2011 Budget: Changes for People with Shortened Life Expectancies

Minister Flaherty tabled his second budget of 2011 in June and re-introduced the RDSP improvements originally proposed in his March budget.

He also improved the Medical Expense Tax Credit and introduced two new credits that could benefit people with disabilities or their families: Family Caregiver Tax Credit and Children’s Arts Tax Credit.  For more details on the tax changes, visit Ability Tax Group.

The change to the RDSP makes it more valuable for people who have shortened life expectancies. Currently, the LDAP formula does not apply during a Specified Year (when a doctor has certified that a person’s life expectancy is five years or less), even if government contributions exceed private contributions.  However, anytime a withdrawal is made from an RDSP – for ANY reason – the holdback amount must be repaid to the federal government. The result of the repayment provision is that anyone who wants or NEEDS to use their money before 10 years has passed faces stiff penalties.  This decreases the flexibility and value of the RDSP for many people.

Specifically, the changes in Budget 2011 will allow people with shortened life expectancies (5 years or less) to make a withdrawal each year without triggering repayment of the holdback amount.

Here’s how it will work:  To take advantage of this new rule, the Holder must complete and submit a form (an Election) along with the medical certification to the financial institution. If the holder doesn’t complete the form, then current rules including the repayment of the holdback amount will apply even if it is a Specified Year.

The amount that can be withdrawn each year is limited as follows. Any withdrawal is made up of a taxable (government contributions and investment income) and a non-taxable (private contributions) portion.  The amount of the taxable portion cannot exceed $10,000 or the 10 year repayment rule will apply.

In addition, once an Election has been made, the following rules will apply:

• No more contributions are allowed, except for a rollover from an RRSP or RRIF

• No more Canada Disability Savings Grants or Bonds will be paid into the plan. Upon the passing of the beneficiary, any Grants and Bonds received by the plan within the preceding 10 years must be repaid. No Grant or Bond entitlements will be carried forward for the specified years that the Election covers, other than the year when the Election was made.

• The minimum withdrawal requirements that apply when a beneficiary turns 60 will apply in the year following the Election, regardless of the age of the beneficiary.

These rules will continue to apply unless a Holder reverses the Election.  If withdrawals of taxable amounts exceed the annual $10,000 limit, the normal 10-year repayment rule will apply, if there are enough assets remaining in the RDSP.

It is possible to reverse an Election – if the beneficiary’s medical condition changes.  Regular RDSP rules will once again apply, except that no new Grants and Bonds will be paid until the year after the Election was reversed.

Withdrawals of taxable amounts exceeding the $10,000 annual limit will result in the automatic reversal of an Election.

This change is effective after June 25^th, 2011.

Example

Amelie, 50, has $100,000 in her RDSP, of which $50,000 is federal government contributions; $30,000 is investment income; and $20,000 is private contributions.

The holdback amount – government contributions in the past 10 years – is $25,000.

Amelie’s doctor informs her that she is terminally ill and not likely to live more than 5 years.

Normally, Amelie’s withdrawals would be limited to the LDAP formula because she has contributed less than government.  (Approximately $3,030 in the first year: 100,000/83-50).

If her doctor certifies that she has five or less years to live, the next five years become specified years and her withdrawals are not limited by the LDAP formula.  She can withdraw any amount but the 10 year repayment rule applies and she would have to repay the holdback amount ($25,000).

If her doctor certifies that she has five or less years and she makes an Election, then she can make a withdrawal, of which $10,000 is the taxable amount, without repaying the holdback amount.  Every dollar withdrawn is comprised of 80% taxable and 20% non-taxable.  If she withdraws $10,000 that is taxable, the non-taxable amount is $2,500.  Thus she can withdraw $12,500 each year without triggering the repayment rule.