a cap of no more than 4 times the applicant’s annual income where the mortgage value plus the CMHC loan doesn’t exceed $480,000.

The buyer must pay back CMHC when the property is sold, however details about the dollar amount payable is unclear. There will be further details released later this year.

Canada Training Benefit

A refundable training tax credit to provide up to half eligible tuition and fees associated with training. Eligible individuals will accumulate $250 per year in a notional account to a maximum of $5,000 over a lifetime.

Canadian Drug Agency

National Pharmacare program to help provinces and territories on bulk drug purchases and negotiate better prices for prescription medicine. According to the budget, the goal is to make “prescription drugs affordable for all Canadians.”

Registered Disability Savings Plan (RDSP)

The budget proposes to remove the limitation on the period that a RDSP may remain open after a beneficiary becomes ineligible for the disability tax credit. (DTC) and the requirement for medical certification for the DTC in the future in order for the plan to remain open.

This is a positive change for individuals in the disability community and the proposed measures will apply after 2020.

Business Owners and Executives

Intergenerational Business Transfer

The government will continue consultations with farmers, fishes and other business owners throughout 2019 to develop new proposals to facilitate the intergenerational transfers of businesses.

Employee Stock Options

The introduction of a $200,000 annual cap on employee stock option grants (based on Fair market value) that may receive preferential tax treatment for employees of “large, long-established, mature firms.” More details will be released before this summer.

Retirement and Retirees

Additional types of Annuities under Registered Plans

For certain registered plans, two new types of annuities will be introduced to address longevity risk and providing flexibility: Advanced Life Deferred Annuity and Variable Payment Life Annuity.

This will allow retirees to keep more savings tax-free until later in retirement.

Advanced Life Deferred Annuity (ALDA): An annuity whose commencement can be deferred until age 85. It limits the amount that would be subject to the RRIF minimum, and it also pushes off the time period to just short of age 85.

Variable Payment Life Annuity (VPLA): Permit Pooled Retirement Pension Plans (PRPP) and defined contribution Registered Retirement Plans (RPP) to provide a VPLA to members directly from the plan. A VPLA will provide payments that vary based on the investment performance of the underlying annuities fund and on the mortality experience of VPLA annuitants.

Farmers and Fishers

Small Business Deduction

Farming/Fishing will be entitled to claim a small business deduction on income from sales to any arm’s length purchaser. Producers will be able to market their grain and livestock to the purchaser that makes the most business sense without worrying about potential income tax issues. This measure will apply retroactive to any taxation years that began after March 21, 2016.

To learn how the budget affects you, please don’t hesitate to contact us.

Several key changes relating to personal financial arrangements are covered in the Canadian government’s 2018 federal budget, which could affect the finances of you and your family. Below are some of the most significant changes to be aware of:

Parental Leave

The government is creating a new five-week “use-it-or-lose-it” incentive for new fathers to take parental leave. This would increase the EI parental leave to 40 weeks (maximum) when the second parent agrees to take at least 5 weeks off. Effective June 2019, couples who opt for extended parental leave of 18 months, the second parent can take up to 8 additional weeks, at 33% of their income.

Gender Equality

The government aims to reduce the gender wage gap by 2.7% for public servants and 2.6% in the federal private sector. The aim is to ensure that men and women receive the same pay for equal work. They have also announced increased funding for female entrepreneurs.

Trusts

Effective for 2021 tax filings, the government will require reporting for certain trusts to provide information to provide information on identities of all trustees, beneficiaries, settlors of the trust and each person that has the ability to exert control over the trust.

Registered Disability Savings Plan holders

The budget proposes to extend to 2023 the current temporary measure whereby a family member such as a spouse or parent can hold an RDSP plan on behalf of an adult with reduced capacity.

If you would like more information, please don’t hesitate to contact us.