Income Tax Withholding on Registered Disability Savings Plans (RDSPs)

1. Income Tax Withholding on Registered Disability Savings Plans (RDSPs)

2. Presenters • Dian Hardiman • Joumana Nasrallah

3. Today’s Topics • Purpose of information session • Background information on RDSP • New withholding requirements • Benefits of withholding • Examples

4. Purpose of Information Session • Effective January 2014, financial institutions (FIs) will deduct income tax from RDSP payments. • Treasury Board of Canada Secretariat requires communication with stakeholders before implementing the regulatory changes. • Two stakeholders were identified: • Financial Institutions (FIs); and • associations representing persons with disabilities. • Information sessions are occurring from April to May with associations to inform them of the change.

5. What is an RDSP? • It is a long-term savings plan to help Canadians with disabilities and their families to save for the future. • In order to be an RDSP beneficiary, a person must first qualify for the disability tax credit (disability amount). • Contributions can be made until the beneficiary turns 59. • Contributions made to an RDSP are not tax deductible.

6. Grants and Bonds • The Government of Canada contributes amounts to an individual’s RDSP: • Grants are matching payments made by the Government (up to $3,500 per year). • Bonds are payments made by the Government (up to $1,000 per year) for low and modest-income Canadians. • Individual contributions can be made by various individuals. • There is a lifetime limit for individual contributions.

7. About the RDSP Payments • There are two types of payments made out of an RDSP: • lifetime disability assistance payments (LDAPs); and • disability assistance payments (DAPs). • Both payments can be made individually or at the same time within a calendar year.

8. Rollovers from RRSPs to RDSPs • Effective July 1, 2011, amounts held in a deceased annuitant’s registered retirement savings plans (RRSPs) can be rolled over to an RDSP, if the beneficiary is financially dependent and qualifies for the disability tax credit. • The amount of the rollover is counted as a private contribution. • It must be treated as part of the earnings of a DAP or LDAP for determining the taxable portion of the RDSP payment.

9. Taxable Income • The following amounts are taxable income when payments are withdrawn from the plan: • Canada disability savings grant; • Canada disability savings bond; and • investment income earned in the plan. • Individual contributions that are withdrawn are not taxable income.

10. Reporting Requirements • FIs will issue a yearly T4A slip to beneficiaries for the taxable portion of any RDSP withdrawal. • Beneficiaries must include the amount reported on the T4A as income on their income tax and benefit return. • If a beneficiary passes away after a payment is made, it is included in the income of the beneficiary’s estate for the year the payment was made.

11. Income Tax Act • In 2007, the Act was amended to require income tax to be withheld at source on payments made from an RDSP. • The amount to be withheld must be calculated according to the Income Tax Regulations (the Regulations). • Starting January 1, 2014, the FIs will be required to withhold income tax at source. • There are no retroactive provisions.

12. Benefits of Withholding at Source • If withholding is not done at source by the FIs, beneficiaries may have a tax liability. • Withholding on RDSP payments at source will reduce the financial burden on beneficiaries. • The rates established will ensure withholding is as close as possible to the tax liability.

13. About the Rates • The rates will be determined based on the taxable portion of the RDSP payments. • The withholding rates will be: • Those rates will be applied to the taxable portion of the payments less the basic personal amount (BPA) and the disability amount (DA).

14. Withholding Rate for Non-Residents • Non-residents can also be RDSP beneficiaries. • A 25% withholding rate will be applied to the taxable portion of the RDSP. • The FIs will provide them with an NR4 slip. • For more information, individuals can call the International Tax Services Office at 1-855-284-5942 (for services in English) and 1-855-284-5943 (for services in French).

15. Withholding on LDAPs • Estimate the running total of all LDAPs expected to be paid during the year. • Determine the taxable portion of the LDAPs. • Determine the withholding rate based on the taxable portion of the total of all LDAPs. • Apply the withholding rate to the LDAPs, less the BPA and the DA.

16. Withholding on DAPs • Determine DAP payment (withholding will be applied on every DAP payment). • Determine the taxable portion of a DAP. • Determine the withholding rate based on the taxable portion of the DAP. • Apply the withholding rate to the DAP, less the BPA and the DA.

17. Example 1 1 DAP $65,000 • Bond amount $ 0 • Grant amount $10,000 • Contributions $40,000 • Earned investment $15,000 Questions: • What is the taxable amount? • What is the withholding rate?

18. Answer to Example 1 1 DAP $65,000 Minus the contributions -$40,000 Equals the taxable amount $25,000 Applicable withholding rate is 30% Calculation Taxable amount $25,000 Minus the BPA and DA -$18,735 Equals amount subject to withholding $ 6,265 Tax withheld at 30%$ 1,880

19. Example 2 12 LDAPs of $1,850 $22,200 • Bond amount $ 0 • Grant amount $ 3,000 • Contributions $15,000 • Earned investment $ 4,200 Questions: • What is the taxable amount? • What is the withholding rate?

20. Answer to Example 2 12 LDAPs X $1,850$22,200 Minus contributions -$15,000 Equals the taxable amount $ 7,200 Applicable withholding rate is 20% Calculation Taxable amount $ 7,200 Minus the BPA and DA -$18,735 Equals amount subject to withholding $ 0 Tax withheld at 20%$ 0

21. Example 3 12 LDAPs of $5,000 $60,000 • Bond amount $ 0 • Grant amount $10,000 • Contributions $36,000 • Earned investment $14,000 Questions: • What is the taxable amount? • What is the withholding rate?

22. Answer to Example 3 12 LDAP X $5,000$60,000 Minus contributions -$36,000 Equals the taxable amount $24,000 Applicable withholding rate is 30% Calculation: Taxable amount $24,000 Minus the BPA and DA -$18,735 Equals amount subject to withholding $ 5,265 Tax withheld at 30%$ 1,580

23. Calculation Chart

24. Example 4 12 LDAPs of $3,000$36,000 2 DAPs: $21,000 • 1 payment in May $9,000 • 1 payment in Sept $12,000 • Bond amount $ 0 • Grant amount $13,000 • Contributions $19,000 • Earned investment $25,000 Questions: • What is the taxable amount? • What are the withholding rates?

25. Answer to Example 4 12 LDAPs X $3,000$36,000 Minus contributions -$12,000 Equals the taxable amount$24,000 2 DAPs $21,000 Minus contributions -$ 7,000 Equals the taxable amount $14,000 Applicable withholding rates: Taxable amount of LDAP of $24,00030% Taxable amounts of DAPs total of $14,000 • 1 payment in May $6,000 20% • 1 payment in Sept $8,000 20%

26. Cont’d Answer to Example 4 Calculation: Taxable amount LDAP $24,000 Total taxable amount of DAPs $14,000 Minus the BPA and DA -$18,735 Equals amount subject to withholding $19,265 Taxes Withheld Tax withheld at 30% on LDAP $3,380 Tax withheld at 20% on DAP payment $1,600 Total tax withheld on LDAPs and DAPs $4,980

27. Calculation Chart

28. Open Communication Approach • The Canada Revenue Agency (CRA) is committed to communicating with stakeholders and to providing them with information their members need. • More information about the RDSP is available on the CRA website. • The CRA may hold a webinar to inform stakeholders of the changes.

29. Points of Contact • Visit our Web site: • For beneficiaries: www.cra.gc.ca/rdsp • For plan administrators: www.cra.gc.ca/tx/rgstrd/rdsp • Call the CRA’s individuals’ enquiries line at 1-800-959-8281. • For more information regarding the program, please visit the Web site of Human Resources and Skills Development at www.disabilitysavings.gc.ca.

30. QUESTIONS