So, where are we at with the recent RDSP updates?

When the RDSP was first launched in December 2008, a review was scheduled to happen in three years’ time. Indeed, one year ago the Federal Government was busy working with PLAN and many others across the country to look at how the RDSP could be improved. After hearing back from many families, Finance Canada spent a few months making their decisions, which were announced in the March 2012 Federal Budget.

  1. Replace the 10-year repayment rule applying to withdrawals with a proportional repayment rule
  2. Allowing investment income earned in a Registered Education Savings Plan (RESP) to be transferred on a tax-free basis to the RESP beneficiary’s RDSP
  3. Extending the period that RDSPs of beneficiaries who cease to qualify for the Disability Tax Credit may remain open in certain circumstances
  4. Amending the rules relating to maximum and minimum withdrawals
  5. Amending certain RDSP administrative rules
  6. Allow a temporary expansion on who may be an adult beneficiary’s plan holder to include the beneficiary’s spouse, common-law partner, or parent

The last one, number six, was able to be enacted early—on June 29, 2012 in fact, and it goes to until 2016—but what about the others? Well they have been going through all the usual steps that every new bill goes through, in front of the house and the senate, before eventually receiving royal assent. The expectation is that all will pass and the changes will take place after 2013.

If you find this process at all interesting, you may enjoy the following excerpts taken about two weeks ago from the Standing Senate Committee on National Finance where our senate examined and discussed the merits of the proposed RDSP updates with the Department of Finance.

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THE STANDING SENATE COMMITTEE ON NATIONAL FINANCE

OTTAWA, Tuesday, November 6, 2012

The Standing Senate Committee on National Finance met this day at 1 p.m. to examine the subject matter of all of Bill C-45, A second Act to implement certain provisions of the budget tabled in Parliament on March 29, 2012, and other measures, introduced in the House of Commons on October 18, 2012. Senator Joseph A. Day (Chair) in the chair.

The Chair: I call this meeting of the Standing Senate Committee on National Finance to order.

Honourable senators, this is our second meeting on the subject matter of Bill C‑45. This afternoon, we will hear from government officials primarily, if not exclusively, from the Department of Finance.  They will take us through the bill, in a clause‑by‑clause manner, explaining what the initiative is with respect to each of the clauses.

After there has been an explanation by one of our witnesses in relation to a clause, I will look around the room and see if there is anyone who wishes further clarification or has a point to make.  If not, we will proceed to the next matter.

Ted Cook, Senior Legislative Chief, Department of Finance Canada: The next clause that has an actual new measure is 33.

The Chair: Is that on page 53 of the bill?

Mr. Cook: Exactly.  This measure relates to registered disability savings plans and provides for the rollover or transfer of investment income earned in a registered education savings plan to an RDSP in certain circumstances, particularly where the RESP and the RDSP share a beneficiary and that beneficiary is unable to pursue post‑secondary education as a result of a mental impairment.

Senator Chaput: Does that happen very often?

Mr. Cook: No.  The expectation is that such a rollover would not occur on a frequent basis.

Senator Chaput: Why would we change that?

Mr. Cook: The basic policy of registered disability savings plans is to save and provide for the long‑term care of people with significant medical concerns.  At the same time, we have the registered education savings plan and the person may become unable to pursue post‑secondary education because of mental impairment.  When a subscriber withdraws money from an RESP, it can be subject to tax at normal income tax rates as well as an extra 20 per cent to recognize the time growth value of the money within the RESP.  This measure recognizes that both measures are savings vehicles and so it makes sense to allow, recognizing that the person cannot pursue post‑secondary education, these medically related saving needs to go on a tax-deferred basis.

Senator Chaput: They would pay less tax or it would be deferred.

Mr. Cook: When they start to withdraw money, the RDSPs are taxed such that there is a taxable portion of a withdrawal and a non‑taxable portion, depending on how the money came into the RDSP.  There would be some tax paid by the beneficiary of the RDSP, but on the actual transfer, there would be no tax.

Senator Callbeck: A review was done on the registered disability savings plan in 2011.  Is this where these changes are coming from?  Were these recommendations from that review?

Mr. Cook: Certainly, this bill contains four or five measures with respect to RDSPs. In large part, they reflect the kinds of concerns that were raised.  I could not say whether this particular change was a result of particular comments that had been received, but the review was held, as you point out, in 2011.  The department received approximately 280 submissions, and many of the comments were around one of the changes being proposed ‑‑ the impact of making withdrawal from an RDSP.  Currently, you have to pay back the entire assistance holdback amount, and we are introducing a proportional repayment rule.  That is probably the most important change as a result of the consultation, which flagged a number of issues around the ability to access funds and what they are used for.  Whether this was as a result of a specific submission, I could not say.

Senator Hervieux-Payette: When people are using the fund for people going to school, who allows the students to study abroad and qualify the institution?  Let us say you want to study in Paris, which is a nice place. Does the Minister of Finance give the okay to a particular institution for a student?  Where does the approval come from?

Mr. Cook: I am sorry but we are looking at this measure related to transferring money from an RESP to an RDSP.  I am afraid I do not have the answer as to how foreign institutions get qualified for RESP.

Senator Hervieux-Payette: In Canada, it is easy but since we want more and more people to have exchanges, I was wondering about that.  I have some examples of people who want to go to an institution in Australia, and I am not talking about Melbourne.  Some institutions are qualified and some are not.  Who makes these decisions?

Mr. Cook: I do not know that.

Senator Hervieux-Payette: If you find someone in your department who knows, it would be good for us to know, because I could not give the answer.

The Chair: On to the next one.

Mr. Cook: Clause 34 relates to pooled registered pension plans and simply allows for transfers to a registered retirement income fund and transfers out of a registered retirement income fund.

Clause 35 relates to a number of measures with respect to registered disability savings plans.  I would note that with respect to withdrawals from registered disability savings plans, this clause in the bill would take an existing requirement that only applies to RDSPs funded primarily by government grants and bonds.  These plans have the requirement that once people turn 60, they have to start making withdrawals every year; and the minimum withdrawals relate to what we call the “lifetime disability assistance plan formula.” This takes that requirement and extends it to all RDSPs in line with the notion of the RDSP that it is supposed to provide for the long‑term care of the individual involved.

Senator Chaput: Does that make it easier for people with disabilities to have access or does it make it more difficult complicated?

Mr. Cook: I do not think it will affect the complexity of the way that RDSPs work.  It helps to ensure that the RDSPs are being used for the right reasons.  Currently, there is a requirement to make a withdrawal once you turn 60, but that withdrawal can be any amount.  In cases where small withdrawals are being made, you sort of question if the RDSP is there to provide for the long‑term care of someone. If they are not withdrawing funds once a person reaches the age of 60 or over, what is the rationale for those funds staying in the RDSP?

Senator Chaput: The funds were there to begin with to help the disabled person, were they not?

Mr. Cook: That is right.

Senator Champagne: What is the real problem?

Mr. Cook: At some point, the funds should start coming out to pay for the expenses of that person rather than just staying in the RDSP and accumulating more income that may never be used for the care of the individual.

Senator Chaput: Have you made any study that shows such funds should have been withdrawn before or is it just based on logic?

Mr. Cook: It is logical based on the way the provision is laid out that there is no requirement that the funds be used.

Senator Nancy Ruth: With disability pensions, if the disabled person dies, do the remaining funds remain part of his or her estate or is it taxed in a different manner?

Mr. Cook: It is essentially treated as a withdrawal.  The assistance holdback amount still has to be repaid, if you will.  The assistance holdback amount is the government grants and bonds that had gone into the RDSP in the last 10 years and the remainder goes into the estate of the individual.

Senator Nancy Ruth: Thank you.

The Chair: We are on to clause 35.

Mr. Cook: I spoke about the minimum withdrawal requirement for all RDSPs.  Under current rules there is also a maximum withdrawal rule that applies with respect to plans that are primarily government assisted, or primarily funded by government grants and bonds, to provide greater flexibility to the beneficiaries of those plans.  That upper limit is being increased from the existing amount, which is a formula‑based amount, to the greater of that formula and 10 per cent of the plan assets.  Up to 10 per cent of the plan assets will be able to be withdrawn by RDSP beneficiaries.

The clause also provides a number of administrative changes to RDSPs as a result of consultation between issuers of RDSPs and Human Resources and Skills Development Canada.  They are just things like changing particular day deadlines to a more flexible approach to making transfers and notifications to HRSDC.

The last main measure in clause 35 is with respect to Disability Tax Credit eligibility.  Currently, if a person ceases to be eligible for a DTC or Disability Tax Credit, they have an obligation to wind up their RDSP.  Recognizing the potentially episodic nature of some illnesses, the rule will now provide that on an elective basis a RDSP can remain open for up to five years following the first year that they are no longer Disability Tax Credit eligible.  This can be done if a medical doctor certifies in writing that the person is likely to become DTC eligible again in the foreseeable future.

The Chair: It seems like we have had something in each of these budget implementation bills for the last two or three years with respect to RDSPs.

Mr. Cook: Certainly since I have started doing this, it has been.

The Chair: It is a good initiative, but why are we catching up all the time?

Mr. Cook: As Senator Callbeck noted with respect to amendments this year, there was the planned 3‑year review for RDSPs and a significant review process that we went through in the fall.  As I indicated, we received approximately 280 submissions and as a result of that we continue our work on this area.

Senator Callbeck: I have a question on the Registered Disability Savings Plans.  Would you comment on the proportional repayment rule and why the ratio is three to one?

Mr. Cook: It is probably best to start with the existing rule.  Under the existing rules where any withdrawal is made from a RDSP, the individual has to pay back the assistance holdback amount, which is all the grants and bonds that have been contributed by the government over the last 10 years to the RDSP.  That fit in with the initial plan of how these plans were supposed to work.  There would be an income contribution accumulation phase, which would presumably last up till the person is 49, and a growth phase where the investments could grow and would last up until the age of 59 for the individual.  The withdrawal phase would start when the person is 59 or 60, and then they would take out money each year to support their long‑term needs.

The assistance holdback amount, in support of this view, was that if you made a withdrawal of $1 you would have to pay back all the grants and bonds in the prior 10 years.  The view came to be that this was a rather harsh result; if you made a very small withdrawal, you would have to repay everything that you received over the last 10 years.  I guess the three‑for‑one proportional repayment rule is significantly less harsh than the existing rule.  The assistance holdback amount still forms the ceiling but serves as a deterrent for using other than for the intended purpose.

Senator Callbeck: Is there any rationale for the ratio of three to one, rather than four to one or two to one?

Mr. Cook: I think the rationale is no more than a review and analysis to suggest an appropriate ratio.  It would deter withdrawals, but at the same time not be overly punitive when a person makes a small withdrawal from an RDSP.

Senator Callbeck: Thank you.

Mr. Cook: Then clauses 71, 72 and 73 all relate to RDSPs.  In particular, clause 73 is where the RDSP change relating to proportional repayment is found.

The Chair: To “proportional . . .”?

Mr. Cook: Repayment.  That is the rule where, if you make a withdrawal from an RDSP, you pay $3 for every $1 that is withdrawn instead of having to pay back the whole assistance holdback amount.  That can be found in new section 5.3 and 5.4.

Senator Callbeck: With clause 71, the Canada Disability Savings Regulation, you are talking about the transfer to a new issuer.  It says that this budget proposes that Human Resources and Skills Development Canada rather than the original issuer be responsible for providing this information to the issuer of the new plan.

Why are you making that change?

Mr. Cook: This is to facilitate transfers between issuers of RDSPs.  Currently, when a beneficiary of an RDSP wants to change from one issuer to another, the person who is leaving the RDSP has to provide all the related transactional information to the new issuer.  As we talked about earlier, if you make a withdrawal from an RDSP, you are potentially liable for the assistance holdback amount.  That means that any RDSP issuer must have a full record of all the transactions, grants and bonds paid into the RDSP in the prior 10 years.

HRSDC, Human Resources and Skills Development Canada, has all that information.  Therefore, this is to make life easier for issuers; HRSDC has the information and they can provide it to the new issuer rather than requiring one issuer to provide it to another.

Senator Callbeck: That makes sense.  Thank you.

The Chair: I see no other senators wishing to ask any questions.  I suspect that is the end of your work, because we just got to the end of Part 1, which has been very good.  Mr. Trueman, Mr. Cook, Mr. Porter and Mr. Pomroy, thank you very much for being here.

Mr. Cook: Thank you.

The Chair: This meeting is now concluded.

(The committee adjourned.)

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2 Comments

Comments

If #6 has been enacted on June 29.2012, why is my financial institution (TD) not aware of it, and why is it not on the CRV website? How and where does one get confirmation of this change?

Doug King
February 20, 2013
12:26 pm
Reply |

    Hi Doug,

    Not every staff member is aware of this new provision unfortunately, but hopefully the info is being passed down. Even more unfortunate, not every bank is quite set up to manage the plan-holder expansion option yet, although the federal government is pushing for this to happen. Check with your bank to make sure they have changed their “specimen plan”. For more info on what that is exactly, see here:
    http://www.cra-arc.gc.ca/tx/rgstrd/rdsp/fq-eng.html#P110_6793

    jcrocker
    March 18, 2013
    11:54 am
    Reply |

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