Feds improve, streamline RDSP

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Despite its austerity, this budget was a huge boon for disabled clients.

“There were a number of very positive changes to the RDSP,” says Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management.

Under certain circumstances, a plan-holder can now withdraw up to 10% of the plan’s fair market value at one time, and there’s now a minimum required withdrawal for certain types of RDSP.

Another positive change: The government rolled back penalties to plan-holders who withdraw matching grants and bonds. Previously, if a client got $10,000 in grants over the prior ten years and withdrew even $1, says Rachel Blumenfeld, partner with Miller Thomson LLP, the issuer had to repay the entire $10,000. Now, under the new proportional repayment rule, the issuer only has to repay $3 for every $1 withdrawn.

Herberts Berzins, a Whitby, Ont.-based consultant with Investors Group, applauds this measure, but says clients shouldn’t view the RDSP like a bank account; it’s meant for long-term savings, to be withdrawn primarily after age 60.

There’s also good news for parents whose children become disabled before graduating high school.

“They’ve allowed a rollover of RESP growth for the disabled person if they aren’t able to attend [school]; you can roll that into an RDSP tax-free,” Golombek says.

The government’s also removed the roadblocks for disabled adults to obtain RDSPs.

Previously, some adults had trouble entering into RDSP contracts because their mental capacities were in doubt. In some provinces and territories, the only way they could open RDSPs was if a court declared them legally incompetent and named legal guardians.

That’s an expensive process. Berzins says at least one of his clients held off opening an RDSP because of the cost.

A parent or spouse* can now be a plan-holder for a disabled adult. This temporary provision will be in effect until 2016; allowing the provincial and federal governments to harmonize their RDSP regulations over the next four years.

Blumenfeld, who was involved in the government’s fall consultation process for RDSP improvements, says issuers wanted clarification on who could open them. She says some institutions were opening the accounts for parents and spouses anyway. Now, that’s officially allowed.

“The feds weren’t asking for the documentation on guardianship either; they were relying on the institutions,” she says. But even with this new provision, issuers should be careful. “If you’re a mom saying your adult child is mentally incompetent, I’m going to want something in my file saying that’s the case,” such as a doctor’s letter or capacity assessment.

Being labelled mentally incompetent is also a strong stigma, says Blumenfeld.

Berzins agrees. “Unless there’s an urgent need [such as to qualify for the RDSP], the courts don’t like to award guardianship of an adult to someone; because it takes away that person’s rights.”

As for concerns a parent or spouse may abscond with the funds, Blumenfeld expects that after 2016 the government will require formal guardianship, which has greater oversight.

In the meantime, if someone suspects a parent or spouse is not fulfilling his or her duties, she can complain to the Public Guardian and Trustee’s Office in Ontario, or provincial equivalent.

As for further improvements, Blumenfeld would have liked to see the $200,000 lifetime maximum for the RDSP increased, or at least indexed for inflation.

For families, this austerity budget offers nothing new.

Instead, it reminded Canadians of the goodies offered in previous budgets such as transit credits, home buying and renovation credits, and the Children’s Fitness and Arts Tax Credits.

“The budget streamlined some things administratively, but any provisions that would impact families directly, especially from a tax perspective, were few and far between,” says Murray Pituley, tax and financial planning expert at Investors Group.

The benefits for families won’t raise bank balances by much. The budget has increased the travellers’ exemption: as of June 1, Canadians who leave for 24 hours or more will be able to bring back $200 duty-free, up from $50; and those who leave for 48 hours or more $800. This new threshold replaces the current 48-hour exemption of $400 and seven-day exemption of $750.

Pituley points to the GST/HST exemptions for services performed by pharmacists as another small concession.

He also says families may benefit from the increased employment arising from the one-year extension of the Hiring Credit for Small Business, the $1.1 billion committed over five years for R&D support, and the $500 million available for venture capital.

*The original version of this article stated siblings could also be plan-holders. The Budget only specifies a beneficiary’s spouse, common-law partner, or parent.

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.