2 December 2024 External T.I. 2023-0973581E5 - Registered Disability Savings Plan

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1. Whether the LDAP formula in paragraph 146.4(4)(l) allows for an RDSP’s property to be fully distributed before a beneficiary of the RDSP attains the age of 83 years? 2. Whether DAPs under subparagraph 146.4(4)(n)(ii) can be made where the terms of an RDSP stipulate that only LDAPs are permitted? 3. Whether an RDSP can be voluntarily terminated during the lifetime of the beneficiary where the requirements of subparagraph 146.4(4)(p)(ii) are not met?

Position: 1. No; 2. Yes; 3. Yes, under certain circumstances.

Reasons: 1. Generally, the consequence of the formula in 146.4(4)(l) is that the there is an annual maximum limit of the amount of LDAPs that can be made in any given year, ensuring that the property of the plan is not depleted during the beneficiary’s lifetime. 2. A DAP is defined as any payment from an RDSP and as such under subparagraph 146.4(4)(n)(ii) a DAP that is an LDAP or not an LDAP can be made, the latter payment requires that the terms of the RDSP allow for such a payment. 3. Paragraph 146.4(4)(p) does not provide the conditions under which an RDSP can be voluntarily terminated, rather it provides that if certain conditions are met the RDSP must be terminated. A voluntarily termination of an RDSP may be possible but could be delayed depending on whether the restrictions on distributions of the RDSP’s property apply.

XXXXXXXXXX								2023-097358
P. Chiu / K. Koh

December 2, 2024

Dear XXXXXXXXXX:

Re: Registered Disability Savings Plan (“RDSP”)

This letter is in reply to your letters dated May 8, 2023 and May 31, 2023 regarding the application of section 146.4 of the Income Tax Act (“Act”) (footnote 1) where a beneficiary of an RDSP has Down syndrome and an average life expectancy of 60 years. In particular, you requested our views on whether the provisions of the Act governing the withdrawal of funds from an RDSP would limit the utility of an RDSP for such a beneficiary. You also requested our views on the application of paragraph 146.4(4)(l), the interpretation and intent of both paragraph 146.4(4)(m) and subparagraph 146.4(4)(n)(ii), and whether an RDSP can be voluntarily terminated during a beneficiary’s lifetime.

Our comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R12, Advance Income Tax Rulings and Technical Interpretations. However, we offer the following general comments, which may be of assistance to you.

Payments from an RDSP

Subparagraph 146.4(4)(i) requires that in order for a disability savings plan (“DSP”) to be registered under the Act, the plan is only permitted to make payments that are disability assistance payments (“DAPs”), transfers in accordance with subsection 146.4(8), and repayments under the Canada Disability Savings Act (“CDSA”) or a designated provincial program.

The term DAP is broadly defined in subsection 146.4(1) to mean any payment made from an RDSP to a beneficiary or to the beneficiary’s estate. Generally, there are two types of DAPs that may be made from an RDSP to the beneficiary or the beneficiary’s estate; namely, lifetime disability assistance payments (“LDAPs”) and DAPs that are not LDAPs.

LDAPs and paragraph 146.4(4)(l)

The term LDAP is defined in subsection 146.4(1) to mean DAPs that are identified under the terms of the plan as LDAPs and once started, must be paid at least annually until the earlier of the day the RDSP is terminated or the day the beneficiary dies.

LDAPs may begin at any time. However, paragraph 146.4(4)(k) imposes a requirement upon an RDSP that LDAPs must begin no later than the end of the calendar year that the beneficiary turns age 60. In addition, pursuant to paragraph 146.4(4)(l), an RDSP must also provide that the total amount of LDAPs made in any particular calendar year (other than a specified year) cannot exceed the amount determined by the formula A/(B + 3 - C) + D (the “LDAP formula”).

For the purposes of the LDAP formula, the average life expectancy of a beneficiary is assumed to be 80 years and Factor B of the LDAP formula is based on that average life expectancy plus 3 years (unless the beneficiary’s actual age is greater than age 80, then Factor B replaces 80 with the actual age of the beneficiary). Due to the mechanism of the LDAP formula, the property of an RDSP will be mostly, but not completely, depleted via LDAPs when the beneficiary attains the age of 80.

In other words, the LDAP formula ensures that an RDSP’s property is not exhausted before the beneficiary reaches 80 years old. In a situation where a beneficiary has a life expectancy of 60 years, the beneficiary of an RDSP will likely only receive a fraction of the RDSP’s property. Beginning LDAPs prior to age 60 would allow a beneficiary to receive a larger portion of an RDSP’s property. If the circumstances allow, making DAPs that are not LDAPs (“non-LDAPs”) would also allow the beneficiary to receive a larger portion of an RDSP’s property. A beneficiary may also receive a larger portion of an RDSP’s property if the calendar year is a specified year for the RDSP as defined in subsection 146.4(1) or the RDSP becomes a specified disability savings plan as described in subsection 146.4(1.1).

A request for LDAPs to begin to be made prior to age 60 should be directed to the RDSP issuer. These earlier LDAPs may result in the repayment of a portion of the grants and bonds that were deposited into the RDSP less than 10 years ago under the CDSA. Additional repayments may also occur under the relevant designated provincial program.

Paragraph 146.4(4)(m) – non-LDAPs

Non-LDAPs are discretionary payments that allow a beneficiary greater access to the RDSP’s property and can be made at any time, subject to the plan terms and certain restrictions under the Act.

Pursuant to paragraph 146.4(4)(m), a condition for registration for a DSP is that the terms of the plan must stipulate whether or not non-LDAPs are permitted under the plan. Non-LDAPs can only be made if the terms of the plan allow for such payments. Although the Act requires a plan to stipulate whether non-LDAPs are permitted, it does not mandate that the terms of the plan provide for such payments. As such, an RDSP issuer is permitted, but is not obligated, to offer an RDSP that permits non-LDAPs, which raises the possibility that there could be RDSPs that do not permit non-LDAPs. Nevertheless, it is our understanding that the majority of specimen plans on file with the Registered Plans Directorate of the Canada Revenue Agency (“CRA”) permit non-LDAPs.

Where non-LDAPs are permitted under the terms of a plan, and the Act or plan do not otherwise restrict such payments or the amount of such payments, it appears that a non-LDAP, may be requested for various reasons, including where a beneficiary is in financial distress.

The RDSP issuer must be contacted to request a non-LDAP and a request must be made for each non-LDAP. It is important to note that each RDSP issuer may have different rules pertaining to how to request non-LDAPs and the circumstances under which non-LDAPs can be made.

In a situation where an RDSP is a primarily government-assisted plan (that is, where the total of all amounts paid under the CDSA to an RDSP is greater than the private contributions made to the RDSP) (a “PGAP”), paragraph 146.4(4)(n) restricts the total DAPs (non-LDAPs and LDAPs) that can be paid in a calendar year. This restriction will limit the non-LDAPs that can be paid from a PGAP. However, in circumstances of severe financial hardship, the CRA has taken an administrative position that an exception to this restriction can be requested by the holder of a PGAP. This request must be submitted via a formal request to the PGAP issuer who will forward or submit the request to the Registered Plans Directorate of CRA.

Subparagraph 146.4(4)(n)(ii) – Beneficiary’s right to direct payments

Generally, pursuant to paragraph 146.4(4)(n), the Act imposes a limit on the amount of DAPs that can be made in a calendar year from a PGAP, and grants the beneficiary of the PGAP certain rights relating to DAPs that can be made in a particular calendar year.

Pursuant to subparagraph 146.4(4)(n)(i), a PGAP (provided the given calendar year is not a specified year and the conditions in clauses 146.4(4)(p)(ii)(A) and (B) are not met in the calendar year), must, regardless of the beneficiary’s age, limit the total amount of DAPs to the specified maximum amount as defined in subsection 146.4(1). In very general terms, the total DAPs (non-LDAPs and LDAPs) for a given calendar year from a PGAP cannot exceed the greater of the amount determined under the LDAP formula and 10% of the fair market value (“FMV”) of the PGAP property at the beginning of that calendar year.

Furthermore, if a beneficiary attained 27 years of age but not 59 years of age, subparagraph 146.4(4)(n)(ii) requires that a PGAP provide the beneficiary with the right to direct that DAPs be made from the plan to the beneficiary. This right by the beneficiary is an exception to the general rule that the right to direct DAPs from an RDSP lies with the holder of the RDSP (absent the holder’s consent, the beneficiary generally has no right to demand that the issuer make a payment).

In providing the beneficiary with this right, a PGAP must ensure compliance with the constraints imposed by paragraph 146.4(4)(j) and subparagraph 146.4(4)(n)(i). This means that DAPs directed by a beneficiary cannot be made if the payment would cause the FMV of the plan’s property to fall below the assistance holdback amount (“AHA”) as defined in subsection 146.4(1). It also means that DAPs directed by a beneficiary, when added to all other DAPs made to the beneficiary in the calendar year (whether as non-LDAPs or LDAPs ), must not exceed the specified maximum amount as defined in subsection 146.4(1).

Since subparagraph 146.4(4)(n)(ii) refers to the right to direct DAPs by a beneficiary (or legal representative of a beneficiary who lacks the requisite legal capacity), the RDSP issuer appears to have to comply with such a request and make the payment provided it does not contravene the terms of the Act or the plan. The Act does not stipulate that an RDSP issuer has the discretion as to whether to make such a payment, if requested; however, the terms of the plan may provide the issuer with such discretion. For example, because a DAP is all payments from an RDSP to a beneficiary or the beneficiary’s estate, a beneficiary can request a DAP that is an LDAP or a non-LDAP under subparagraph 146.4(4)(n)(ii). However, the payment of the latter is dependent on whether the RDSP stipulates that non-LDAPs may be made from the RDSP.

In establishing an RDSP, the plan holder should ensure that the RDSP issuer can offer a plan best suited for their needs and requirements. In addition, provided certain conditions are met, a holder can transfer, on a tax deferred basis, the assets of an RDSP to another RDSP of the same beneficiary at a different financial institution that has more flexible terms or terms that are more appropriate to a particular beneficiary.

Paragraph 146.4(4)(p) and voluntary termination of an RDSP during the lifetime of the beneficiary

Pursuant to paragraph 146.4(4)(p), a plan must include the requirement that the plan be terminated by the end of the calendar year following the earlier of:

• the calendar year in which the beneficiary dies (per subparagraph 146.4(4)(p)(i)), and
• the first calendar year in which both conditions below are satisfied:
• the holder has requested that the issuer terminate the plan (per clause 146.4(4)(p)(i)(A)), and
• throughout the year, the beneficiary has no severe prolonged impairments in physical or mental functions as described in paragraph 118.3(1)(a.1) (per clause 146.4(4)(p)(i)(B)).

Paragraph 146.4(4)(p) only describes situations when an RDSP must be terminated. It does not stipulate when an RDSP can be voluntarily terminated, nor does it stipulate that a plan cannot be terminated in other circumstances.

Paragraph 74 of IC99-1R4, Registered Disability Savings Plans, provides the following information on when a holder can ask for an RDSP to be terminated:

74. The holder can ask to close an RDSP when:

• there is no property in the RDSP;
• only the AHA is left in the plan (there are no earnings or private contributions in the plan); the AHA would be returned and the plan could then close;
• the holder asks for all the funds left in the plan to be paid out to the beneficiary and the payment is not more than the maximum allowable payment for that year [Footnote 2 referenced to this bullet point states: Minimum and maximum withdrawal amounts apply if a holder asks to close a plan for a DTC-eligible beneficiary. It is possible that the maximum allowable withdrawal amount will not empty the funds left in the plan in the year the holder asks for the plan closure. The plan will stay open until all funds can be paid out within the limits.]; or
• the beneficiary is no longer DTC-eligible.

Note

Before closing a plan, issuers should make sure they consider any associated trust laws and requirements.

The CRA’s website, Close a registered disability savings plan - Canada.ca, (footnote 2) also contains the following comments on when an RDSP may be terminated:

There are three situations where a registered disability savings plan (RDSP) can be closed.

1. An RDSP holder(s) can close a plan if it meets certain conditions.

2. A financial institution must close an RDSP after the RDSP beneficiary’s death.

3. A financial institution can close a disability savings plan if the Canada Revenue Agency deregisters the RDSP.

[…]

The holder(s) of an RDSP can close the plan only in one of the following situations:

• the RDSP beneficiary is no longer eligible for the disability tax credit
• there are no funds left in the plan
• the amount of grant and bond in the RDSP is more than the amount of contributions at the beginning of the year, and the only amount now left in the plan is the assistance holdback amount […]
• RDSP payment rules allow the holder(s) to ask for a withdrawal of all funds (minus any assistance holdback amount) in the plan

As such, a holder can request that an RDSP issuer terminate an RDSP (regardless of whether the RDSP is a PGAP or not) during the lifetime of a beneficiary if the beneficiary is no longer eligible for the disability tax credit, there is no property in the plan, or the only property in the plan is the AHA.

Where the FMV of property held by an RDSP is in excess of the AHA, the RDSP cannot be terminated until this excess is fully eliminated. The length of time required to do so is dependent on the restrictions on maximum DAP payments, such as those contained in paragraphs 146.4(4)(l) and (n), described above with respect to LDAPs and non-LDAPs and whether an RDSP is a PGAP.

For an RDSP that is not a PGAP, the excess amount may be depleted through the payment of a non-LDAP in that amount, assuming that the plan allows for non-LDAPs. For example, in a scenario where an RDSP is not a PGAP, the FMV of the RDSP’s property is greater than the RDSP’s AHA, and the terms of the RDSP allow for non-LDAPs, the holder can request the withdrawal of the full property of the RDSP (minus the AHA, if any) and termination of the RDSP. However, if in the aforementioned example the RDSP does not permit non-LDAPs, then the restrictions in paragraphs 146.4(4)(i) and (l) will delay the termination of the RDSP until all the funds within can be paid out within these restrictions, with the possibility that the excess amount may never be fully depleted.

That being said, it is our understanding that the majority of issuers of RDSPs offer plans that permit non-LDAP. Where an RDSP does not permit non-LDAPs, the holder of the RDSP could consider transferring the property of the RDSP to a financial institution that offers RDSPs that allow for non-LDAPs. Provided the conditions of subsection 146.4(8) are met such a transfer could occur on a tax deferred basis.

However, with respect to a PGAP, even if the plan allows for non-LDAPs the possibility exists that the excess amount may never be fully depleted given the restrictions in paragraph 146.4(4)(n).

For further details on plan termination, please see IC99-1R4 Registered Disability Savings Plans - Canada.ca (footnote 3) and Close a registered disability savings plan - Canada.ca. (footnote 4) Alternatively, you may Contact the Registered Plans Directorate - Canada.ca. (footnote 5)

We trust that our comments will be of assistance to you.

Yours truly,

Irina Schnitzer
Section Manager
for Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Please note that all legislative references in this letter are to the Act, unless otherwise specified.

2 https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/registered-disability-savings-plans-rdsps/closing.html.

3 https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/ic99-1.html.

4 Supra note 2.

5 https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/contact-registered-plans-directorate.html.