RDSP - Special Circumstances

by Geoff Sgarbossa, CD,CFP,RIS, Financial Planner

RDSP - Special Circumstances

While we originally provided a Discussion Paper illustrating Registered Disability Savings Plan (RDSP) basics, this Brief Discussion Paper is designed to build off the original and provide answers to some specific questions that tend to come up quite regularly with RDSPs. 

There is a lot of conflicting information surrounding the RDSP. Some of the conflict is from well intended, but ill-advised folks. However, a lot of it - believe it or not - is from official government documentation that professionals are trained to rely upon. I would not assume malicious intent, but the varying states of the legislative process to be the primary source of this is confusion. We are currently following rules proposed in the 2019 federal budget that have not yet received royal assent, meaning it is not written into law. What this means is official publications are all in varying states of update. Some publications are reflective of the current rules, some have added transitional rules “to not follow the rules as written”, and others give no indication at all that anything is amiss. Once royal assent is received, all the official guides and rule books will be updated, and confusion should start to diminish. I am not sure why the delays, but I suspect the reason is benign and the RDSP rule updates keep getting triaged to a lower priority to be dealt with, after they deal with the chaos the world has been throwing our way over the last few years. I don’t anticipate them going back to old ways, but this remains a very important distinction for folks relying on the RDSP to shelter assets from the various provincial disability programs. Because some of the rule changes are not yet “written in stone”, it is much easier to go back to the old ways where one needed to close RDSP if they lost DTC eligibility as an example. Again, I don’t anticipate this happening, but a plan B filed away in case of emergency would still be prudent for these folks.

Assistance Holdback Amount (AHA), AKA 10-year vesting rule

The Assistance Holdback Amount is all Canada Disability Savings Grants (CDSG) and Canada Disability Savings Bonds (CDSB) paid into the RDSP in the previous 10 years, minus any grants and bonds from that same 10 year period already repaid to the Government of Canada. This amount remains inaccessible in the account for withdrawals, save for specific scenarios.

Proportional Repayment Rule.

When a withdrawal is requested, you are required to pay back $3 worth of CDSG’s and CDSB’s, up to and including the full Assistance Holdback Amount. If no holdback amount exists, then no proportional repayment is required.

Age Limits.

Withdrawals must start by the end of the year the beneficiary turns 60. Proportional repayment is required if any CDSG or CDSB were paid in the previous 10 years. In other words, once the beneficiary has attained the age of 50, no further grants and/or bonds will be paid out, even if eligibility for that grant or bond was granted before 49. Otherwise, they would be forcing a proportional repayment when they force you to start making withdrawals at 60.

Primarily Government-Assisted Plan (PGAP).

An RDSP becomes a PGAP in a year when the total of all CDSG’s and CDSB’s, is more than the total of all private contributions. Once a PGAP, there are more restrictive withdrawal rules.

What Happens if you Lose DTC Eligibility?

Since 2021, if a beneficiary is no longer approved to claim the DTC, the holder of the RDSP has the option of closing the plan and repaying the AHA, or keeping the account open and allow for continued growth. If the holder decides to keep it open, amounts can still be withdrawn from the RDSP, but:

• No new contributions

• Withdrawals are still allowed, but the AHA gets anchored to the 10-year period immediately preceding the loss of DTC eligibility.

Qualifying Family Member (QFM)

There are many cases where the beneficiary of a RDSP may not be competent to contract, or their contractual competence is in doubt. There may be an option to use QFM to fill the role of account holder in certain situations. Depending on the circumstances, the following people are eligible to be the account holder as a qualifying Family Member: Spouse, Common-Law Partner, Parent, Sibling.

Transfers and Rollovers

Under certain conditions, there is an ability to roll funds over to your RDSP on a tax deferred basis. These include retirement savings of a deceased parent or grandparent, or Accumulated Income Payments (AIP) from a RESP with the same beneficiary. Rollovers will require available contribution room, do not attract CDSG’s or CDSB’s, and are considered personal contributions when determining if account is PGAP or not.

Shortened Life Expectancy

If a beneficiary has shortened life expectancy of 5 years or less, the RDSP holder can choose one of the following options:

• Keep the plan as an RDSP which is now in a specified year; or

• Designate the plan as a Specified Disability Savings Plan (SDSP).

Specified Year

A specified year is ultimately a recognition that the beneficiary has a shortened life expectancy. The account generally continues to operate normally but offers more flexibility when trying to access funds in the plan.

Specified Disability Savings Plan (SDSP)

An SDSP provides beneficiaries who have a shortened life expectancy with even greater flexibility in accessing their RDSP savings. Once converted to a SDSP, no further contributions can be made, and the plan will not be entitled to any new CDSG’s or CDSB’S.

What happens if the beneficiary dies?

The RDSP must be closed by December 31st of the year following the calendar year in which the beneficiary dies. All funds remaining after any required assistance holdback repayments must be paid out to the beneficiary’s estate.

Residency

The beneficiary of an RDSP must be a resident in Canada for the following purposes:

• RDSP contract registration

• New contributions, both personal and governmental.

Residency is not required for the following purposes:

• For the holder to open and RDSP.

• For the beneficiary to receive payments from the RDSP.

Withdrawals

• A payment cannot be made from a plan if the FMV of the plan, after the payment, will be less than the AHA.

• If the plan is not a PGAP (more personal contributions than Governmental), there are no limits to withdrawal amounts. 3:1 proportional repayment of AHA is required.

• If the plan is a PGAP (more Governmental contributions than personal), then annual withdrawal limits are limited to the greater of the Lifetime Disability Assistance Payment formula and 10% of account market value at the beginning of the year. 3:1 proportional repayment of the AHA is required.

• If the holder chooses to keep the plan as an RDSP in specified year, the beneficiary can receive a payment of any amount. There is no yearly maximum limit for repayments, but the 3:1 proportional repayment of AHA still applies.

• If the holder chooses to designate the plan as an SDSP, he or she can withdraw a portion of the plan’s assets without having to repay the AHA.

Taxation

All withdrawals will consist of both tax free and taxable income. Contributions are not tax deductible, and they are tax-free when withdrawn. Everything else such as, but not limited to CDSG’s, CDSB’s, Investment income, and rollovers will grow on a tax deferred basis and get included in the beneficiary’s income in the year the withdrawal and taxed at their own marginal tax rate.

Bankruptcy

Except for any contributions made in the previous 12 months, the RDSP is protected from creditors in the case of Bankruptcy.

Provincial and Territorial Income and Asset Inclusions

All provinces and territories will provide some form of exemptions when determining how RDSP holdings and withdrawals will impact eligibility for provincial disability benefits. This ranges from partial to full exemption depending on province or territory of residence.

Summary

The RDSP is a registered plan providing a powerful planning tool to those living with disabilities. This remains true beyond 49 when there is no further grant and bond entitlements. The account is relatively easy to open, but there are a very strict set of withdrawal rules once contributed, and CDSG’s and/or CDSB’s received. It is very important to understand those rules and ensure they line up with your goals for the money. I would not recommend you base your decision to open an account solely on government contributions - as attractive as they may be. While I agree that it would be a shame to pass up, if you can’t access the money when needed, no amount of “free money” will help! This is not an account to pull emergency funds from, or plan short-term goals. This account is designed to start providing an income stream at 60, with limited withdrawal options and potentially hefty penalties if withdrawals do happen before 60. We recommend you seek qualified advice on this matter. You are welcome to speak to one of our qualified Wealth Advisors to see if the RDSP is right for you and your family.

Disclaimer and Notice to Reader: This Discussion Paper should not be construed as financial, legal or tax advice but rather only as a general statement and explanation of the topic matter. Professional financial, tax and legal advice should be obtained for the readers’ own personal situation. For more information on this topic or how it applies to your family, please contact our Wealth Advisory Team.

Last Updated March 25th, 2025