The federal government is proposing to remove the limitation on the period that a Registered Disability Savings Plan (RDSP) may remain open after a beneficiary becomes ineligible for the disability tax credit (DTC).
Introduced Tuesday in the 2019 budget, the proposed changes would also eliminate the requirement for medical certification that the beneficiary is likely to become eligible for the DTC in the future in order for the plan to remain open.
The Liberals say the proposed new rules “will better protect the long-term savings of people with disabilities.”
The proposed measures will apply after 2020.
“This is a very positive change, and something that many in the disability community had long lobbied for,” says Jamie Golombek, managing director of tax and estate planning with Canadian Imperial Bank of Commerce’s financial planning and advice group.
Under current legislation, when a beneficiary of an RDSP ceases to be eligible for the DTC, no contributions may be made to, and no Canada Disability Savings Grants and Canada Disability Savings Bonds may be paid into, the RDSP. Generally, the RDSP must be closed by the end of the year following the first full year during which the beneficiary is not eligible for the DTC.
“Occasionally, individuals with disabilities will experience an improvement in their condition. This results in them no longer qualifying for the DTC. Under the current rules, the RDSP would most likely have to be closed, with all grants and bonds repaid,” Golombek says.
In addition, an RDSP issuer is required to set aside an amount equivalent to the total Canada grants and bonds paid into the RDSP in the preceding 10 years, less any of these grants and bonds that have been repaid in that period. Upon plan closure, this amount must be repaid to the government. Any assets remaining in the RDSP after this repayment are paid to the beneficiary.
A RDSP plan holder can extend the period for which an RDSP may remain open but only with the certification of a medical practitioner that the beneficiary is likely to be eligible for the DTC, in respect of the condition, in the foreseeable future.
Under the current rules, in most cases if you no longer qualify for the DTC, up to 10 years’ worth of grants and bonds would generally have to be paid back.
Under the new rules, this may no longer be required. Each year after the year in which the beneficiary turns 50 years of age, a declining amount of grants and bonds will have to be repaid, according to a set of new complex rules.
“It’s a much more generous regime,” Golombek says.
If a beneficiary regains eligibility for the DTC, the regular RDSP rules will apply commencing with the year in which the beneficiary becomes eligible for the DTC. Should the beneficiary become ineligible for the DTC at some later time, the proposed rules in respect of DTC ineligibility will resume.
In addition to these changes relating to the eligibility for the DTC and RDSP, the government also proposed that amounts held in RDSPs be exempt from seizure in bankruptcy, with the exception of contributions made in the 12 months before filing. This change would align the rules governing RDSPs to those of RRSPs.