The number one question I get is, “What happens to my Registered Disability Savings Plan (RDSP) if the beneficiary loses the Disability Tax Credit (DTC)?”
For years I did not have a good answer. The account could be frozen for a short period of time but eventually would be closed with the grants and bonds returned to the government.
Now I have a good answer. With effect from Jan 1, 2021 if the beneficiary loses DTC eligibility, the RDSP account will be frozen. No new grants or bonds will be added to the account, but it will not be closed. If the individual regains DTC eligibility, the contributions along with grants and bonds may continue.
What happens if the individual never regains DTC eligibility?
The easy answer: Leave the account alone until the individual turns 60 and then withdraw funds in the same manner as other RDSPs.
The slightly more complicated answer: There is a ten year holdback for all RDSP accounts. This means any withdrawals will involve a clawback of grants and bonds contributed by the government in the past ten years. This reinforced the notion of the RDSP as a long term savings plan.
The loss of DTC eligibility now means that the ten year window now becomes a rolling time period which does not decrease until age 50 when it will decrease by one year until decreasing to zero at age 60.
Once again this means the RDSP is a long term savings plan with very little use in the short to medium term.
What happens if the individual regains DTC eligibility?
The account becomes active. Grants and bonds may be added as before. If the new DTC eligibility includes the period that the account was inactive, grants and bonds will be available for that period.
As with all RDSP accounts the government will send you a “Statement of Grant Entitlement” which you may use to optimize your contributions. RDSP bonds will be automatically added for the inactive period.
This is a great amendment to the RDSP and the government should be applauded for a positive change for those individuals affected by intermittent DTC eligibility.
For more detailed information please visit a good friend of the Autism Community – Big Cajun Man at the Canadian Personal Finance Blog or RDSP.com brought to you by the Plan Institute who were the drivers behind the RDSP development.
4 thoughts on “A Significant Change To The RDSP”
Hi, thanks for your post, I’m the beneficiary of an RDSP, and I’m hoping you can answer a question I have. I tried calling the government of Canada to get my question answered, but after being either ignored or transferred to a different department, I gave up. My understanding is the new DTC and RDSP rules have not yet received royal assent, which means the new rules aren’t yet law. So, have these new rules received royal assent yet and if not when can we expect them to?
That is a very good question and I will admit that I don’t have a specific answer as to when it will receive royal assent. My understanding of the situation is that there is a transition rule in place to prevent the forced closing of the RDSP.
Thanks for providing some clarity. I too wondered for years about the effect of losing DTC eligibility. Your explanation is excellent, especially the rolling window concept. Very helpful.
You are most welcome