When people take care of their disabled children or grandchildren, they’re usually very concerned about what will happen to their dependants after their death. If you have clients in this situation, you may want to help them secure their dependant’s financial future. In particular, you may want to look at rolling their retirement funds into their children or grandchildren’s Registered Disability Savings Plans. There are specific rules on these rollovers, but if your clients qualify, they may be able to do the rollover without any tax penalties.
As of 2010, eligible recipients include all disabled children and grandchildren who are financially dependent on your client at the time of your client’s death. In the past, these rules only applied to dependants under the age of 18. Additionally, the recipient must have an RDSP, and must be eligible for the disability tax credit. If your client’s child or grandchild might qualify but isn’t claiming the disability tax credit, you may want to talk with your client about helping their child or grandchild apply for that credit. To do that, you need to fill out Form T2201, Disability Tax Credit Certificate, and you have to get a statement from a medical professional that explains the disability.
Qualifying Retirement Accounts
In addition to meeting the above criteria, the recipient must also agree to the rollover. Typically, you can’t make any contributions to an RDSP unless the beneficiary of the plan consents. But if the beneficiary agrees, you can roll over funds from all the following retirement accounts:
- Proceeds from Registered Retirement Savings Plans
- Proceeds from Registered Retirement Income Funds
- Proceeds from Pooled Registered Pension Plans
- Lump sum amounts from Registered Pension Plans
- Lump sum amounts from Specified Pension Plans
If your client doesn’t have one of these plans, they may want to open one. That helps to ensure the rollover is as seamless as possible after their death.
RDSP Contribution Limits
Unlike many other savings plans, there are no annual contribution limits for RDSPs, but there are lifetime contribution limits. As of 2018, the lifetime contribution limit is $200,000. To explain, say your client has a disabled son with an RDSP. To save for their child’s future expenses, your client contributes $50,000 to the RDSP during their lifetime. When your client dies, they have $100,000 in an RRSP, and those funds roll into their son’s RDSP. At this point, a total of $150,000 in contributions has been made, and only $50,000 more can be contributed to this savings plan.
Claiming the Tax Deferral
Generally, contributions to RDSPs are taxed. For instance, if your client puts $10,000 into their grandchild’s RDSP, that amount is taxed. But qualifying funds rolled into the RDSP after death are not taxed.
To secure the tax deferral for your client, you need to fill out and submit Form RC4625 Rollover to a Registered Disability Savings Plan. This is a short, relatively straightforward form that requires information about your client, their retirement plan, the recipient, and the recipient’s RDSP. You also need to ensure you claim a deduction on your client’s final tax return.
When you file a tax return for a deceased person, you note their status in a small box near the top of the T1 Income Tax and Benefit Return. Then, you note the proceeds from the retirement account. Typically, you receive a short form such as a T4A, T4RSP, or T4RIF from the manager of the retirement account, and this explains how much you need to report. The exact line you should use to report the income varies based on the type of retirement account. In all cases, you claim a deduction equal to the rollover on line 232.
These steps ensure your client doesn’t face any posthumous income tax on these amounts.
Payouts From Rollovers
As you talk with your clients about this option, they may have questions about payouts. In particular, they may wonder how their child or grandchild will be taxed when they withdraw these funds from their RDSPs. The recipient won’t have to pay any tax while these contributions generate income in the RDSP but will face income tax when they withdraw the funds.
To give you an example, imagine your client rolls $50,000 into their child’s RDSP. During the first year or two, these funds earn $5,000 in interest. That $5,000 is not taxable income if it stays in the fund. The beneficiary takes out $1,000 a month from the RDSP to cover living expenses. Those payouts are considered taxable income. Your client’s child or grandchild has to report those amounts on their tax return and pay income tax as relevant.
When your clients are financially responsible for disabled children or grandchildren, the thought of dying and leaving those dependants without resources can be incredibly scary, but tax-deferred rollovers can help to give your clients peace of mind while also safeguarding their children or grandchildren’s future. After talking with them about this option, you may also want to talk about trusts or other financial vehicles that can help in this situation.