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5undamentals – RDSP – Registered Disability Savings Plan

Published version: Linkedin

Discuss these 5 fundamentals with your advisor to learn how they apply to you, and whether there are further details, qualifications or exceptions to consider.

1. What is a Registered Disability Savings Plan (RDSP)?

Purpose – The RDSP is a long-term savings plan for persons with disabilities and their families. It offers 3 main financial benefits: 1) Government money added to your contributions 2) Tax-sheltered growth of all money in the plan, and 3) Tax eventually borne by the plan beneficiary, not contributors.

Qualifying criteria –

  • Disability tax credit (DTC) – Application for the DTC is made by or on behalf of an individual using CRA Form T2201. A medical professional must certify that the applicant has a severe and prolonged impairment, providing details of its nature and describing the effects on the person.
  • Age limit – A plan may be opened any time before the end of the year the person turns 59, and may remain open for the life of the beneficiary, though some events may cause earlier closure.
  • Canadian resident – The beneficiary must be a Canadian resident when the plan is opened and when any contribution is made. A holder (who is not the beneficiary) need not be a Canadian resident to open a plan, but both holder and beneficiary must have a valid social insurance number at that time.

Effect on other public support –

  • Federal – Neither RDSP assets nor RDSP withdrawals affect eligibility for federal programs such as the Canada Child Benefit, the G/HST credit, Old Age Security or Employment Insurance.
  • Provinces & territories – RDSP assets are exempt in determining eligibility for social support programs for persons with disabilities. Similarly, RDSP withdrawals are not generally treated as income that affects the amount of support from such programs, though some jurisdictions have a maximum RDSP withdrawal threshold, beyond which benefits may be reduced.
2. Parties to the arrangement

Parties – The holder enters into a contract with an issuer to save for the future of a beneficiary.

Beneficiary – There can be only be one RDSP for a given beneficiary, and only one beneficiary for each RDSP. Once personal funds are contributed into a RDSP, they belong to the beneficiary, not the holder. Government assistance and earnings also accrue to the beneficiary, but may sometimes be repayable.

Holder – The holder opens the RDSP, names a beneficiary, and makes decisions on the plan, including whether to allow others to contribute. As to who may be a holder, it depends on the age and contractual competency of the beneficiary.

  • Minor beneficiary – A parent, or a ‘legal representative’, being a guardian, curator or agency authorized by provincial/territorial law. Age of majority is either 18 or 19, by province/territory.
  • Adult beneficiary who is contractually competent – The beneficiary.
  • Adult beneficiary who is NOT contractually competent – A legal representative.
  • Adult beneficiary whose contractual competence is uncertain – A qualifying family member (QFM), generally being a parent, spouse or common law partner (CLP).

Issuer – Financial institution offering RDSP based on a specimen plan submitted and approved by Canada Revenue Agency (CRA); certifies accuracy of applicant information; administers contributions, rollovers and transfers; applies for, receives and deposits CDSG & CDSB; invests funds as directed by holder; provides statement of accounts; makes payments from RDSP to eligible beneficiaries; and is ultimately responsible for maintaining tax-registered status.

3. Contributions and tax treatment

Contribution limits –

  • Lifetime limit – The lifetime contribution limit is $200,000.
  • Annual limit – There is no annual limit, but there are annual limits to the amount of government assistance that may be received (see below), which could influence your contribution timing.

Qualified investments – RDSPs may generally invest in the same kinds of deposits and marketable securities allowed for RRSPs and other registered plans.

Tax treatment –

  • Coming in – RDSP contributions are after-tax, meaning there is no tax deduction for placing funds into a plan. Government assistance is not taxable when credited to a plan.
  • Within – While in the plan, there is no tax on income or growth, whether on your contributions or on any government assistance.
  • Coming out – When taken out, all income and government assistance are taxable to the plan beneficiary. The later withdrawal of the portion that is your own contributions is not taxable.

Rollover contributions – Under qualifying conditions, funds held in education and retirement savings plans may roll tax-deferred into a RDSP. These rollover amounts count toward the $200,000 lifetime contribution limit, but do not attract CDSG and will be taxable on withdrawal.

  • Registered education savings plan (RESP) – One of three criteria must be met, two dealing with plans that have been in place for many years or decades, and the third applying where the beneficiary cannot attend post-secondary school for DTC related reasons. In all cases, only an otherwise accumulated income payment (AIP) of the RESP earnings may be rolled over.
  • RRSP, RRIF, RPP, PRPP, SPP – These plan types may be rolled over from a parent/grandparent on whom the beneficiary was financially dependent at the time of the former’s death.
4. Government assistance

Family income – Amount of assistance depends on family income. Up to the calendar year when the beneficiary turns 18, it is the family income of the beneficiary’s primary caregiver. Starting the calendar year the beneficiary turns 19, it is the beneficiary’s own family income, which includes the income of a spouse/CLP. [The following income figures are for 2020 entitlements, based on 2019 family income.]

Canada Disability Savings Bond (CDSB) – The CDSB makes an annual payment to a RDSP, regardless of personal contributions. Up to family income of $31,711 it is $1,000, which is then phased-out to zero when family income reaches $48,535. The lifetime bond limit is $20,000.

Canada Disability Savings Grants (CDSG) – The CDSG matches personal contributions at a 1:1, 2:1 or 3:1 rate. If family income is below $97,069, the matching rate is 300% of the first $500 in contributions and 200% of the next $1,000 in contributions. If family income is above this threshold, the rate is 100% of the first $1,000 in contributions. That’s as much as $3,500 in one year, with a lifetime limit of $70,000.

Carryforward and usage timeline – You can carry forward up to 10 years of unused grant and bond entitlements to claim in future years, as long as you meet eligibility requirements in those future years. The annual usage maximum for carried forward CDSG is $10,500, and $11,000 for CDSB. All grants and bonds must be claimed by the end of the year the beneficiary turns 49.

10-year repayment rule – Grant and bond money received in the preceding 10 years may have be returned to the government upon certain events. These include intentional termination of the plan, ceasing to qualify for the DTC, and death of the beneficiary. Consult your issuer to explain all triggering events, and the availability of relief and/or deferral depending on the circumstances.

Provincial assistance – Provinces may also enact programs to assist RDSPs and their beneficiaries.

5. Payments out of the plan

Three payment types – Funds come out of a RDSP by either: 1) Repayment of CDSB, CDSG or provincial support to the respective government 2) Transfer/payment of the holdings to a RDSP for the same beneficiary with another issuer 3) Assistance payment to the beneficiary. Our focus is on the last of these, assistance payments.

Assistance payments – The regulations on drawing funds out of a RDSP are complex, with there being two types of payments to a beneficiary – DAP and LDAP – governed by a variety of rules as to the amount, timing and composition of those payments.

  • Disability assistance payment (DAP) – A DAP is a RDSP withdrawal at the holder’s request, as made from time to time, payable to the beneficiary or their estate.
  • Lifetime disability assistance payment (LDAP) – A LDAP is a recurring annual (or more frequent) RDSP withdrawal paid to the beneficiary. Once begun, the LDAP series must continue until the beneficiary is deceased or the funds in the plan are exhausted.
  • Composition of DAP or LDAP – Each payment is a proportion of each of personal contributions, earnings, CDSB, CDSG and provincial support. The beneficiary/recipient of the payment is taxed on all components, except for the non-taxable return of personal contributions. The beneficiary does not have to be a Canadian resident to receive a DAP or LDAP.
  • Minimums and maximums – The allowable amount for a DAP or LDAP depends on many variables, including 1) Age, specifically 59-under or 60-plus 2) Whether government support exceeds personal contributions 3) CDSB & CDSG receipts in the preceding decade 4) If the beneficiary’s life expectancy is less than 5 years, and 5) Formulas prescribed by regulations.

Death of beneficiary – Upon the beneficiary’s death, all CDSB, CDSG and provincial support paid in the preceding 10 years must be repaid to the respective government. It is not possible for a RDSP beneficiary to directly name a beneficiary to receive the plan upon his/her death, so the remaining RDSP assets will be a taxable receipt for the beneficiary’s estate, except the non-taxable return of personal contributions. The plan must then be closed no later than December 31 of the calendar year following the year of death.

5undamentals – RESP – Registered Education Savings Plan

Published version: Linkedin

Discuss these 5 fundamentals with your advisor to learn how they apply to you, and whether there are further details, qualifications or exceptions to consider.

1. What is a Registered Education Savings Plan (RESP)?

Purpose – The RESP is designed to help families and friends save for a child’s post-secondary education. It offers 3 main financial benefits: 1) Government money added to your contributions, 2) Tax-sheltered growth of all money in the plan, and 3) Tax eventually borne by the student-beneficiary, not contributors.

Post-secondary education – Qualifying education programs include apprenticeship programs, CEGEPs, trade schools, colleges and universities, in Canada or abroad. Employment and Social Development Canada (ESDC) keeps a master list of designated educational institutions on its website.

Plan type – An individual plan has one beneficiary. A family plan may include one or more of a parent, sibling, child or grandchild of a subscriber, whether by blood, adoption or step-relationship. A group plan is a collection of individual non-family plans administered based on age-determined groups.

How long a plan may stay open – There is no minimum or maximum age to open an individual plan, and you can even set one up for yourself. Contributions to a plan may be made up to 31 years after opening, and it may stay open for 35 years. If the beneficiary qualifies for the disability tax credit in year 31, contributions are allowed through 35 years, and it may stay open for 40 years.

2. Parties to the arrangement

Parties – The subscriber enters into a contract with a promoter to save for the education of a beneficiary.

Subscriber – There is generally no restriction on who may be a subscriber, other than being an individual (ie., not a corporation or trust). This person must provide a Social Insurance Number (SIN) to the promoter in order for the plan to be registered with the Canada Revenue Agency (CRA).

Beneficiary – Beneficiaries must be residents of Canada with a SIN when the designation is made by the subscriber. Beneficiaries of family plans created after 1998 must be under 21 when designated.

Promoter – A promoter is an organization that offers RESPs to the public. In order to do so, the promoter must first obtain written approval of a specimen plan from the CRA Registered Plans Directorate.

3. Contributions and tax treatment

Lifetime limits – From 1996 to 2006, the lifetime contribution limit was $42,000 for each beneficiary. Since 2007, the lifetime limit is $50,000. This dollar limit may be spread across any number of plans.

Annual limits – An annual contribution limit of $2,000 applied in 1996, and $4,000 from 1997 to 2006. Since 2007, there is no annual limit, but there are limits to the amount of government assistance that may be received annually (see below), which could influence your contribution timing decision.

Qualified investments – RESPs may generally invest in the same kinds of deposits and marketable securities allowed for RRSPs and other registered plans.

Tax treatment –

  • Coming in – RESP contributions are after-tax, meaning there is no tax deduction for placing funds into a plan. Government assistance is not taxable when credited to a plan.
  • Within – While in the plan, there is no tax on income or growth, whether on your contributions or on any government assistance.
  • Coming out – When taken out for the beneficiary’s education, all income and government assistance are taxable to the student-beneficiary. The later withdrawal of the portion that is your own contributions is not taxable. (See below, “Funds coming out of a plan”)

Excess contribution tax – If the lifetime limit is exceeded across all plans for a beneficiary, each subscriber for that beneficiary is liable to pay a 1% per-month tax on his or her share of the excess contribution that is not withdrawn by the end of the month.

4. Government assistance

Basic Canada Education Savings Grants (CESG) – The basic CESG is up to $500 annually, paid by matching 20% of your contributions up to $2,500. Unused room carries forward to claim on top of a future year’s room, to a combined annual maximum of $1,000. Room is earned whether or not an RESP is open. The lifetime maximum is $7,200. Any CESG must claimed before the beneficiary turns 18.

CESG for age 16 & 17 – CESG grants are only available for ages 16 & 17 if you’ve put in at least $2,000 by the end of the year your child turns 15, or at least $100 in any 4 years by then.

Additional CESG (A-CESG) – On the first $500 of contributions, A-CESG is paid if the beneficiary’s primary caregiver is in the first two federal tax brackets, being $48,535 and $97,069 for 2020 income. It’s an additional 20% match up to $100 if in the first bracket, or 10% up to $50 if in the second bracket.

Canada learning bond (CLB) – For an eligible child in a low-income family, the CLB provides $500 for the first year of eligibility and $100 annually to age 15, for up to $2,000 total. Eligibility depends on income of the primary caregiver and any cohabiting spouse/common law partner (CLP), and the number of children in the home. No personal contributions are required in order to receive the CLB.

Provincial support – Some provinces contribute to RESPs using matching and/or age-related criteria.

5. Dealing with the accumulated plan

Funds coming out of a plan – The subscriber may choose how much and what type of draw is to be taken from the RESP. The when depends on the criteria for each type of draw.

  • Education assistance payment (EAP) – An EAP is any payment to a beneficiary to further his or her post-secondary education. It comprises the income and any allocation of government assistance, and is fully taxable to the beneficiary. A maximum of $5,000 may be taken in the first 13 weeks of a full-time program, though ESDC will consider requests beyond this level on a case-by-case basis. There is no dollar limit thereafter, but for requests over an indexed annual threshold ($24,432 in 2020), the promoter must seek the review/consent of ESDC.
  • Refund of contributions – RESP contributions can be returned to the subscriber at any time without tax consequences. However, they may trigger a repayment of government assistance, which should be confirmed with ESDC before initiating.
  • Accumulated income payment (AIP) – This is a payment of the income to the subscriber, generally only if all beneficiaries have reached age 21, with none eligible for an EAP, and the plan having existed at least 10 years. An additional 20% tax applies (effectively matching the matching grant rate), which may be avoided by allocating the AIP to a subscriber or spousal RRSP. Once any AIP is taken, the plan must normally be closed by March of the following year.
  • Rollover to Registered Disability Savings Plan (RDSP) – If at any time the beneficiary qualifies for the RDSP, a tax-free rollover of the RESP income may be possible. Government assistance from the RESP will not roll to the RDSP (so must be returned to ESDC, or province per its rules), and the amount rolled over will not qualify for RDSP government assistance.
  • Payments to a designation educational institution – If funds remain in the plan and the subscriber does not qualify under the foregoing draw options, a payment may be made to a Canadian designated educational institution. The subscriber is neither taxed on the amount, nor allowed a donation receipt.

Sole subscriber, lifetime transfer – During lifetime, a sole subscriber may only transfer a plan to a spouse/CLP, which must be as part of a division of assets under a written agreement or court order.

Joint subscriber, transfer at death – After 1997, only spouses may be joint subscribers. They’re bound by the promoter’s contract while both are living, and upon a death the survivor becomes the sole subscriber.

Sole subscriber at death – On death, the plan becomes the property of the estate, to be dealt with in one of three ways: 1) You may direct in your Will to transfer to a successor subscriber, not necessarily a spouse/CLP, 2) The plan may continue with your estate as subscriber, or 3) The plan may be wound down with the net proceeds directed as either a specific legacy or as part of the estate residue.

5undamentals – TFSA – Tax-free Savings Account

Published version: Linkedin

1. What is a TFSA?

Purpose – The TFSA is a flexible savings plan that can be used (and re-used) for any savings purpose over a person’s lifetime. It is registered under the Income Tax Act, entitling it to special tax treatment. Compared to other registered plans, the TFSA has relatively few rules to understand and follow.

Investment options – Qualified investments are similar to RRSPs and other registered plans. Options include money accounts, deposits with a regulated financial institution and guaranteed investment certificates; stocks, bonds and most other securities listed on a designated stock exchange; and mutual funds and segregated funds.

2. Who can use it?

Eligible contributors – To use a TFSA, a person must be a Canadian resident over the age of 18. When you open an account, your financial institution will require proper identification, your Social Insurance Number (SIN) as a tax requirement, and other information according to securities regulations.

Age 18 contributors – A person must be 18 to open a TFSA, and will be entitled to the TFSA dollar limit (discussed below) for that full year, not pro-rated by birthday. If the person cannot enter a contract until age 19 if that is the province’s age of majority, the TFSA limit/room for the age 18 year carries forward.

Upper age limit – There is none.

Foreign citizens – Eligibility is based on being a legal Canadian resident, regardless of citizenship. For Americans (and possibly others), their home country tax rules may influence whether to use a TFSA.

3. How it works – Key tax features

In, within and out – Whereas RRSP contributions are deductible and withdrawals taxable, for TFSAs:

  • Contributions are after-tax, meaning they are NOT deductible in calculating current income.
  • Income and growth within the plan are NOT taxable.
  • Withdrawals from the plan are NOT taxable.

Over-contributions – If your TFSA contributions exceed your TFSA contribution room recorded at the beginning of the year, you are said to have an excess TFSA amount. If this is the case at any time in a month, you are liable to a penalty tax of 1% on your highest excess TFSA amount in that month.

Non-resident contributions – If, at any time during the year, your TFSA contains contributions you made while a non-resident of Canada, you will be subject to a tax of 1% per-month on these contributions.

4. Contributions and withdrawals

TFSA dollar limit – As a Canadian resident who is 18 at any time in a year, you are entitled to the annual TFSA dollar limit. The limit was $5,000 from 2009-12, $5,500 from 2013-14, $10,000 in 2015, $5,500 from 2016-18, and $6,000 in 2019-20. It is indexed to inflation and rounded to the nearest $500.

Unused room – Your unused room is carried forward for you to use in any future year.

In-kind transfers – You may transfer securities in-kind to a TFSA, but the transaction may trigger tax. If it originates from a non-registered account, there is a deemed disposition at fair market value (FMV) that may result in a taxable capital gain. If the source is your RRSP, it will be treated as a withdrawal at FMV.

Credit for withdrawals – When you make a withdrawal, you get a dollar-for-dollar credit to re-contribute to your TFSA. The credit applies the following January 1st. If you re-contribute in the current year, you may exceed your contribution room and face the 1% penalty tax.

TFSA-to-TFSA transfers – If you want to move funds from one TFSA account to another, whether at the same institution or another, do so as a direct transfer so as not to affect your TFSA room. There is no prescribed form for this purpose, so some companies use their own form or use CRA Form T2033.

Loan interest – TFSA income is tax-exempt, so interest on a loan to invest in a TFSA is not deductible.

5. Life events, and death

Income splitting with spouse / common law partner (CLP) – Generally if you make a gift to a spouse/CLP that is put into passive investments, tax on that income will be attributed to you the giver. However, those attribution rules don’t apply if your spouse/CLP places the gifted money in a TFSA.

Relationship breakdown – A direct transfer of a TFSA to a separated spouse/CLP will not affect either person’s TFSA room. The recipient’s room is not reduced by the receipt, and the transferor receives no credit to recover room as this is not a withdrawal. You must be living separate and apart at the time of transfer, and the transfer amount must be pursuant to a separation agreement or court order.

Becoming non-resident – If you become non-resident, there is no tax on a TFSA at that event nor while you remain non-resident, and any earnings or withdrawals will still not be taxed in Canada. You will not accrue any annual room while non-resident. Withdrawals are allowed, and those will be credited toward room the following year, but you may only use that room if you re-establish Canadian residency.

Death: Designated beneficiary generally – You may designate one or more beneficiaries on the TFSA contract, and he/she/they will receive the plan value at date of death without any tax reduction. Any growth from time of death until the transfer is taxable to the beneficiary/ies.

Death: Spouse as designated beneficiary – If you die having designated your spouse/CLP as beneficiary on the TFSA contract, he/she may contribute and designate all or a portion of the payment as an exempt contribution to their own TFSA, without affecting their own unused TFSA room. Again though, any growth from time of death until transfer is taxable to the spouse beneficiary. To qualify for the rollover, transfer must occur before the end of the calendar year after the year of death.

Death: Spouse/CLP as “successor holder” – If you die having designated your spouse/CLP as successor holder, he/she becomes the new holder of the TFSA without affecting his/her existing TFSA room. This designation will be effective whether it is made on the TFSA contract or in the original holder’s Will. In this case though, the transfer is deemed to occur at the date of death, so any post-death growth will not be taxable as it will occur within the survivor spouse’s TFSA. Once more, to qualify for the rollover, transfer must occur before the end of the calendar year after the year of death.

Death: Spouse as estate beneficiary – A TFSA paid to the deceased’s estate may be subject to provincial probate tax. A spouse/CLP who has a sufficient financial entitlement as a beneficiary of the estate may make an exempt contribution with the same effect as being a designated beneficiary on the TFSA contract. Interim growth is again taxable to the spouse/CLP. To qualify for the rollover, transfer must occur before the end of the calendar year after the year of death.

Death: Unused TFSA room – Unused room cannot be transferred to anyone at death.