This is the third instalment in a series examining the disability tax credit and related support programs for eligible Canadians. Read the first article here and the second article here.
Disability advocates are calling on the federal government to repay RDSP grants and bonds to people who had to return the amounts after they lost eligibility for the disability tax credit (DTC) and were forced to close their RDSPs.
In the 2019 federal budget, the government proposed changes to the RDSP rules that would remove the time limitation on how long plans could remain open after a beneficiary becomes ineligible for the DTC, to be effective after 2020. The government also proposed modifications to the rules regarding repayment of Canada Disability Savings Grants and Canada Disability Savings Bonds.
The 2019 budget proposal received royal assent on June 29, 2021, with amendments to rules governing repayment of grants and bonds retroactive to Jan. 1, 2021. RDSP issuers have not been required to close plans solely due to loss of DTC eligibility since March 19, 2019, the day the proposal was announced.
In general, prior to Jan. 1, people who lost DTC eligibility had to close their RDSPs and repay grants and bonds. And those who did so before Jan. 1 appear to be out of luck.
People who lost their DTC status between January 2010 and December 2020 repaid $34.4 million in grants and bonds to the federal government, according to figures provided to Investment Executive by Employment and Social Development Canada (ESDC).
The federal government’s Disability Advisory Committee (DAC) recommended in its second annual report, released in April, that “in light of the positive decision to eliminate the requirement to close an RDSP when a beneficiary no longer qualifies for the DTC, the federal government should pay retroactively the RDSP grant and bond portions for which an RDSP holder might be eligible.”
Kimberley Hanson, executive director of Diabetes Canada, also urged the federal government to repay RDSP grants and bonds.
“Canadians with disabilities count on their RDSPs to ensure they’ll be able to afford their medical expenses in retirement,” wrote Hanson in a statement emailed to Investment Executive. “[RDSP grants and bonds] should be repaid as soon as possible.”
In 2017, nearly 2,300 Canadians lost access to the DTC after the Canada Revenue Agency (CRA) changed how it reviewed DTC applications under “life-sustaining therapy,” one of the criteria by which an individual may be eligible for the DTC. According to Hanson, some people who lost DTC status began receiving notices from issuers that their RDSPs would need to be closed.
After considerable backlash to the change in the CRA’s DTC application assessment process, the government announced in late 2017 that the CRA would revert to its previous method of reviewing DTC applications under the life-sustaining therapy criteria. It subsequently re-reviewed and approved more than 1,300 applicants who had been denied.
In light of that reversal, and subsequent change to the RDSP rules, the government should repay grants and bonds to anyone who had repay the amounts after losing DTC status, Hanson argued.
So far, the federal government has not indicated it would repay grants and bonds to RDSP beneficiaries who lost DTC status. The Department of Finance did not respond to questions on the topic from Investment Executive.
The complexity of the RDSP rules, and the interplay between the DTC and the RDSP, has negative implications on the take-up and effectiveness of the RDSP as a long-term savings vehicle for persons with disabilities, the DAC report suggested.
The DAC has also called on the government to establish an advisory body consisting of RDSP applicants and holders to address ongoing and emerging issues with respect to the relationship between the RDSP and the DTC.
The RDSP is a tax-sheltered vehicle that provides an opportunity for Canadians with disabilities and their families to build long-term savings. The RDSP program is jointly administered by the Department of Finance, the CRA, the ESDC and the registered financial institutions that issue RDSPs.
The government provides matching grants, depending on an RDSP beneficiary’s family income and contributions. It also offers bonds to low- and modest-income beneficiaries. Grants and bonds are available up until the end of the year the beneficiary turns 49 years of age.
RDSP issuers must set aside an “assistance holdback amount” equal to all of the grants and bonds paid into the RDSP over the previous ten years, less amounts withdrawn.
Beneficiaries must repay $3 of grants and bonds for every $1 that is withdrawn, up to the total amount of grants and bonds paid into the RDSP in the last 10 years.
If an RDSP is closed or the beneficiary dies, all grants and bonds paid into the RDSP in the previous 10 years must be repaid to the government.
Prior to Jan. 1, a beneficiary who lost DTC eligibility had to close their RDSP by the end of the first full year after the year throughout which they did not have DTC status — and repay grants and bonds.
In Budget 2019, the government announced it would scrap this requirement in order to “better protect the long-term savings of persons with disabilities,” particularly people who experience disabilities that were episodic in nature.
This decision was applauded by the DAC: “[It] will have a profound positive impact on the financial security of persons with disabilities.”
Under the new rules, grants and bonds already in an RDSP for which a beneficiary has lost DTC status do not have to be returned as long as the plan remains open. However, no new contributions are permitted into an RDSP where the beneficiary has lost DTC status and no new grants and bonds are paid into the plan.
Should an RDSP beneficiary later regain eligibility for the DTC, the regular RDSP rules would apply, commencing with the year in which the beneficiary becomes eligible for the DTC.
For the years throughout which the beneficiary does not have DTC status and before the year in which the beneficiary turns 51, withdrawals may require the repayment of grants and bonds paid into the plan in the 10 years prior to the loss of DTC status. After the beneficiary turns 51, and over the following 10 years, the assistance holdback amount gradually reduces based on the grants and bonds paid into the plan over a reference period.