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Amendments to the Income Tax Act (Canada) to implement the Registered Disability Savings Plans (the ˇ§RDSPˇ¨) has received Royal Assent on December 14, 2007 for them to come into effect in the taxation year of 2008. Therefore it is now a legitimate and effective way for splitting income with a disabled person.
While Registered Education Savings Plans (the ˇ§RESPˇ¨) have been widely used by parents to contribute money for their childrenˇ¦s post-education as the contributions can grow tax-free in the RESP, the RDSP provides even more incentives for families, friends and people with disabilities themselves to save for the disabled personˇ¦s future and security.
One important feature of the RDSP that distinguishes it from the RESP is that persons who may contribute to the RDSP are not restricted to those who are connected to the beneficiary of the plan by blood relationship or adoption. Anyone, including the beneficiary himself or herself, can contribute to the RDSP.
Apart from accepting contributions from individuals, an RDSP will be eligible to receive grant and bond payments from the federal government. The amount of grant and bond payments an RDSP is entitled to receive corresponds with the income level of the family of the beneficiary of the plan. Basically, plans set up for beneficiaries of low- and modest-income families will receive a higher amount of grant and bond payments than those received by high-income families.
The RDSP prohibits contributions from being made after the year in which the beneficiary turns 59 years of age, or at a time when the beneficiary is not resident of Canada. Further, it prohibits a contribution from being made if the total of the contribution and all other contributions to the RDSP of the beneficiary would exceed $200,000.
The rules on taxation relating to the RDSP are basically similar to those governing the RESP. Any contribution to the RDSP is not deductible to the contributor. The investments in the plan can grow tax-free. Lifetime disability assistance payments (the ˇ§LDAPˇ¨) out of the RDSP to the beneficiary must commence no later than the end of the year in which the beneficiary turns 60 years of age. The plan limits the total amount of LDAP that can be made in any given year to the amount determined in accordance with a complicated formula under the legislation. The amount by which the LDAP exceeds the non-taxable portion of the payment is included in the taxable income of the beneficiary in the year in which it is paid out. In general terms, the non-taxable portion is the total contributions made to the plan. Accordingly, only the growth portion of the contributions are taxable to the beneficiary.
An RDSP has to be registered by an issuer and various rules have to be complied with in order for its registration to be approved. Further, there are numerous regulations on such plans and compliance with those has to be ensured at all times to prevent deregistration of the plan and to avoid adverse tax consequences. Accordingly, anyone who wishes to set up an RDSP for a disabled person should consult an investment advisor or a financial institution which provides such services.
From a legal perspective, we advise that the will of the person who has the principal decision making authority with respect to the RDSP (known in the legislation as the ˇ§directorˇ¨) as well as that of the beneficiary himself or herself should be carefully prepared so as to ensure the continuity of the RDSP as planned after the death of the director and to direct the flow of the assets in the plan after the death of the beneficiary. Our lawyers have the experience to help you achieve these goals and they will work closely with your investment advisors to make full use of the tax advantages offered by the RDSP. Such advice also applies to parents or other persons who have set up RESPs for their children or family members.
Prepared by Iris S.M. Chung
Barrister & Solicitor
Metcalfe, Blainey & Burns, LLP
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