BUDGET 2012: CHANGES TO THE RDSP QUESTIONS & ANSWERS
Please click on the following link to see a brief overview of announced Budget 2012 enhancements to the RDSP, the grant and the bond: BUDGET 2012_Qs & As_EN_Final July 2012
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Also copied here:
- Plan Holders
The Budget announced the Government of Canada’s commitment to work with provinces and territories to develop standardized, streamlined processes that provinces and territories could adopt in order to facilitate and simplify the process of opening RDSPs for adult beneficiaries who lack contractual competence. In the interim, while these processes are being developed, the Government of Canada has temporarily expanded the definition of who may be the plan holder of an RDSP. Until the end of 2016, a beneficiary’s spouse, common-law partner or parent will be able to become the plan holder and open the RDSP on behalf of an adult beneficiary who might not be able to open a plan due to concerns about their ability to enter into a contract. These temporary rules are intended to afford provinces and territories sufficient time to develop long-term solutions to address RDSP legal representation issues. This interim measure came into effect as of June 29, 2012 when Bill C-38 received Royal Assent.
1. Q. Who can open an RDSP and be the holder for a beneficiary who is not contractually competent and has reached the age of majority?
A. In addition to the existing legislation in effect, the beneficiary’s parent(s), spouse or common-law partner.
2. Q.Whenwillthisnewruletakeeffect?
A. The enabling legislation (Bill C-38) was passed as of June 29, 2012.
3. Q. How long will this measure be in effect?
A. This is a temporary measure and will end on December 31, 2016.
4. Q. If a parent, spouse or common-law partner becomes the holder under this temporary measure, what happens on January 1, 2017?
A. A holder named to an RDSP contract under this measure will be able to remain the holder after 2016.
5. Q. What happens if a legal representative is appointed for the beneficiary after a qualifying family member has opened an RDSP for the beneficiary?
A. The legal representative will replace the qualifying family member as plan holder and the current holder would have to be removed.
6. Q. What happens if a beneficiary becomes contractually competent after a qualifying family member has opened an RDSP for the beneficiary?
A. The beneficiary may be added as a plan holder or become the sole plan holder. The qualifying family member may remain as a holder or be removed altogether.
- Proportional Repayment Rules
Currently, all grant and bond paid into an RDSP in the previous 10 years must be repaid to the Government of Canada when any of the following events occur:
-There is a withdrawal from the RDSP The RDSP is deregistered or closed
-The beneficiary is no longer eligible for the Disability Tax Credit (DTC)
-The beneficiary dies
This ten-year amount to be repaid is known as the Assistance Holdback Amount (AHA). To allow beneficiaries greater access to their funds when necessary, while respecting the objective of long-term savings, a proportional repayment rule will be introduced for withdrawals only. The ten-year AHA will remain in place for all other situations identified above.
The new proportional repayment provision will require that $3 be repaid to the Government of Canada for every $1 that is withdrawn, up to a maximum of the ten-year AHA amount. Repayments to the Government of Canada will be attributed in the order in which grants and bonds were paid into the plan, from the oldest to the newest. This new measure will take effect after 2013 and apply to withdrawals made after that time.
1. Q. If a beneficiary withdraws $5,000, how much AHA needs to be repaid?
A. Issuers would repay to the Government of Canada either $15,000, (3 x $5000) or the total amount of AHA that is in the plan at the time, whichever is less.
2. Q. When does this new measure take effect?
A. Legislation will need to be tabled in Parliament in order to make this change, and to determine a coming-into-force date. If the legislation is passed within the current calendar year, this new measure could come into effect as early as January 1, 2014.
- Maximum and Minimum Withdrawals
There are two types of withdrawals that can be made from an RDSP:
Disability Assistance Payments (DAPs)
Lifetime Disability Assistance Payments (LDAPs).
DAPs are discretionary payments that can be made at any time (if the plan allows DAPS – currently, all financial organizations allow DAPs), and LDAPs, once started are annual payments that continue until the beneficiary dies or the plan is depleted of funds and closed.
The Income Tax Act (ITA) specifies through the use of a formula how much can be withdrawn from a plan during a calendar year, depending on the composition of the funds held in the plan on January 1st of that year. An RDSP may contain more Government of Canada assistance than private contributions. If so, it is considered a Primarily Government Assisted Plan (PGAP). When the amount of private contributions is greater than the amount of grant and bond held in the RDSP, it is considered non- PGAP.
Withdrawal limits (i.e. DAPs or LDAPs) are calculated depending upon the proportion of private versus government contributions held in the RDSP. PGAPs are currently limited in the amount of money that can be withdrawn in a given year, while non-PGAPs have no limitations whatsoever. Budget 2012 announced measures to provide greater flexibility to make withdrawals from PGAPs by increasing the annual maximum withdrawal limit that applies to these plans, and ensuring that RDSP assets are used to support a beneficiary during their lifetime by requiring a minimum amount to be withdrawn from all RDSPs beginning the year a beneficiary attains 60 years of age. This new measure will take effect after 2013. The following table outlines the old rules and the new rules:
EXAMPLE
In 2008, Katie is 10 years old, and has an RDSP opened on her behalf. Katie and
her family contribute $1,500 each year, and receive the annual maximum grant
($3,500) and annual maximum bond ($1,000) each year.* Once the lifetime limits of
the grant ($70,000) and bond ($20,000) have been reached, Katie’s family stops
making contributions. When Katie reaches 45 years old, government contributions
will exceed private contributions making her RDSP worth $412,450 (assuming the
interest earned is 5% annually).
If Katie would like to make a DAP at the age of 45, under the current rules, she would only be able to withdraw $10,854 in that calendar year.
$412,450/ (80 + 3 – 45) = $10,854.
Under the new rules, Katie will be able to withdraw the amount determined by the formula or 10% of the total assets. Therefore, up to $41,245 may be withdrawn in the calendar year.
* In this example, Katie’s family income qualifies her to receive the full bond each and every year.
1. Q. Will this change the DAP/LDAP formula?
A. The DAP/LDAP formula remains unchanged.
2. Q. When do these rules take effect?
A. Legislation will need to be tabled in Parliament in order to make this change, and to determine a coming-into-force date. If the legislation is passed within the current calendar year, this new measure could come into effect as early as January 1, 2014.
3. Q. Does this new rule have an impact on the shortened life expectancy measure?
A. No. The shortened life expectancy measure remains the same.
- Rollover of Registered Education Savings Plan (RESP) Investment Income
To provide greater flexibility for parents of a child with a disability, if certain conditions are met, any earnings in a Registered Education Savings Plan (RESP) will be eligible to be rolled-over into an RDSP without incurring any tax implications if the plans share a common beneficiary.
To be eligible to rollover the income from an RESP to an RDSP, the beneficiary must meet age and residency requirements with respect to RDSP rules. As well, one of the three following conditions must be met:
The beneficiary has a severe and prolonged mental impairment that can reasonably be expected to prevent the beneficiary from pursuing post-secondary education;
The RESP account has been in existence for at least 10 years and each beneficiary is at least 21 years of age and is not pursuing post-secondary education;
The RESP has been in existence for more than 35 years.
The income portion of the RESP will be considered a contribution, but will not be eligible to attract the Canada Disability Savings Grant. The amount “rolled-over” cannot cause the RDSP to exceed the $200,000 limit of total contributions, and will use available contribution room. The rolled-over amount will be a taxable portion of any Disability Assistance Payment (DAP) or Lifetime Disability Assistance payment (LDAP), and will be used to determine if the plan is a Primarily Government Assisted Plan (PGAP) with respect to withdrawals, (refer to item “Maximum and Minimum Withdrawals” above for a description of these terms). This new measure will take effect after 2013.
1. Q. Can I roll-over contributions made to an RESP?
A. Contributions made to an RESP belong to the subscriber and are returned to them when the plan is closed. It is up to that individual to decide what to do with those funds, but that individual could choose to put them into an RDSP.
2. Q. Can I roll-over the Canada Education Savings Grant (CESG)?
A. No. Any unused CESG remaining in the RESP is to be repaid to the Government
of Canada.
3. Q. When does this new measure take effect?
A. Legislation will need to be tabled in Parliament in order to make this change, and to determine a coming-into-force date. If the legislation is passed within the current calendar year, this new measure could come into effect as early as January 1, 2014.
- Termination of an RDSP following Cessation of Eligibility for the Disability Tax Credit (DTC)
In certain circumstances, an RDSP will be allowed to remain open, but “dormant” for a period of up to five years when a beneficiary ceases to be Disability Tax Credit (DTC) eligible, if there is a likelihood that the beneficiary will again qualify for the DTC. If this is the case, the holder must make an “election” whereby a medical practitioner must certify in writing that the nature of the beneficiary’s condition will make the beneficiary eligible for the DTC in the foreseeable future. If so, the plan can remain open, however no additional contributions can be made to the plan during this period, no grant or bond will be paid to the plan, and no grant or bond entitlements will be accumulated. The Assistance Holdback Amount (AHA) will remain the amount as at cessation of DTC eligibility, and the new proportional repayment rule will also apply. This new measure will take effect after 2013.
1. Q. When does the “election” have to be made?
A. The election must be made by December 31 of the year following the year in which the beneficiary is no longer eligible for the DTC.
2. Q. How long can the plan remain open under “election”?
A. The plan must be closed by the end of the fourth year following the year in which the beneficiary is no longer eligible for the DTC, if the beneficiary remains DTC ineligible.
3. Q. When will this new measure take effect?
A. Legislation will need to be tabled in Parliament in order to make this change, and to determine a coming-into-force date. If the legislation is passed within the current calendar year, this new measure could come into effect as early as January 1, 2014.