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Emergency Withdrawals from an RDSP

Enable up to three emergency withdrawals of up to $5,000 of private contributions in a beneficiary’s lifetime.

Withdrawing any amount from an RDSP triggers the repayment of the holdback amount until ten years has passed since the last federal government contribution.  This means contributions become unavailable for many years.

Many, perhaps even the majority, of people have limited funds and must choose between spending their money now, saving it in a financial mechanism where it is readily accessible (e.g. Tax Free Savings Account) or saving it in an RDSP to take advantage of the generous federal government incentives but making the money inaccessible for many (up to 30) years.  This is a difficult decision. Many people who have few assets, little access to credit or who have real concerns about financial needs in the short or medium term, feel like they have no option but to pass up the RDSP for short or medium term security.

This is unfortunate as these people actually need the federal government incentives to save more than people who have the luxury of putting some money in RDSPs and still have some left over for emergencies.

Analysis of Solutions

Making some of the capital available for financial emergencies, without triggering the repayment of the holdback amount, would remedy this problem.  People could invest in an RDSP , knowing that they would be able to access some or all of it in an emergency.

The other consideration, however, is the concern with tax slippage as outlined above.  That is, I claim an emergency, withdraw some of my funds and then re-contribute the money to the get the Canada Disability Savings Grant, using the same money more than once to lever the Grant.

One option would be to require that a person (the holder) document the emergency.  A physician could document a critical illness.  Police could document theft.  Fire marshals could document fire loss or damage.  It becomes complicated, however, as how can policy anticipate all possible causes for an emergency.  Another option would be to submit documentation of exceptional expenses and financial situation to the federal government for review and approval.  This would, however, create additional administrative costs and, almost certainly, create situations where there is conflict around what qualifies, what does not qualify and how much is permitted.

A second option would be to permit the withdrawal of a specified amount or a specified proportion of the personal capital.  This would not require additional administration; however, it would create a risk of tax slippage.  A possible solution to the concern of tax slippage would be to make the beneficiary ineligible to receive the Grant or Bond for the year that the withdrawal is made and for the two calendar years following the emergency withdrawal.  A possible criticism of this direction is that some people are likely to consider this to be punitive in situations where people are already facing hardship.

The former option provides a better match between a specific emergency and the emergency amount withdrawn from an RDSP.  Personally, I think that the additional administration combined with the fact that government will be arbitrating decisions about people being able to use their own money, which is counter to the spirit of the design of the RDSP, result in the second option being a better choice.

How much would be permitted to be withdrawn from an RDSP in an emergency?  Should it vary depending on whether the federal government or private contributions comprise a greater part of the RDSP?  Should it be a specified amount?  The LDAP formula defines the maximum amount that can be withdrawn in a year if government contributions exceed private contributions.  The new rules around specified years permit an individual to make a withdrawal where the taxable part of the withdrawal does not exceed $10,000 without resulting in repayment of the holdback amount.  Both of these are complicated for many people to understand.  The latter is also close to the end of a beneficiary’s life. An emergency might happen long before that time.

Easier to understand possibilities include:

  • 25% of the value of the RDSP excluding the holdback amount
  • Up to 10,000 of private contributions
  • 50% of private contributions

Because of concerns around tax slippage, I think that the amount cannot be significantly greater than the individual would contribute over three years to maximize the Canada Disability Savings Grant:  $4,500.

Recommendation: Permit up to three emergency withdrawals in a beneficiary’s lifetime of not more than $5,000 each time.  The beneficiary would not be eligible to receive the Canada Disability Savings Grant for the calendar year in which the withdrawal is made and the two following calendar years.