Everything you Wanted to Know About the Holdback Amount (but were afraid to ask)

We have written extensively on the holdback amount, as part of withdrawals (http://rdspresource.ca/index.php/how-do-you-get-money-out-of-an-rdsp/) and as a deterrent to people considering opening a Registered Disability Savings Plan (http://rdspresource.ca/index.php/2011/08/should-the-holdback-amount-deter-you-from-opening-an-rdsp/).
Through discussions with both Account Holders and representatives of financial institutions, I suspect that lack of clarity around the holdback amount is affecting people’s investment choices.  I’d like to clarify with additional details.

THE FACTS:

What is the holdback amount?

The holdback amount, or “assistance holdback amount” is defined by the Canada Disability Savings Act as follows:

• if an RDSP is a specified disability savings plan (doctor’s certificate that indicates a beneficiary has five or less years to live) the holdback amount is zero, provided the taxable component of any withdrawal does not exceed $10,000
• in any other case, the holdback amount is the total amount of bonds and grants paid into the RDSP within the 10-year period before the particular time (minus any amount of bond or grant paid that has already been repaid in that 10-year period)

When does the holdback amount have to be repaid?

The holdback amount has to be repaid when:

• the RDSP is terminated
• the plan ceases to be an RDSP as a result of non-compliance, such as not having a qualified holder (the application of paragraph 146.4(10)(a) of the Income Tax Act)
• a disability assistance payment is made
• the beneficiary ceases to be eligible for the Disability Tax Credit; or
• the beneficiary dies.

How much has to be repaid?

The amount that must be repaid is the lesser of

• the assistance holdback amount, and
• the fair market value of the property held by the RDSP.

Even where an RDSP is a specified disability savings plan, if the beneficiary dies or ceases to be eligible for the Disability Tax Credit, the holdback amount must be repaid.  If the value of the RDSP is less than the holdback amount, the remainder of the RDSP must be repaid.

What if an RDSP experiences an investment loss?  Who has to repay the holdback amount?

If an RDSP experiences an investment loss, it is first attributed to earnings, then to contributions, then to grants and bonds more than 10 years old, then to the assistance holdback amount.

What does this mean?

Suppose an RDSP has had $20,000 in contributions: $10,000 in private contribution and $10,000 in Canada Disability Savings Bonds.  Consequently, the holdback amount is $10,000 (the amount received from the federal government in the previous ten years).  The RDSP then has an investment loss of 50%, such that only $10,000 remains.  If a triggering event (death, withdrawal, loss of DTC status) then occurred, the federal government would receive the full holdback amount $10,000 – meaning nothing would remain in the RDSP.

Suppose an RDSP has had $10,000 in contributions through the Canada Disability Savings Bond program, and has experienced a 50% loss such that only $5,000 remains in the RDSP.  If a triggering event occurred, the federal government would receive $5,000 back. The remainder of the loss would be attributed to the bonds as there would be no earnings or contributions to cover the loss.

There would, however, be no liability to the federal government on the part of the beneficiary, their estate, or an issuer to cover the loss.

Note: a 50% loss is extreme and used to provide an example of what would happen in a worst case scenario.