5 improvements to the RDSP

The government introduced five positive changes to the RDSP in Budget 2012.

Here’s a synopsis of each change, when each comes into effect, and how they will benefit clients.

1. Fewer restrictions on account holders

When the RDSP first launched, the account holder (the person authorized to open the RDSP) had to be the disabled beneficiary’s legal guardian or representative if he was over age 18 and not contractually competent.

Problem was, becoming an adult’s legal guardian or representative can be expensive and time consuming. Budget 2012 recognized this challenge and hence temporarily changed the rules to allow a qualifying family member to be an account holder. This includes the beneficiary’s parent, spouse or common-law partner.

The change became effective July 2012 and will last through to the end of 2016. It will make it much easier to set up an RDSP account when an adult with a disability is not contractually competent.

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Even though it’s a temporary change, the account holder can remain beyond 2016; new accounts cannot be opened this way after 2016.

2. New proportional repayment rule

When a beneficiary withdraws money from an RDSP account, some money is held back. This is called the Assistance Holdback Amount (AHA), and it consists of all Canada Disability Savings Bonds (CDSBs) and Canada Disability Savings Grants (CDSGs) paid into the RDSP account over the 10 years prior to the withdrawal.

Under the old rules, the beneficiary had to repay the entire AHA, no matter the size of the redemption. That could significantly reduce the RDSP’s value, not to mention the beneficiary’s cash flow.

To illustrate, if $10,000 worth of CDSGs and CDSBs went into the account in the 10 years prior to a $500 redemption, the beneficiary had to repay the full $10,000 AHA to the government.

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A new repayment rule introduced in Budget 2012 is far less punitive. Under the new rule, for every $1 that is withdrawn from the RDSP, $3 worth of CDSBs and CDSGs have to be repaid, up to the value of the AHA.

So now, if the beneficiary were to redeem $500, he will only have to repay $1,500 worth of CDSGs and CDSBs, instead of the $10,000 AHA. This gives the beneficiary the ability to access money without severe penalties.

This new rule is effective January 1, 2014.

3. More flexibility for minimum and maximum withdrawals

Currently, if an RDSP beneficiary is age 60 or older, and the RDSP is primarily government funded — known as a Primarily Government Assisted Plan (PGAP) – he can only withdraw a set amount from the RDSP.

For a non-PGAP RDSP, there’s no minimum or maximum withdrawal amount.

Budget 2012 introduced a new rule: if an RDSP beneficiary is age 60 or older, both PGAP and non-PGAP RDSPs have the same minimum withdrawal amount. It’s calculated using the Lifetime Disability Assistance Payment (LDAP) formula.

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And, the maximum annual limit for total withdrawals (combined LDAP and Disability Assistance Payments [DAPs]) from a PGAP is the greater of the LDAP formula and 10% of the fair market value of the RDSP at the beginning of the year. There is no maximum annual limit for total withdrawals (combined LDAP and DAP) from a non-PGAP RDSP.

The changes are effective January 1, 2014.

4. More flexibility when beneficiaries ceases to be eligible for the Disability Tax Credit (DTC)

If RDSP beneficiaries lose DTC eligibility, they’re currently required to collapse their RDSPs by December 31 of the following year. Upon collapse, all CDSBs and CDSGs paid into the RDSP over the last 10 years must be returned to the government.

This is a problem if the beneficiary expects to again become DTC eligible in the near future.

Budget 2012 introduced a new rule that allows an RDSP to remain open but dormant for up to five years after the beneficiary loses DTC eligibility. To be eligible, the beneficiary must file an election form in which a medical practitioner certifies that the beneficiary is expected to regain DTC eligibility within the next five years.

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No contributions are permitted during this dormancy period. Also, the RDSP is not eligible for grants or bonds and cannot accumulate any carry forward of these government incentives.

The beneficiary can still make withdrawals from the account but the Assistance Holdback Amount (AHA) will apply. Currently, the full amount of the AHA will need to be repaid but as of January 1, 2014, $3 will be repaid for every $1 withdrawn. This delays the clawback of Government grants and bonds and results in less paperwork if the beneficiary requalifies for the DTC within 5 years.

5. RESP income can roll into an RDSP

Budget 2012 introduced the ability to move investment income from an RESP (Accumulated Income Payments) to an RDSP on a tax-deferred basis, provided the beneficiary already has an RESP and is disabled. The rollover is not eligible for the CDSG and will reduce the beneficiary’s RDSP contribution room.

Read: Odd RDSP tax case exposes problems

This is useful if a child becomes disabled and may never attend post-secondary education. Now, RESP accumulated income can be transferred to an RDSP for the same beneficiary on a tax-deferred basis without the 20% penalty tax applying. This is effective January 1, 2014.