Cessation of disability or death of a beneficiary
What happens if the beneficiary is no longer eligible for the DTC?
Unless an election is filed with the issuer, the RDSP must be terminated and all amounts paid out of the plan by December 31st of the year following the first calendar year throughout which the beneficiary is no longer considered to have a severe or prolonged impairment in physical or mental functions that qualified him or her for the DTC. Any funds remaining in the RDSP after any required repayments of government grant and bond will be paid to the beneficiary. The taxable portion of the disability assistance payment (DAP) will be included in the income of the beneficiary in the year the payment is made to the beneficiary.
A beneficiary who becomes ineligible for the DTC, might, due to the nature of their condition, be eligible for the disability tax credit (DTC) for some later year. Since January 1, 2014, subject to the conditions discussed below, an election may be made if the RDSP holder wishes to postpone closing the plan, a licensed medical doctor must certify in writing that the nature of the beneficiary's condition makes it likely that the beneficiary will, because of the condition, be eligible for the DTC for a future taxation year. In these circumstances, contribution room and repaid grants and bonds are not restored.
The RDSP plan holder will be required to:
- have a licensed medical doctor certify in writing that the beneficiary will likely become DTC-eligible at some point in the future; and
- make an election to keep the plan open by providing the medical certificate to the issuer.
The RDSP issuer will then be required to notify ESDC that the election has been made. The election must be made on or before December 31st of the year following the first year for which the beneficiary is ineligible for the DTC.
An election will generally be valid until the end of the fourth calendar year following the first full calendar year for which a beneficiary is DTC-ineligible.
The RDSP must be terminated by:
- the end of the year following the first year for which there is no longer a valid election; or
- the end of the year following the 5th year of continuous DTC-ineligibility.
If a beneficiary becomes eligible for the DTC while an election is valid, the usual RDSP rules will apply commencing with the year for which the beneficiary becomes eligible.
Results of an election while DTC-ineligible
Where an election is made, the following rules will apply commencing with the first year for which the beneficiary is DTC-ineligible:
- no contributions to the RDSP will be permitted, including the rollover of RESP investment income; however, a rollover of proceeds from a deceased individual's RRSP or RRIF to the RDSP of a financially dependent infirm child or grandchild will still be permitted;
- no new grant, bond, or designated provincial payments will be paid into the RDSP;
- no new entitlements will be generated for the purpose of the carry forward of grants and bonds;
- withdrawals from the RDSP will be permitted and will be subject to the proportional repayment rule and the maximum and minimum withdrawal rules;
- if a beneficiary dies after an election has been made, the existing 10-year repayment rule will apply.
The assistance holdback amount will be equal to the amount of the assistance holdback amount immediately preceding the beneficiary becoming DTC-ineligible less any subsequent repayments.
For more information on how much the repayment will be, contact the issuer of your RDSP or go to Employment and Social Development Canada (ESDC).
What happens if the beneficiary dies?
The RDSP must be closed and all amounts remaining in the plan must be paid out to the beneficiary's estate and the plan terminated, by December 31st of the year following the calendar year in which the beneficiary dies. Any funds remaining in the RDSP, after any required repayment of government grants and bonds, will be paid to the estate. If a DAP had been made and the beneficiary is deceased, the taxable portion of the DAP must be included in the income of the beneficiary's estate in the tax year in which the payment is made.
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