ARCHIVED – Registered Disability Savings Plan (RDSP)
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ARCHIVED – Registered Disability Savings Plan (RDSP)
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Notice to the reader
This measure has received Royal Assent.
- In respect of an RRSP, Registered Retirement Income Fund (RRIF) and certain lump sum payments from a Registered Pension Plan (RPP), what is currently allowed under the Income Tax Act to allow an individual to provide for a financially dependent child by reason of mental or physical infirmity (financially dependent infirm child) upon their death?
- Will the government extend this treatment to transfers of proceeds to an RDSP?
- Will this measure apply retroactively to the introduction of the RDSP legislation?
- Could you clarify the time period in which a contribution can be made?
- Can individuals take advantage of these proposed rules if RRSP or RRIF proceeds were previously rolled over to an RRSP or included in the income of the spouse or common-law partner, or financially dependent infirm child?
- What if the RRSP or RRIF proceeds were included in the income of the deceased individual in the year of death?
- What if lump sum proceeds from an RPP were previously included in the income of an individual?
- Which rule will apply if an individual dies after March 3, 2010 and before 2011?
- How are these proceeds treated for RDSP purposes?
- Does an election need to be filed?
- Where can I obtain more information on this budget measure?
1. In respect of an RRSP, Registered Retirement Income Fund (RRIF) and certain lump sum payments from a Registered Pension Plan (RPP), what is currently allowed under the Income Tax Act to allow an individual to provide for a financially dependent child by reason of mental or physical infirmity (financially dependent infirm child) upon their death?
Currently, when an individual dies, amounts paid out of the deceased's RRSP as a refund of premiums can be rolled over on a tax deferred basis to the RRSP of a child or grandchild who was financially dependent on the deceased individual. Similar rules exist for the refund of premiums from a RRIF and certain lump-sum amounts paid from RPPs. (For the purposes of these Q&As , "a refund of premiums" and "certain lump-sum amounts" are referred to as "proceeds".)
General Rule
2. Will the government extend this treatment to transfers of proceeds to an RDSP?
Yes, for deaths occurring after March 3, 2010, the budget proposes to extend these rules to allow these proceeds to be rolled over to a RDSP subject to certain conditions:
- the beneficiary:
- would have been entitled to a deduction under the current tax deferral rules had the proceeds been transferred to their RRSP; and
- was, at the time of the deceased's death, a financially dependent child or grandchild of the deceased by reason of physical or mental infirmity (financially dependent infirm child), and
- the contribution:
- from the rollover must comply with existing RDSP contribution rules;
- cannot be made before July, 2011; and
- cannot exceed the amount of the proceeds that were included in computing the beneficiary's income.
Transitional Rules
3. Will this measure apply retroactively to the introduction of the RDSP legislation?
Yes, where the death of an individual occurs after 2007 and before 2011, transitional rules will allow for a contribution to be made to the RDSP of a financially dependent infirm child of the deceased individual that would provide a result that is generally equivalent to the above proposed measures (subject to similar conditions).
4. Could you clarify the time period in which a contribution can be made?
To benefit from these transitional rules, the contribution to the RDSP must be made after June 2011 but before 2012.
IMPORTANT: Contributions to an RDSP of a financially dependant infirm child will not be eligible for the tax deferral treatment if the contribution is made outside of these time periods.
Where RRSP or RRIF Proceeds were Included in the Income of the Spouse or Common-law Partner, or Financially Dependent Infirm Child
5. Can individuals take advantage of these proposed rules if RRSP or RRIF proceeds were previously rolled over to an RRSP or included in the income of the spouse or common-law partner, or financially dependent infirm child?
Yes, these proceeds can be contributed to the RDSP of the financially dependent infirm child. A deduction for the portion of the proceeds contributed will be allowed to the recipient:
- in the year the proceeds were received; or
- if the proceeds had been rolled into an RRSP, in the year the proceeds are transferred from the RRSP to the RDSP.
Example 1:
Under the terms of her deceased husband's will, Nancy received $150,000 that her deceased husband's estate had received from his RRSP in 2008. She decided to rollover $100,000 of this amount into her own RRSP and she kept the remainder. She included the $150,000 in income for 2008 and claimed a deduction for the $100,000 that was rolled into her RRSP.
In August of 2011, Nancy contributes $50,000 of her own funds and rolls over $100,000 from her RRSP into her son Joey's RDSP, of which she is the holder. At the time of his father's death, Joey was financially dependent, by reason of physical or mental infirmity, on his father.
Provided that Nancy elects (as the RDSP holder and as the individual eligible to claim the deduction), she will be able to claim a deduction of:
- $50,000 in 2008, to offset the $50,000 income inclusion; and
- $100,000 in 2011, to offset the $100,000 income inclusion resulting from her RRSP withdrawal.
Example 2:
If in the above example, Joey was the beneficiary of the proceeds of the RRSP under the will and similarly included $50,000 in his income and rolled the remainder into his RRSP, provided that both Joey and Nancy (as the RDSP holder) elect, he will be able to claim a deduction of:
- $50,000 in 2008, to offset the $50,000 income inclusion; and
- $100,000 in 2011, to offset the $100,000 income inclusion resulting from his RRSP withdrawal.
Where the RRSP or RRIF Proceeds were Included in the Income of the Deceased Individual
6. What if the RRSP or RRIF proceeds were included in the income of the deceased individual in the year of death?
Where RRSP or RRIF proceeds are included in the income of the deceased individual in the year of death (net of any post-death losses claimed), a deduction will be allowed in computing the deceased individual's income for that year if a beneficiary of the deceased's estate or an individual who received the proceeds directly from the deceased's RRSP or RRIF contributes the proceeds or a portion of the proceeds to an RDSP of the financially dependent infirm child after June, 2011 but before 2012.
Example 3:
Ron has a son, named Tom, who is financially dependent on him by reason of physical or mental infirmity. Ron died in 2008 and under the terms of his will left $300,000 from his RRSP to his sister Angela. The $300,000 was included in Ron's income in 2008.
Tom has an RDSP with $20,000 in contributions and therefore has $180,000 of available RDSP contribution room. Angela is the RDSP holder and also the executor of Ron's estate.
In November of 2011, Angela contributes $180,000 to Tom's RDSP and elects, in her capacity as the executor of the estate and as the RDSP holder, to take advantage of the proposed rules. The estate will be allowed a deduction in 2008 of $180,000, to partially offset the $300,000 income inclusion.
Where Lump Sum Proceeds from an RPP were Included in the Income of an Individual
7. What if lump sum proceeds from an RPP were previously included in the income of an individual?
Where lump sum proceeds from an RPP are included in the income of an individual, a deduction will be allowed in computing the individual's income for that year if the individual:
- is a beneficiary of the deceased RPP member's estate or is an individual who received proceeds directly from the deceased RPP member's RPP; and
- contributes after June, 2011 but before 2012, an amount not exceeding the lump sum proceeds previously included in income into the RDSP of the financially dependent infirm child.
Example 4:
In 2008, Marcel included in income a $450,000 lump sum payment received from his deceased mother's RPP.
In October, 2011, Marcel contributes the eligible $200,000 to each of his twin daughter's RDSPs, of which he is the holder. His daughters were financially dependent on his mother at the time of her death by reason of physical or mental infirmity.
At the time of the contribution, Marcel elects, to take advantage of the proposed rules. Marcel will be allowed a deduction in 2008 of $400,000, to partially offset the $450,000 income inclusion.
Other
8. Which rule will apply if an individual dies after March 3, 2010 and before 2011?
For deaths occurring after March 3, 2010 and before 2011, individuals may use either the general or the transitional rules.
9. How are these proceeds treated for RDSP purposes?
Proceeds described above that are contributed to an RDSP will reduce the beneficiary's RDSP contribution room, will not attract Canada Disability Savings Grants and will be taxable when withdrawn from the RDSP.
10. Does an election need to be filed?
Yes, the holder of the RDSP and the individual who is eligible to claim the proposed deduction must designate the RDSP contribution in prescribed form (elect) at the time the contribution is made. The RDSP issuer must file the election with both the CRA and Human Resources and Skills Development Canada.
11. Where can I obtain more information on this budget measure?
The CRA encourages taxpayers to check its Web pages often. All new forms, policies, and guidelines will be posted as they become available.
In the meantime, please consult the Department of Finance Canada's Budget 2010 documents for details.
- Date modified:
- 2015-07-15