Odd RDSP tax case exposes problems

To ensure clarity and efficiency, new legislation is often layered upon existing law; otherwise, there could be unnecessary duplication of definitions, parallel procedures and inconsistent results.

A recent court decision concerning the relatively new registered disability savings plan (RDSP) illustrates how this otherwise logical approach may nonetheless lead to unexpected outcomes, and leave a court handcuffed in its attempt to fashion remedies.

Qualification for the RDSP

The disability tax credit (DTC) is a long-standing component of the Income Tax Act. The introduction of the RDSP is directed at the same individuals and families eligible for the DTC. In fact, to open an RDSP, a person must qualify for the DTC. Specifically, a person must be a “DTC-eligible individual,” defined in the RDSP provisions of the Income Tax Act as “an individual in respect of whom an amount is deductible […] under section 118.3 in computing a taxpayer’s tax payable.”

The implications of not falling under this definition are stated explicitly in later provisions that prohibit contributions to an RDSP “if the beneficiary is not a DTC-eligible individual in respect of the taxation year.”

Effect of a nil assessment

In an October 26, 2010 case from the Tax Court of Canada (TCC), the interaction between DTC entitlement and RDSP eligibility came under scrutiny.

In February 2009, taxpayer Giovanni Tozzi had a medical doctor complete a Disability Tax Credit Certificate, which was then forwarded to the Canada Revenue Agency (CRA). But the CRA denied the credit. In an effort to seek redress, Tozzi used the Informal Procedure in the TCC to appeal his nil tax assessment for 2008. Tozzi was not contesting the assessment of tax, but rather the CRA’s refusal to allow him the DTC qualification upon which he could establish RDSP eligibility.

Jurisdiction of the TCC

When a taxpayer is dissatisfied with a tax assessment, an appeal may be made to the TCC. The disposition of that appeal is set forth in the Income Tax Act, allowing the court to dismiss or allow the appeal, vacate or vary the assessment, or refer the matter back for reconsideration and reassessment.

That said, the point of law before the court was not the appeal itself, but rather a motion by the Crown to dismiss Tozzi’s appeal as being from a nil assessment. Recent case law indeed holds that there can be no appeal from a nil assessment, so the judge was compelled to allow the Crown application and dismiss Tozzi’s appeal.

What now for the disentitled?

The required disposition didn’t sit well with the judge, who said, “It is simply not right for the Crown to act behind a nil assessment to prevent [Tozzi] from applying for a disability savings plan.”

Although there is likely a procedure under the Federal Courts Act for Tozzi to have CRA administrative actions reviewed, this was not satisfactory, either. Expressing particular concern for low-income taxpayers, he said, “Ideally this Court should be a ‘one stop’ Court for persons who have claims under the [Income Tax Act].” He went on to raise the possibility that Parliament and the legislative drafters simply may not have anticipated Tozzi’s situation.

In recognition of the spirit and purpose of the RDSP initiative, on November 25, 2010, Finance Minister Jim Flaherty announced that legislative changes would be introduced to address the problem exposed in this case.

“Procedural issues of this nature should not be an impediment for individuals who wish to establish their right to the Disability Tax Credit and, as a result, also their right to open an RDSP,” he said in a statement.

Doug Carroll, JD, LLM (Tax), CFP, TEP, is vice president of tax and estate planning at Invesco Trimark Ltd.