Today’s blog was written by Darren G.Lund, Associate at Fasken Martineau DuMoulin LLP.

In the 2010 Federal budget the Federal government announced new measures to support persons with disabilities, stating that an “important concern for parents caring for a disabled child is to ensure that the child will be adequately provided for in the event that one or both parents die.”[1] The new measure was announced as follows:

To give parents and grandparents more flexibility in providing for a disabled child’s long-term financial security, Budget 2010 proposes to allow a deceased individual’s RRSP or RRIF proceeds to be transferred, on a tax-free basis, to the RDSP [Registered Disability Savings Plan] of a financially dependent infirm child or grandchild.[2]

The rollover is subject to the lifetime RDSP contribution limit of $200,000 for a particular RDSP beneficiary, and became effective on July 1, 2011. The RDSP rollover provisions are certainly welcome, and do benefit persons with disabilities; however, there is room for improvement.

Although the RDSP rollover extends to both children and grandchildren, one wonders how often a grandchild will qualify in practice. In Information Sheet RC4177, Death of an RRSP Annuitant or a PRPP Member, the Canada Revenue Agency (“CRA”) states that a child or grandchild is “generally considered” to be financially dependent on the deceased annuitant by reason of mental or physical infirmity if, on the date of death, the child or grandchild: (1) “ordinarily resided with and was dependent on the annuitant”; (2) is “impaired in physical or mental functions”; and (3) his or her net income for the previous year did not exceed the basic personal amount ($11,327 for 2015) plus the disability amount ($7,899 for 2015).[3] Demonstrating impairment in physical or mental function should normally be straightforward. In order to qualify as an RDSP beneficiary an individual must qualify for the Disability Tax Credit (“DTC”), which is available to persons with a prolonged and severe mental or physical impairment. RC4177 indicates there is flexibility with respect to the income threshold. If the income threshold is exceeded it is not fatal to the rollover; rather, evidence can then be provided to demonstrate financial dependence.

The real difficulty for a grandchild is the criterion that the grandchild be living with the deceased annuitant and financially dependent on the deceased annuitant when the annuitant dies. Presumably the CRA is using the residence test, combined with the income threshold, as a marker for financial dependence on the deceased annuitant. Yet, there will be many cases where a disabled person has very low income but lives in a group home or other facility rather than with a parent or grandparent, but is financially dependent. And what of the disabled child living with financially-strapped parents whose grandparents provide financial support to the family and are in a better financial position to potentially use the rollover? It is not clear from RC4177 whether there is any flexibility in the residence test to accommodate these scenarios. If the residence test is applied as a requirement rather than an indicator like the income threshold, one would expect that most grandchildren are effectively excluded from benefitting from the rollover. The RDSP rollover is already limited in scope (only children and grandchildren with a severe and prolonged mental or physical impairment) and quantum (a maximum of $200,000 for any particular person). If the intention is to provide better long-term security for such individuals, it is time to reconsider whether it should be necessary to demonstrate financial dependence on the deceased annuitant to qualify.

[1]       Canada, “Leading the way on Jobs and Growth”, Department of Finance, March 4, 2010 (“Budget 2010”), at p. 130.

[2]       Ibid.

[3]       Information Sheet RC4177, “Death of an RRSP Annuitant or a PRPP Member” (“RC4177”), at p. 2.

Darren G. Lund