Introduced in the 2007 Federal Budget, Registered Disability Savings Plans ("RDSPs") are designed to provide long-term tax-assisted savings to individuals with disabilities and their families. This year's Budget proposes to enhance the flexibility of RDSPs for beneficiaries with shortened life expectancies by providing earlier access to their savings, without requiring the repayment of Canada Disability Savings Grants ("CDSGs") and Canada Disability Savings Bonds ("CDSBs").
The Budget proposes to permit an RDSP beneficiary who has a physician-certified shortened life expectancy (of five years or less) to withdraw more of their RDSP savings without triggering the present 10-year repayment rule for CDSGs and CDSBs received by an RDSP on a premature withdrawal from or termination of the plan, subject to specified limits and certain conditions.
To take advantage of this measure, the plan holder (often a parent or other close relative) will be required to file an election in a prescribed form, together with the medical certification, with the RDSP issuer, who then notifies Human Resources and Skills Development Canada of the election. If a plan holder does not make such an election, then the current RDSP rules, including the 10-year repayment rule, will continue to apply to the plan.
Currently, withdrawals from an RDSP comprise a taxable portion and a non-taxable portion based on the relative proportions of taxable assets (including CDSGs, CDSBs and investment income) and non-taxable assets ("private" contributions of capital) in the plan.
Under the proposal, withdrawals made at any time following an election will not trigger the repayment of CDSGs and CDSBs provided that the total of the taxable portions of the withdrawals does not exceed $10,000 annually. The total annual withdrawals may exceed $10,000, as some of the withdrawal may be derived from non-taxable portions. If withdrawals of taxable amounts exceed $10,000 in a year, the normal 10-year repayment rule will apply, to the extent that CDSGs and CDSBs and other taxable assets remain in the plan.
When an election has been made by the plan holder, the following proposed rules will apply:
- No further contributions to the plan will be allowed, although a tax-deferred rollover of a deceased parent's or grandparent’s RRSP or RRIF to the RDSP of a financially-dependent infirm child or grandchild may still be available, even when the child or grandchild has a shortened life expectancy.
- No new CDSGs or CDSBs can be paid to the plan. Upon the death of the RDSP beneficiary, all remaining CDSGs and CDSBs which were received by the plan within the preceding 10 years must be repaid.
- No CDSG or CDSB entitlements will be carried forward in respect of years subject to the election, other than for the year in which the election is made.
- The minimum withdrawal requirements that ordinarily apply in the year in which a beneficiary attains 60 years of age will continue to apply to the plan starting in the year following the election, regardless of the age of the beneficiary. These rules will generally apply to the plan on an ongoing basis, unless the plan holder reverses the election.
A plan holder will be permitted to reverse an election on a prospective basis at any time. In this case, the regular RDSP rules will generally apply, except that no new CDSGs and CDSBs can be paid into the plan until the year after that in which the election is reversed.
To reverse an election, the plan holder will be required to provide a notice in prescribed form to the RDSP issuer. The issuer will be required to notify Human Resources and Skills Development Canada of the reversal.
Reversing an election will not preclude a plan holder from making a subsequent election if a new medical certification of shortened life expectancy is obtained. However, a subsequent election will be permitted only two or more years after the reversal of the preceding election.
Withdrawals of taxable amounts exceeding the $10,000 annual limit will result in the automatic reversal of an election.
This measure will apply after 2010 to withdrawals made after Royal Assent to the enacting legislation. However, as a transitional rule, beneficiaries making an election under this measure will be permitted to utilize their 2011 withdrawal limit in 2012 provided that the required medical certification was obtained before 2012