Consultation on the proposed amendments to the Income Tax Regulations for withholding tax on payments from Registered disability savings plans

Purpose

The purpose of the consultation was to inform the financial institutions and the associations representing persons with disabilities of the proposed changes to the Income Tax Regulations (the Regulations) to include the rules for withholding tax on payments from Registered disability savings plans (RDSPs).

The consultation was done in two phases. The first phase was with the financial institutions to inform them of the proposed regulatory changes and to get their feedback on the effect the Regulations may have on them. The second phase was with the associations and included a series of information sessions in six major cities: Ottawa, Halifax, Montréal, Toronto, Winnipeg, and Vancouver. During the sessions, the Canada Revenue Agency (CRA) explained how the tax withholding will be done and how beneficiaries may be affected.

Background

RDSPs were introduced in 2007, and subsection 153(1)(i) was added to the Income Tax Act (Act) to provide the authority to payers, in this case the financial institutions, to withhold income tax on payments from RDSPs, in line with the approved rules and regulations. Notwithstanding this legislative requirement, the Regulations governing the rules for withholding income tax on payments from RDSPs have not yet been passed. As a result, the financial institutions are not withholding tax on these payments right now. As is the case with other types of registered savings plans, the Act requires the payer to withhold tax on the taxable part of payments made from RDSPs, in line with the approved rules, and to remit these amounts to the CRA. As a result of this requirement, several sections of the Regulations need to be changed to include these rules.

There are two types of payments that can be made from an RDSP to a beneficiary:

• disability assistance payments; and
• lifetime disability assistance payments

Disability assistance payments are singular payments that can be paid at any time at the beneficiary’s request. Lifetime disability assistance payments are a series of payments that, once started, must be paid at least every year or until the plan is terminated or the beneficiary dies. Both types of payments can be made from an RDSP in a calendar year. To figure out the withholding rates that apply to the taxable part of lifetime disability assistance payments and disability assistance payments, the Regulations will be changed to reflect that:

• the taxable part of a series of lifetime disability assistance payments is to be considered one lump-sum payment; and
• the taxable part of a disability assistance payment is to be considered a separate lump-sum payment.

This approach will make sure enough tax is withheld from the payments, therefore preventing the beneficiary from having a large tax liability when he or she files his or her income tax and benefit return.

As a result of the proposed regulatory changes, only the taxable part of the RDSP payments that is more than the total of the beneficiary’s annual basic personal amount and the disability amount will have tax withheld from it. However, there may be instances where tax may not be withheld from the RDSP payments, because the total taxable amount is less than the total of the basic personal amount and the disability amount. Similarly, there may be other instances where tax will be withheld only on the taxable part of the RDSP payments that go over the total of the basic personal amount and the disability amount and are made later in a calendar year.

Consultations

Phase I – Financial institutions

In April 2012, the CRA sent a letter to the 12 participating financial institutions that offer RDSPs to their clients to tell them about the proposed regulatory changes. The letter mentioned a proposed implementation date of January 1, 2013. The financial institutions were given a copy of the proposed changes, along with various examples of how the proposed withholding rates would apply to RDSP payments. The CRA also asked for feedback on:

• the time it would take to implement the changes
• the cost of implementation, system changes, and training

The CRA also held a conference call with the financial institutions on April 19, 2012, to answer their questions about the proposed Regulations.

All but three financial institutions gave feedback. The feedback was received by the end of May 2012.

Feedback on the time required to implement the changes:

• The financial institutions said that the implementation date of January 1, 2013, did not give them enough time to make and test the necessary system changes, train their staff, and change the RDSP information they give their clients. They said they would need at least 12 to 18 months.
• They suggested waiting to make system changes until other changes to the RDSP, announced in the federal budget of March 29, 2012, come into force (information on these changes can be found at www.fin.gc.ca/drleg-apl/bia-leb-0812-eng.asp). They suggested making all system changes at the same time so as not to duplicate work.

Feedback on costs:

• Only two financial institutions gave quick cost estimates for the system changes, which varied from $85,000 to $450,000. They said that the costs could increase significantly depending on the CRA’s specifications and on the requirements for transferring from one financial institution to another.
• They also said that to process the information, they needed to refer to multiple tables to see how the components used in the calculation are combined and how they affect the amount withheld. This may mean it would cost more and take more time to implement the necessary changes.
• They believed that they might incur considerable costs for the necessary monitoring of the yearly exemption amounts and for internal and external communications.
• They did not give an estimate of their training costs.

Other feedback from the financial institutions:

• The financial institutions felt that the withholding is overly complex and it will be difficult to include such factors as the basic personal amount and the disability amount. The financial institutions would like the tax withholding to be simplified and harmonized with that of other registered plans.
• They said that the CRA will have to be proactive in giving them the yearly basic personal amount and disability amount.

• The financial institutions also expressed concern that once clients reach their limit where tax does not have to be withheld, their payments will be lower for the rest of the tax year, which may cause them financial hardship. They recommended that the amount of payments made from the plan, minus the exemption amount, be calculated at the beginning of the year and the tax be withheld at the same rate throughout the year on each payment.

Phase II – Associations representing persons with disabilities

The CRA invited various associations representing persons with disabilities to attend information sessions in Ottawa, Halifax, Montréal, Toronto, Winnipeg, and Vancouver in April and May 2013. These associations were identified as having a far and extended reach with individuals having or receiving RDSPs. Representatives from about 32 associations took part in these sessions. During the sessions, the CRA explained the regulatory changes and gave examples of how the tax withholding will be done based on the proposed Regulations, as well as how the application of the Regulations may affect their members who have an RDSP. The associations were then asked to comment on the Regulations. The CRA also shared a Questions and Answers document with the associations so they would be ready to address any questions their members may have about the Regulations.

The associations were unanimous in saying that they agree with the intent of the proposed Regulations. They said that the withholding of income tax when payments are made from RDSPs will be beneficial because it will result in a decreased tax liability when the beneficiaries file their income tax and benefit returns. Nevertheless, they still had concerns.

Feedback from the associations:

• They commented that the proposed withholding requirements are too technical and some of their members may not understand the full scope of the Regulations.
• They were concerned about the withholding starting only after the payments go over the total of the basic personal amount and the disability amount. They believe this may be confusing for beneficiaries that would like to receive equal payments throughout the year. The beneficiaries will have to plan ahead to account for this to make sure they continue to receive enough income.
• They suggested that tax be withheld on all payments from an RDSP and not just on payments made after the total of the basic personal amount and the disability amount has been exceeded. This would spread the withholding out across the calendar year and would result in predictable and consistent RDSP payments, like the beneficiaries want.
• Some associations suggested not taking the total of the basic personal amount and the disability amount into account in calculating the tax withholding. Although this would result in more income tax withheld from the payments, beneficiaries would receive consistent payments throughout the year and would likely receive a bigger refund when they file their income tax and benefit return. It could also be beneficial to have more tax withheld at source for those individuals that are employed and are, or will be, receiving RDSP payments, because it will reduce the likelihood that they will have to pay tax at the end of the year.
• The associations commented that not all members understand the financial aspects of the RDSP and, as a result, they may not be able to understand the withholding requirements if they are not presented with concrete examples and information.

Conclusion

The consultation was completed in May 2013.

In summary, the financial institutions were unanimous in saying that the proposed effective date of January 1, 2013, was too early and recommended pushing it back a year to January 1, 2014. This would give them enough time to make the necessary changes to their systems and to educate their staff and clients. The financial institutions were unable to give the CRA an accurate estimate of the cost of changes to their systems, training, and implementation. But, they did anticipate the cost to be considerable.

Both the financial institutions and the associations were concerned about the complexity of the calculation of the tax withholding and the effect it would have on beneficiaries when payments are made from their RDSPs.

Withholding tax only after the payments from the plan go over the total of the basic personal amount and the disability amount could be confusing for beneficiaries that want to receive a fixed amount every month. It may be difficult for the beneficiaries to understand that they may have to take more or bigger payments from their plan later in the year to accommodate the tax withholding or plan ahead to budget for the lower amounts they would receive after the tax withholding starts.

Both the financial institutions and the associations recommended that the withholding be made on all payments throughout the calendar year so that the payments beneficiaries receive are consistent.

Date modified:

2015-11-19