Archived - Legislative Proposals, Explanatory Notes and Overview Relating to Registered Disability Savings Plans

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- Table of Contents

Explanatory Notes Relating to Income Tax

These explanatory notes are provided to assist in an understanding of the proposed amendments to which they relate. These notes are intended for information purposes and should not be construed as an official interpretation of the provisions they describe.


Preface

These explanatory notes describe proposed amendments to the Income Tax Act, the Income Tax Regulations, the Employment Insurance Act and the Old Age Security Act relating to registered disability savings plans. These explanatory notes describe these amendments, clause by clause, for the assistance of Members of Parliament, taxpayers and their professional advisors.

The Honourable James. M. Flaherty, P.C., M.P.
Minister of Finance


Part 1

Income Tax Act

Clause 1

Income or Loss from a Source or from Sources in a Place – Deductions Applicable

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4(3)(a)

Subsection 4(2) of the Income Tax Act provides that, in determining the income or loss from a source, no deductions are permitted under sections 60 to 64 of the Act. Subsection 4(3) provides that this rule does not apply, with the exception of certain deductions, in determining the foreign source income designated by a trust to a beneficiary under subsections 104(22) and 104(22.1), in determining a taxpayer’s taxable income earned in Canada under section 115 and in determining a taxpayer’s foreign tax credit under section 126 of the Act. The exceptions are for deductions permitted by paragraphs 60(b) to (o), (p), (r) and (v) to (x).

Paragraph 4(3)(a) is amended to expand the list of exceptions to include deductions permitted by existing paragraph 60(y) (repayment of amounts under the Universal Child Care Benefit Act) and proposed new paragraph 60(z) (repayment of amounts under the Canada Disability Savings Act).

This amendment applies to the 2007 and subsequent taxation years.

Clause 2

Deductions – Limitation

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18(11)

Subsection 18(11) of the Act prohibits the deduction of interest on money borrowed to make a contribution to a registered retirement savings plan (RRSP) or certain other deferred income plans.

Subsection 18(11) is amended to extend the prohibition on interest deductibility so that it applies to money borrowed to make a contribution to a registered disability savings plan.

This amendment applies to the 2008 and subsequent taxation years.

Clause 3

Gains and Losses – Limitations

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40(2)(g)

Subparagraph 40(2)(g)(iv) of the Act denies a capital loss arising from the disposition of property by a taxpayer to a trust governed by an RRSP or certain other deferred income plans under which the taxpayer is the annuitant or a beneficiary.

Clause 40(2)(g)(iv)(A) is amended to extend the stop-loss rule so that it applies to the disposition of property by a taxpayer to a trust governed by a registered disability savings plan under which the taxpayer is the beneficiary.

This amendment applies to the 2008 and subsequent taxation years.

Clause 4

Amounts to be Included in Income for Year – Registered Disability Savings Plan Payments

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56(1)(q.1)

Subsection 56(1) of the Act requires that certain amounts be included in computing income.

New paragraph 56(1)(q.1) requires that amounts relating to a registered disability savings plan be included in computing a taxpayer’s income to the extent required by section 146.4 of the Act. Subsection 146.4(6) provides for an income inclusion for the taxable portion of a disability assistance payment made from a registered disability savings plan. For more details, refer to the commentary on new subsections 146.4(6) and (7).

This amendment applies to the 2008 and subsequent taxation years.

Clause 5

Deductions in Computing Income – Repayment under Canada Disability Savings Act

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60(z)

Section 60 of the Act provides for various deductions in computing income.

New paragraph 60(z) provides for a deduction for an amount repaid by a taxpayer under the Canada Disability Savings Act to the extent that the amount was previously included in the taxpayer’s income because of section 146.4 of the Income Tax Act.

This amendment applies to the 2008 and subsequent taxation years.

Clause 6

Attribution Rules – Where Sections 74.1 to 74.3 do not apply

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74.5(12)

Sections 74.1 to 74.5 of the Act provide attribution rules in respect of property transferred by an individual to the individual’s spouse or common-law partner or to certain other individuals under the age of 18 years. Subsection 74.5(12) provides several exceptions from these rules, including an exception for a transfer of property made by way of a premium paid by a taxpayer to an RRSP that is a spousal or common-law partner plan in relation to the taxpayer.

Subsection 74.5(12) is amended to add an exception for contributions made to a registered disability savings plan.

This amendment applies to the 2008 and subsequent taxation years.

Clause 7

Attribution Rules – Trusts – Exceptions

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75(3)(a)

Subsection 75(3) of the Act exempts income from property held by trusts governed by RRSPs and certain other trusts from the application of the attribution rules in subsection 75(2). Subsection 75(2) generally applies to attribute income from trust property to a person where the property was received by the trust from the person and can revert to the person (or pass to other persons determined by that person).

Paragraph 75(3)(a) is amended to extend the exemption so that it applies to property held by a trust governed by a registered disability savings plan.

This amendment applies to the 2008 and subsequent taxation years.

Clause 8

Qualifying Disposition

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107.4(1)

Under subsection 107.4(3) of the Act, a qualifying disposition generally qualifies for a tax-deferred “rollover” of the property to the trust. For this purpose, subsection 107.4(1) defines “qualifying disposition” to be a disposition of property to a trust that does not result in any change in the beneficial ownership of the property and that otherwise meets the conditions set out in that subsection. The condition in paragraph 107.4(1)(j), which applies where the transferor is a trust governed by a registered education savings plan (RESP) or certain other special purpose trusts, requires the transferor trust to be the same type of trust as the transferee trust. For example, if the transferor trust is an RESP trust, the transferee trust must also be an RESP trust for the disposition to be a qualifying disposition.

Paragraph 107.4(1)(j) is amended so that it also applies to a trust governed by a registered disability savings plan.

This amendment applies to the 2008 and subsequent taxation years.

Clause 9

Taxation of Trusts and their Beneficiaries – Definitions

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108(1)

“trust”

For the purposes of the 21-year deemed disposition rule and other specified measures, subsection 108(1) of the Act defines “trust” to exclude certain trusts. Under paragraph (a), trusts governed by RRSPs and other deferred income plans are among the excluded trusts for these purposes.

Paragraph (a) of the definition is amended to add to the list of exclusions a trust governed by a registered disability savings plan.

This amendment applies to the 2008 and subsequent taxation years.

Clause 10

GST Credit - Definitions

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122.5(1)

“adjusted income”

Subsection 122.5(1) of the Act defines a number of terms for the purpose of the goods and services tax credit (GSTC).

The definition “adjusted income” is amended to exclude payments from a registered disability savings plan from the income base upon which the GSTC is calculated.

This amendment applies to the 2008 and subsequent taxation years.

Clause 11

Canada Child Tax Benefit – Definitions

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122.6

“adjusted income”

Section 122.6 of the Act defines a number of terms for the purpose of the Canada Child Tax Benefit (CCTB).

The definition “adjusted income” is amended to exclude payments from a registered disability savings plan from the income base upon which the CCTB is calculated.

This amendment applies to the 2008 and subsequent taxation years.

Clause 12

Changes in Residence - Definitions

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128.1(10)

“excluded right or interest”

Subsection 128.1(10) of the Act defines the expression “excluded right or interest” for the purposes of the taxpayer migration rules in section 128.1. This definition is primarily of relevance for paragraphs 128.1(1)(b) and (4)(b), which treat individuals as having disposed of (and to have immediately reacquired) most of their property on immigrating to or emigrating from Canada. Generally, excluded rights or interests are exempted from these deemed disposition rules. Paragraph (a) of the definition refers to rights under, or an interest in a trust governed by, certain deferred income plans, including RRSPs.

Paragraph (a) of the definition is amended to add a reference to registered disability savings plans. This will ensure that a beneficiary under a registered disability savings plan who immigrates to or emigrates from Canada will not be treated as having disposed of their rights under the plan.

This amendment applies to the 2008 and subsequent taxation years.

Clause 13

Mutual Fund Qualifying Exchanges

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132.2(3)(h)

Section 132.2 of the Act provides rules to allow two mutual fund trusts, or a mutual fund trust and a mutual fund corporation, to merge on a tax-deferred basis. Bill C-33, Income Tax Amendments Act, 2006, included amendments to restructure this section. Proposed paragraph 132.2(3)(h) ensures that such a merger will not cause shares or units of the transferor fund to cease to be qualified investments for trusts governed by RRSPs and certain other registered plans.

Proposed paragraph 132.2(3)(h) is amended to add a reference to the definition “qualified investment” in new subsection 205(1). This amendment, which applies to the 2008 and subsequent taxation years, is consequential to the introduction of registered disability savings plans.

Clause 14

Registered Disability Savings Plans

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146.4

New section 146.4 of the Act provides rules relating to registered disability savings plans.

In general terms, a registered disability savings plan is a trust arrangement, the beneficiary under which qualifies for the disability tax credit, and to which contributions (including grant and bond payments under the Canada Disability Savings Act) are made for the purpose of improving the long-term financial security of the beneficiary. Generally, there can never be more than one registered disability savings plan of a beneficiary at any given time.

The tax treatment of registered disability savings plans is similar, in some respects, to that of registered education savings plans. It is similar in that contributions are not deductible and investment income accrues on a tax-deferred basis. The tax treatment of payments made from registered disability savings plans is, however, quite different. Unlike registered education savings plans, each payment made from a registered disability savings plan is considered to be comprised, in part, of grants and bonds and investment income, and such part is included in the beneficiary’s income when the payment is received.

Section 146.4 applies to the 2008 and subsequent taxation years.

Definitions

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146.4(1)

New subsection 146.4(1) of the Act defines a number of terms that apply for the purposes of new section 146.4.

“assistance holdback amount”

Subsection 146.4(1) defines “assistance holdback amount”, in relation to a disability savings plan, as having the meaning assigned under the Canada Disability Savings Act. (It is expected that the definition will be set out in regulations made pursuant to that Act, rather than in the Act itself.) In general terms, the assistance holdback amount is the amount that the plan would be required, under the Canada Disability Savings Act, to repay to the government if a disability assistance payment were made from the plan – that is, the total amount of grants and bonds paid into the plan (or into any prior registered disability savings plan of the beneficiary) in the ten-year period preceding the disability assistance payment, plus associated investment income.

The definition is relevant for a number of provisions in new section 146.4 of the Act.

“contribution”

Subsection 146.4(1) defines “contribution” to a disability savings plan to exclude amounts paid into the plan under the Canada Disability Savings Act. This ensures, among other things, that grants and bonds paid into a registered disability savings plan under the Canada Disability Savings Act are not taken into account for the purpose of applying the $200,000 lifetime limit (in subparagraph 146.4(4)(e)(iii)) on contributions to registered disability savings plans of a beneficiary, and that grants and bonds are taxable when paid out of registered disability savings plans.

The definition “contribution” also excludes prescribed payments, in anticipation that some provinces may wish to make contributions to registered disability savings plans on behalf of their residents.

These exclusions do not apply for the purpose of paragraph (b) of the definition “disability savings plan” in this subsection. This ensures that an arrangement that receives no amounts other than bonds paid under the Canada Disability Savings Act may still qualify as a disability savings plan.

“director”

Subsection 146.4(1) defines “director” of a disability savings plan of a beneficiary at any time to mean each of the following:

(a) An entity that has, at that time, rights as an entity with whom the issuer entered into the plan. – See the commentary on the definition “disability savings plan” in this subsection for a description of those entities who are permitted to enter into a disability savings plan of a beneficiary;

(b) An entity that has, at that time, rights as a successor or assignee of another director of the plan. – See the commentary on paragraph 146.4(4)(b) for a description of those entities who are permitted to acquire rights as a successor or assignee of a director of a disability savings plan; and

(c) The beneficiary, if the beneficiary has, at that time, rights under the plan to make decisions (either alone or with other directors) concerning the plan. (The beneficiary will not be considered to be a director if the beneficiary’s only such right is to direct that disability assistance payments be made as provided for in subparagraph 146.4(4)(l)(ii).) This paragraph is primarily relevant where the beneficiary of a disability savings plan would not otherwise qualify as a director of the plan under paragraph (a) or (b).

As illustrated in the following examples, a disability savings plan may have several directors throughout its existence and more than one director at any given time.

Example 1

The mother and father of a minor child jointly establish a disability savings plan for the child. – The parents are joint directors of the plan.

Example 2

A father establishes a disability savings plan for his child. The plan provides for decisions regarding the plan to be made solely by the father until the child reaches the age of majority, and then to be made jointly with the child. – The father is the sole director of the plan until the child reaches the age of majority, at which time the father and the child become joint directors of the plan.

Example 3

The mother and father of an adult child with a mental impairment are the legal guardians of the child. The father establishes a disability savings plan for the child. Upon the father’s death, the mother acquires the father’s rights under the plan. – The father and mother are successive directors of the plan.

Example 4

A single mother, of a child with a physical impairment, establishes a disability savings plan for the child. The mother dies while the child is still a minor. The Children’s Aid Society assumes custody and care of the child, and acquires the mother’s rights and obligations under the disability savings plan. Upon reaching the age of majority, the child acquires all rights and obligations under the plan. – The mother, the Children’s Aid Society and the child are successive directors of the plan.

In practice, the directors of a disability savings plan will have the principal decision making authority with respect to the plan, which could include, for example, directing investments and the amount and timing of payouts.

Where an entity becomes a director of a disability savings plan after the plan has been entered into, new paragraph 146.4(4)(c) requires the plan to prohibit the new director from acting as a director (except to the extent otherwise permitted by the Minister or the specified Minister) until such time as the issuer has been advised of the new directorship and been provided with the new director’s Social Insurance Number or business number, as the case may be. The issuer is then required, by new paragraph 146.4(13)(a), to so notify the specified Minister.

A director of a registered disability savings plan will be subject to the provisions of the Act that impose sanctions relating to such plans. This includes new subsection 160.2(2.3), which makes directors jointly liable with the beneficiary (or the beneficiary’s estate) for taxes arising in connection with the deregistration of a non-compliant plan. It also includes new Part XI, which imposes taxes on directors in connection with various transactions relating to the plan, such as the acquisition of a non-qualifying investment or the disposition of an asset for inadequate consideration.

“disability assistance payment”

Subsection 146.4(1) defines a “disability assistance payment” in relation to a disability savings plan of a beneficiary to mean any payment made from the plan to the beneficiary during the beneficiary’s lifetime or to the beneficiary’s estate following the death of the beneficiary. In accordance with the registration condition in new paragraph 146.4(4)(g), disability assistance payments are one of three types of payments that a registered disability savings plan is permitted to make. (The others are transfers in accordance with subsection 146.4(8) and repayments to the government as required under the Canada Disability Savings Act.)

Under subsection 146.4(6), the amount by which a disability assistance payment exceeds the non-taxable portion of the payment (as determined under subsection 146.4(7)) is included in computing the income of the beneficiary or the beneficiary’s estate.

Section 146.4 places no restrictions on the timing or amount of a disability assistance payment, or on the use to which such a payment is put, apart from:

Under the Canada Disability Savings Act, a disability assistance payment made from a registered disability savings plan at a time when there is an assistance holdback amount in relation to the plan will trigger a requirement for the plan to repay the assistance holdback amount to the government.

“disability savings plan”

Subsection 146.4(1) defines “disability savings plan” of a beneficiary to be an arrangement, between a trust company (the “issuer”) and one or more other entities, that is entered into in a year in which the beneficiary is a DTC-eligible individual (as defined in this subsection) and under which contributions are to be invested and used by the issuer to make payments to the beneficiary. (For the purposes of this definition, contributions include payments made into the plan under the Canada Disability Savings Act. This ensures that an arrangement that receives no amounts other than bonds paid under the Canada Disability Savings Act does not fail to qualify as a disability savings plan.)

The definition “disability savings plan” requires that the issuer be licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada the business of offering to the public its services as trustee. In addition, the definition requires that, at the time the arrangement is entered into, there be an agreement between the issuer and the specified Minister (i.e., the Minister of Human Resources and Social Development) that applies to the arrangement for the purposes of the Canada Disability Savings Act.

The definition also limits the entity (or entities) with whom the issuer can enter into the arrangement to the beneficiary and any entity that is, at the time the arrangement is entered into, a qualifying person in relation to the beneficiary. Subsection 146.4(1) defines “qualifying person” as

This means that, if the beneficiary is of the age of majority and contractually competent, no one other than the beneficiary can enter into the arrangement with the issuer. Only if the beneficiary is a minor, or is not otherwise contractually competent, can entities other than the beneficiary enter into the arrangement.

The definition also allows a “director” (as defined in this subsection) of a pre-existing registered disability savings plan of the beneficiary to enter into a new disability savings plan of the beneficiary. However, subsection 146.4(3) generally requires that the pre-existing plan be wound-up within 120 days of the new arrangement being entered into, in order for the new plan to qualify as a registered disability savings plan. In the course of the wind-up, funds from the pre-existing plan can be transferred to the new plan on a tax-free basis under subsection 146.4(8).

“DTC-eligible individual”

Subsection 146.4(1) defines an individual to be a “DTC-eligible individual” in respect of a year if the individual has a severe and prolonged physical or mental impairment in respect of which the individual, or another person, is entitled to a deduction under section 118.3 of the Act (generally referred to as the “disability tax credit”) in computing tax payable for the year, or would be so entitled if the restriction for attendant care in paragraph 118.3(1)(c) of the Act were disregarded.

This definition is relevant for the definition “disability savings plan” in this subsection, because the beneficiary of the plan must be a DTC-eligible individual in respect of the year in which the plan is entered into in order for the plan to be a disability savings plan. It is also relevant for paragraph 146.4(4)(d), which prohibits contributions in any year in respect of which the beneficiary is not a DTC-eligible individual, and for paragraph 146.4(4)(n), which requires a registered disability savings plan to be terminated by the end of the year following the year in respect of which the beneficiary ceases to be a DTC-eligible individual (or, where DTC-eligibility is in dispute, by such later time as may be specified by the Minister in accordance with new paragraph 146.4(12)(d)).

“life expectancy”

Subsection 146.4(1) defines “life expectancy” of a beneficiary under a disability savings plan, determined for a year in connection with the plan. The definition is relevant for paragraph 146.4(4)(j), which limits the amount of lifetime disability assistance payments that can be paid from a registered disability savings plan in any given year. In general terms, the maximum amount that can be so paid is equal to the value of the assets of the plan at the beginning of the year divided by a factor equal to three plus the remaining number of years the beneficiary is expected to live based on the beneficiary’s “life expectancy”.

“Life expectancy” is generally defined to be the beneficiary’s life expectancy at birth for the year of the beneficiary’s birth, the beneficiary’s sex and the beneficiary’s province of birth, or for Canada if the beneficiary was not born in a province – as determined by Statistics Canada. (This information will be made available on the Canada Revenue Agency website.)

However, there are two exceptions to this manner for determining life expectancy.

“lifetime disability assistance payments”

Subsection 146.4(1) defines “lifetime disability assistance payments” under a disability savings plan of a beneficiary to be disability assistance payments (as defined in this subsection)

This definition is primarily relevant for two of the registration conditions set out in subsection 146.4(4).

“plan trust”

Subsection 146.4(1) defines “plan trust” in relation to a disability savings plan to be the trust governed by the plan. This definition is provided simply for ease of reference.

“qualifying person”

Subsection 146.4(1) defines “qualifying person” in relation to a beneficiary of a disability savings plan at any time to mean each of the following:

Thus, there are no qualifying persons in relation to a beneficiary who is of the age of majority and contractually competent at the time in question. If a beneficiary is not contractually competent, the beneficiary’s guardian, tutor or curator or the department, agency or institution maintaining the beneficiary is a qualifying person in relation to the beneficiary. A legal parent of a minor beneficiary is also a qualifying person in relation to the beneficiary, even if the parent is not the beneficiary’s guardian, tutor or curator.

This definition is relevant for clause (a)(ii)(B) of the definition “disability savings plan” in this subsection and for subparagraph 146.4(4)(b)(iv). The former allows a disability savings plan of a beneficiary to be established by an entity that is, at the time the plan is established, a qualifying person in relation to the beneficiary. The latter allows an entity to acquire rights as a successor or assignee of a director of a disability savings plan of a beneficiary if the entity is, at the time the rights are acquired, a qualifying person in relation to the beneficiary.

“registered disability savings plan”

Subsection 146.4(1) defines “registered disability savings plan” to be a “disability savings plan” (as defined in this subsection) that satisfies the conditions in subsection 146.4(2).

By virtue of this definition, a disability savings plan that satisfies the conditions in subsection 146.4(2) is a registered plan as of the time it is entered into. Unlike other registered plans (e.g., registered retirement savings plans, registered education savings plans), there is no requirement that the Minister of National Revenue accept the particular plan for registration.

However, if the conditions set out in subsection 146.4(3) are not subsequently satisfied, that subsection deems the plan never to have been a registered disability savings plan (i.e., the registered status conferred by subsection 146.4(2) is rescinded retroactively to the time when the plan was entered into). Subsection 146.4(3) requires that, within 60 days of the plan being entered into, the issuer notify the “specified Minister” (as defined in this subsection) of the plan’s existence, and that the issuer do so in prescribed form containing prescribed information. That subsection also requires that, within 120 days of the plan being entered into, any pre-existing registered disability savings plan of the beneficiary be terminated.

The definition “registered disability savings plan” also excludes a plan to which subsection 146.4(10) applies. Under that subsection, a registered disability savings plan that is non-compliant (as described in subsection 146.4(11) and subject to subsection 146.4(12)) ceases, as of the time that it becomes non-compliant, to be a registered plan.

“specified Minister”

Subsection 146.4(1) defines “specified Minister” to be the Minister designated for purposes of the Canada Disability Savings Act. This will be the Minister for Human Resources and Social Development. (By virtue of subsection 248(1), references in this section to “Minister” – rather than “specified Minister” – mean the Minister of National Revenue.)

Registered Status

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146.4(2)

New subsection 146.4(2) of the Act sets out the conditions that must be satisfied in order for a disability savings plan to be a registered disability savings plan, as defined in new subsection 146.4(1).

Paragraph 146.4(2)(a) requires that, before entering into the plan, the issuer of the plan receive written notification from the Minister of National Revenue that, in the Minister’s opinion, a plan with identical terms would, if entered into, comply with the conditions in subsection 146.4(4) – as would be the case if the plan were issued under a specimen plan that had previously been approved by the Minister. (Refer to the commentary on subsection 146.4(4) for further information.)

Paragraph 146.4(2)(b) requires that the issuer be provided, at or before the time the plan is entered into, with the Social Insurance Numbers of the beneficiary and of each of the entities entering into the plan. In other words, the plan cannot be established before this information is provided to the issuer.

Paragraph 146.4(2)(c) requires that, except in transfer situations, the beneficiary be resident in Canada when the plan is entered into.

By virtue of the definition “registered disability savings plan”, a disability savings plan that satisfies the conditions in this subsection is a registered plan as of the time it is entered into. Unlike other registered plans, there is no requirement that the Minister of National Revenue accept the particular plan for registration.

However, if the conditions set out in subsection 146.4(3) are not subsequently satisfied, that subsection deems the plan never to have been a registered disability savings plan (i.e., the registered status conferred by subsection 146.4(2) is rescinded retroactively to the time when the plan was entered into). (Refer to the commentary on subsection 146.4(3) for further information.)

Registered Status Nullified

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146.4(3)

New subsection 146.4(3) of the Act deems a disability savings plan never to have been a registered disability savings plan if the conditions set out in that subsection are not met. The effect of this provision is that the registered status that was automatically conferred on the plan by virtue of subsection 146.4(2) is rescinded retroactively to the time when the plan was entered into. (Refer to the commentary on subsection 146.4(2) for further information.)

Under paragraph 146.4(3)(a), the issuer is required, within 60 days of the plan being entered into, to notify the ”specified Minister” (i.e., the Minister of Human Resources and Social Development) of the plan’s existence, and to do so in prescribed form containing prescribed information.

If, at the time the plan was entered into, the beneficiary was a beneficiary under another registered disability savings plan, paragraph 146.4(3)(b) requires that the other plan be terminated within 120 days of the new plan being entered into (or by such later day as the specified Minister considers reasonable in the circumstances). If the pre-existing plan is not terminated within the specified timeframe, it maintains its registered status, but the registration of the new plan is nullified by the application of this subsection. This ensures that, except for the time that it takes to process a transfer from one issuer to another, a beneficiary should not have more than one registered disability savings plan at any given time.

Plan Conditions

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146.4(4)

New subsection 146.4(4) of the Act sets out conditions applicable to registered disability savings plans.

In order for a disability savings plan to be a registered disability savings plan, new paragraph 146.4(2)(a) requires that the issuer have received prior notification from the Minister of National Revenue that, in the Minister’s opinion, a plan identical to the plan would, if entered into, comply with the conditions in this subsection.

In order for a registered disability savings plan to maintain its registered status, new paragraph 146.4(11)(a) of the Act (in conjunction with new subsection 146.4(10) of the Act) requires that the plan continue to comply with the conditions in this subsection. Failure to administer a registered disability savings plan in accordance with its terms will also generally cause the plan to be deregistered. (Refer to the commentary on subsections 146.4(10) to (12) for further information.)

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146.4(4)(a)

Under new paragraph 146.4(4)(a) of the Act, a registered disability savings plan must stipulate that it is to be operated exclusively for the benefit of the beneficiary. Given the difficulty inherent in having to determine if a registered disability savings plan is always being administered in accordance with this particular plan term, failure to so administer will not cause the plan to be deregistered. However, if the beneficiary (or the beneficiary’s legal representative) is of the opinion that the plan is not being operated exclusively for the benefit of the beneficiary, this explicit provision in the plan should assist in seeking legal recourse for the beneficiary to acquire control of the plan from the existing directors.

Paragraph 146.4(4)(a) also requires that the plan stipulate that the designation of the beneficiary is irrevocable, and that no right of the beneficiary to receive payments from the plan is capable of surrender or assignment.

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146.4(4)(b) and (c)

New paragraphs 146.4(4)(b) and (c) contain requirements relating to the acquisition of rights under a registered disability savings plan after the plan is entered into.

Paragraph 146.4(4)(b)

Paragraph 146.4(4)(b) requires that the plan allow an entity to acquire rights as a successor or assignee of a director of the plan only if the entity is one of the following: the beneficiary, the beneficiary’s estate, a current or previous director of the plan, or a qualifying person in relation to the beneficiary. Upon acquiring such rights, the successor or assignee becomes a director of the plan. (Refer to the commentary on the definitions “director” and “qualifying person” in subsection 146.4(1) for further information.)

Paragraph 146.4(4)(c)

Paragraph 146.4(4)(c) requires a plan to prohibit a new director from acting as director (except to the extent otherwise permitted by either the Minister or the specified Minister) until such time as the issuer has been advised of the new directorship and been provided with the new director’s Social Insurance Number or business number, as the case may be.

When an entity becomes a director of a disability savings plan after the plan is entered into, the issuer is required, under new paragraph 146.4(13)(a), to inform the specified Minister of the new directorship no later than 60 days after the later of the day on which the issuer is advised of the new directorship and the day on which the issuer is provided with the new director’s Social Insurance Number or business number, as the case may be.

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146.4(4)(d) to (f)

New paragraphs 146.4(4)(d) to (f) contain restrictions on contributions to a registered disability savings plan. (By virtue of the definition “contribution” in subsection 146.4(1), these restrictions do not apply to grants and bonds paid into the plan under the Canada Disability Savings Act.)

Paragraph 146.4(4)(d)

Paragraph 146.4(4)(d) requires that the plan prohibit contributions from being made in a year in respect of which the beneficiary is no longer a DTC-eligible individual. (Refer to the commentary on the definition “DTC-eligible individual” in subsection 146.4(1) for further information.) It also requires that the plan prohibit contributions after the death of the beneficiary.

Paragraph 146.4(4)(e)

Paragraph 146.4(4)(e) requires that the plan prohibit contributions from being made after the year in which the beneficiary turns 59 years of age, or at a time when the beneficiary is not resident of Canada. It also requires that the plan prohibit a contribution from being made if the total of the contribution and all other contributions to registered disability savings plans of the beneficiary would exceed $200,000. The prohibitions in paragraph 146.4(4)(e) do not apply to contributions made by way of a transfer made in accordance with new subsection 146.4(8).

Paragraph 146.4(4)(f)

Paragraph 146.4(4)(f) requires that the plan prohibit contributions by an entity that is not a director of the plan, except with the written consent of a director of the plan. This allows the director to schedule contributions so as to maximize access to grants payable under the Canada Disability Savings Act.

ITA
146.4(4)(g) to (l)

New paragraphs 146.4(4)(g) to (l) contain requirements relating to payments from a registered disability savings plan.

Paragraph 146.4(4)(g)

Paragraph 146.4(4)(g) requires that the plan provide that no payments may be made from the plan other than

Paragraph 146.4(4)(h)

Paragraph 146.4(4)(h) requires that the plan prohibit a disability assistance payment being made from the plan if the payment would cause the value of the plan’s assets to fall below the assistance holdback amount. (See the commentary on the definition “assistance holdback amount” in subsection 146.4(1) for further information). The purpose of this provision is to ensure that the plan has sufficient assets to satisfy any potential obligations to repay grants and bonds (and associated investment income) under the Canada Disability Savings Act.

Paragraph 146.4(4)(i)

Paragraph 146.4(4)(i) requires that the plan provide for lifetime disability assistance payments to commence no later than the end of the year in which the beneficiary turns 60 years of age. Subsection 146.4(1) defines “lifetime disability assistance payments” as disability assistance payments (simply, payments from the plan to the beneficiary) that are identified under the terms of the plan to be lifetime disability assistance payments and that, once they begin to be paid, are payable at least annually until the beneficiary dies or the plan is terminated. Paragraph 146.4(4)(j) sets a limit on the total amount of lifetime disability assistance payments that can be made in any year. (See the commentary on that paragraph for further information.)

If the plan is established in the year the beneficiary turns 60 years of age or a later year (which could occur only if the plan is being set up to receive funds transferred from another registered disability savings plan of the beneficiary), paragraph 146.4(4)(i) does not require the plan to provide for the commencement of lifetime disability assistance payments until the end of the year following the year in which the plan is established.

Paragraph 146.4(4)(j)

Paragraph 146.4(4)(j) requires that the plan limit the total amount of lifetime disability assistance payments that can be made in any given year to the amount determined in accordance with the formula set out in that paragraph. The limit determined under the formula would generally allow equal annual payments to be made for the remainder of the beneficiary’s lifetime, plus an additional three years.

The formula set out in paragraph 146.4(4)(j) is as follows:

A/(B + 3 – C) + D

Variable A is generally the fair market value of the plan’s assets at the beginning of the year. However, if the plan holds a “locked-in” annuity (as described below), that annuity is disregarded in determining the value of the plan’s assets.

Variable B is the beneficiary’s “life expectancy” for the year in connection with the plan as defined in subsection 146.4(1). Generally, this is the beneficiary’s life expectancy (expressed in whole years) at birth as determined by Statistics Canada. However, there are two exceptions for determining life expectancy in this manner.

Variable C is the beneficiary’s age (expressed in whole years) at the beginning of the year for which the limit is being determined.

Variable D applies only if, at the beginning of the year for which the limit is being determined, the plan trust holds a certain type of annuity (referred to in this commentary as a “locked-in” annuity). A locked-annuity is an annuity that is described in paragraph (c) – but not in paragraph (b) – of the definition “qualified investment” in new subsection 205(1). An annuity described in paragraph (c) of that definition would also be described in paragraph (b) if the holder has the right to surrender it at any time.

Where the plan trust holds a locked-in annuity at the beginning of the year, variable D is the total amount of periodic payments received by the trust in the year under the annuity. If the trust disposed of the right to such payments in the year for which the limit is being determined, variable D is an estimate of the payments that the trust would otherwise have received. This ensures that, where a trust governed by a registered disability savings plan holds a locked-in annuity, the annual limit on lifetime disability assistance payments will never be less than the annuity payments to be received by the trust in that year.

By virtue of subsections 146.4(6) and (7), the beneficiary is required to include in income for a year the taxable portion of each lifetime disability assistance payment received in the year. (Refer to the commentary on those subsections for more information.)

The amount determined by the formula in paragraph 146.4(4)(j) is also relevant for paragraph 146.4(4)(l). (Refer to the commentary on that paragraph for further information.)

Paragraph 146.4(4)(k)

Paragraph 146.4(4)(k) requires that the plan specify whether or not disability assistance payments that are not lifetime disability assistance payments are permitted.

Paragraph 146.4(4)(l)

Paragraph 146.4(4)(l) requires that the plan contain certain provisions that apply when, at the end of any particular calendar year, the total amount of grants and bonds paid into registered disability savings plans of the beneficiary under the Canada Disability Savings Act exceeds the total amount of private contributions. These plan provisions serve to impose limits on, and provide the beneficiary with rights relating to, disability assistance payments that may be made in the year following the particular year. (In these notes, the following year is referred to as the “restricted year”.)

Under subparagraph 146.4(4)(l)(i), the plan must limit the total amount of disability assistance payments that can be paid to the beneficiary in the restricted year to the amount determined for that year under the formula set out in paragraph 146.4(4)(j). In other words, the limit that would otherwise apply to lifetime disability assistance payments, if any, made from the plan in the restricted year applies instead to all disability assistance payments made from the plan in that year (whether as lifetime disability assistance payments or otherwise). This limitation applies if the beneficiary is less than 59 years of age at the end of the particular year.

If the beneficiary is between 27 and 58 years of age at the end of the particular year, subparagraph 146.4(4)(l)(ii) requires that the plan provide the beneficiary with the right to direct that disability assistance payments be made to the beneficiary in the restricted year. The requirement that the beneficiary be at least 27 years of age is intended to ensure that beneficiary-directed disability assistance payments do not trigger a repayment of grants and bonds paid into the plan while the beneficiary was a minor.

The plan must stipulate that beneficiary-directed payments made pursuant to this provision are subject to the constraints imposed by paragraph 146.4(4)(h) and subparagraph 146.4(4)(l)(i). This means that a beneficiary-directed payment cannot be made if the payment would cause the value of the plan’s assets to fall below the assistance holdback amount. It also means that beneficiary-directed payments, when added to all other disability assistance payments made to the beneficiary in the restricted year (whether as lifetime disability assistance payments or otherwise), must not exceed the amount determined for that year under the formula set out in paragraph 146.4(4)(j).

This plan provision will be of relevance primarily to a beneficiary who would otherwise have little or no say in the amount and timing of disability assistance payments to be made from the plan, typically because the plan was established when the beneficiary was a minor. (As is the case for other decision making related to financial matters, normal rules of legal competency determined under provincial laws would apply to the ability of a beneficiary to direct that such payments be made.)

If the beneficiary is at least 59 years of age at the end of the particular year, subparagraph 146.4(4)(l)(iii) creates a minimum withdrawal requirement. Specifically, it requires that the plan provide for the total of all disability assistance payments made to the beneficiary in the restricted year (whether as lifetime disability assistance payments or otherwise) to be equal to the amount determined for that year under the formula set out in paragraph 146.4(4)(j). In effect, this requires a minimum payment in the restricted year of an amount equal to the maximum limit on lifetime disability assistance payments for that year. (If the value of the assets declines during the restricted year to such an extent that it is not possible to satisfy this requirement, it will suffice for the plan to pay whatever amounts are supported by the value of the depreciated assets.)

The requirements of subparagraphs 146.4(4)(l)(i) and (iii) do not apply to disability assistance payments made to the beneficiary’s estate after the death of the beneficiary.

ITA
146.4(4)(m)

Paragraph 146.4(4)(m) requires the plan to provide that the issuer will, when directed to do so by the directors of the plan, transfer all the property held by the plan trust (or an amount equal to its value) to another registered disability savings plan of the beneficiary, together with all information in the issuer’s possession that may be considered necessary for the new plan to comply with the requirements of this Act and with any conditions and obligations imposed under the Canada Disability Savings Act.

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146.4(4)(n)

Paragraph 146.4(4)(n) deals with the termination of the plan following the beneficiary’s death or cessation of DTC eligibility.

Specifically, if, in respect of a particular year following the year in which the plan was entered into, the beneficiary fails to qualify as a “DTC-eligible individual” (as defined in subsection 146.4(1)), the plan must provide for any amounts remaining in the plan (after taking into account any repayments under the Canada Disability Savings Act) to be paid to the beneficiary, and for the plan to be terminated, by the end of the year following the particular year. Although the plan must provide for termination within this timeframe, paragraph 146.4(12)(d) allows the Minister to effectively suspend termination, if the beneficiary’s DTC status is uncertain or in dispute, until such time as the issue is resolved. (Refer to the commentary on that paragraph for further information.)

Similarly, in the event of the beneficiary’s death, the plan must provide for any amounts remaining in the plan (after taking into account any repayments under the Canada Disability Savings Act) to be paid to the beneficiary’s estate, and for the plan to be terminated, by the end of the year following the year of the beneficiary’s death.

Trust Not Taxable

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146.4(5)

New subsection 146.4(5) of the Act generally provides that no income tax is payable by a trust governed by a registered disability savings plan. However, there are situations in which the trust is taxable.

Taxation of Disability Assistance Payments

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146.4(6)

New subsection 146.4(6) of the Act provides for a portion of each disability assistance payment made from a registered disability savings plan to be included in the income of the beneficiary for the year in which the payment is made. If the beneficiary is not alive at that time, the amount is included in the income of the beneficiary’s estate for the year of the payment.

The amount included in income under this subsection is the amount by which the payment exceeds the non-taxable portion of the payment as determined under new subsection 146.4(7). In general terms, the proportion of the payment that is non-taxable is the same as the proportion that total contributions is to the total value of the plan’s assets.

This provision, in effect, allows contributions to be paid out of the plan on a tax-free basis (recognizing that contributions are not deductible), while taxing grants and bonds paid into the plan under the Canada Disability Savings Act and investment income earned in the plan.

Non-Taxable Portion of Disability Assistance Payment

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146.4(7)

New subsection 146.4(7) of the Act sets out the manner for determining the non-taxable portion of a disability assistance payment for the purpose of new subsection 146.4(6).

In general terms, the proportion of a disability assistance payment that is non-taxable is the same as the proportion that total contributions is to the total value of the plan’s assets. More specifically, the non-taxable portion of a disability assistance payment is the amount determined by the formula

A x B/C

Variable A is the amount of the disability assistance payment.

Variable B, in general terms, represents the contributions paid to registered disability savings plans of the beneficiary that have not been used in determining the non-taxable portion of previous disability assistance payments, i.e., the running balance of amounts that remain to be withdrawn on a non-taxable basis. More specifically, Variable B is the amount by which contributions previously made to registered disability savings plans of the beneficiary exceed the non-taxable portions of all disability assistance payments previously made from registered disability savings plans of the beneficiary.

Variable C is the amount by which the value of the plan’s assets immediately before the payment exceeds the assistance holdback amount in relation to the plan. The exclusion of the assistance holdback amount reflects the conditional nature of grants and bonds paid under the Canada Disability Savings Act (and associated income) for the 10-year period following the payment of the grant or bond into the plan.

Subsection 146.4(7) provides that the amount determined thereunder will never be greater than the amount of the disability assistance payment. This deals with the fact that, in certain circumstances, the value of Variable B may exceed the value of Variable C. In such circumstances, the non-taxable portion of the disability assistance payment would, but for this provision, exceed the amount of the payment itself. While this would have no impact on the taxation of the payment – it would be fully non-taxable under subsection 146.4(6) – it would unfairly reduce the running balance of amounts that can subsequently be withdrawn on a tax-free basis.

Transfer of Funds

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146.4(8) and (9)

New subsections 146.4(8) and (9) of the Act provide rules governing transfers from one registered disability savings plan of a beneficiary to another.

The transfer of an amount from a registered disability savings plan of a beneficiary is in accordance with subsection 146.4(8) if the conditions set out in that subsection are met. These conditions are as follows:

In accordance with the registration condition in new paragraph 146.4(4)(g), a transfer in accordance with subsection 146.4(8) is one of three types of payments that a registered disability savings plan is permitted to make.

New subsection 146.4(9) of the Act provides that a transfer from a registered disability savings plan in accordance with subsection 146.4(8) will not (solely because of the transfer) be included in any taxpayer’s income.

Non-Compliance – Cessation of Registered Status

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146.4(10) to (12)

New subsections 146.4(10) to (12) of the Act contain provisions dealing with non-compliant registered disability savings plans.

Subsection 146.4(10) describes the consequences of a registered disability savings plan being non-compliant; subsection 146.4(11) sets out the circumstances in which a plan is considered to be non-compliant; and subsection 146.4(12) provides authority for the Minister of National Revenue to modify the application of subsection 146.4(11).

Subsection 146.4(10)

Subsection 146.4(10) outlines the consequences of a registered disability savings plan becoming non-compliant.

If a registered disability savings plan becomes non-compliant at any time, it loses its registered status, as of that time, by virtue of the application of paragraph 146.4(10)(a).

If a plan loses its registered status under paragraph 146.4(10)(a), paragraph 146.4(10)(b) deems the plan to have made a disability assistance payment to the beneficiary (or, if the beneficiary is deceased, to the beneficiary’s estate) immediately before the deregistration of the plan. The deemed payment is equal to the value of the plan’s assets immediately before deregistration less the “assistance holdback amount” in relation to the plan as defined in subsection 146.4(1). (The exclusion of the assistance holdback amount is in recognition of the fact that the plan will be required by the Canada Disability Savings Act to repay this amount to the government.) By virtue of subsection 146.4(6), the taxable portion of this deemed payment is included in the income of the beneficiary (or the beneficiary’s estate) for the year in which the payment is deemed to have been made.

If a plan becomes deregistered under paragraph 146.4(10)(a) because all or part of the assistance holdback amount in relation to the plan is included in a disability assistance payment in contravention of paragraph 146.4(4)(h), paragraph 146.4(10)(c) deems the plan to have made an additional disability assistance payment equal to the portion of the assistance holdback amount so paid out. As in paragraph 146.4(10)(b), the payment is deemed to have been made immediately before the plan’s deregistration, and to have been made to the beneficiary or the beneficiary’s estate, as the case may be. Paragraph 146.4(10)(c) also deems the non-taxable portion of the payment to be nil, which results in the whole amount of the deemed payment being included in income. New paragraph 60(z) of the Act provides for an offsetting deduction if this amount is subsequently repaid to the government.

Subsection 146.4(11)

Subsection 146.4(11) of the Act describes the circumstances in which a registered disability savings plan is considered to be non-compliant.

A registered disability savings plan is non-compliant under paragraph 146.4 (11)(a) at any time at which it fails to comply with a condition in subsection 146.4(4).

A registered disability savings plan is non-compliant under paragraph 146.4(11)(b) at any time at which there is a failure to administer the plan in accordance with its terms. An exception is made for a failure to administer the terms of the plan which stipulate – as required by new subparagraph 146.4(4)(a)(i) – that the plan is to be operated exclusively for the benefit of the beneficiary. This exception recognizes the difficulty inherent in determining if a registered disability savings plan is being operated exclusively for the benefit of the beneficiary. Although such a failure will not cause the plan to become non-compliant, the explicit inclusion of this stipulation in the plan terms should assist the beneficiary (or the beneficiary’s legal representative) in seeking legal recourse to acquire control of the plan if they have reason to believe that the plan is not being operated exclusively for the beneficiary’s benefit.

A registered disability savings plan is non-compliant under paragraph 146.4(11)(c) at any time at which a person fails to comply with a condition or an obligation imposed under the Canada Disability Savings Act, but only if the specified Minister (i.e., the Minister of Human Resources and Social Development) is of the opinion that the plan should be considered non-compliant (and thus deregistered) because of the failure, and so notifies the Minister of National Revenue.

Subsection 146.4(12)

Subsection 146.4(12) of the Act provides authority for the Minister of National Revenue to modify the application of paragraphs 146.4(11)(a) and (b). In some cases, the effect is that deregistration is avoided; in others, deregistration is deferred.

Under paragraph 146.4(12)(a), if a plan does not comply with the conditions in subsection 146.4(4) or is not administered in accordance with its terms, the Minister may, if it is just and equitable to do so, waive the application of the paragraph in subsection 146.4(11) that would otherwise result in the plan being considered to be non-compliant. If the Minister waives the application of the relevant paragraph, the plan is not considered to be non-compliant and, accordingly, is not deregistered.

Under paragraph 146.4(12)(b), the Minister may deem the failure that causes a plan to be non-compliant to have occurred at a later time. This will have the effect of deferring the effective date of deregistration.

Paragraph 146.4(12)(c) deals with contributions made to a registered disability savings plan that are prohibited under any of paragraphs 146.4(4)(d) to (f). In general terms, those paragraphs prohibit contributions made after the beneficiary has died, ceased to be DTC-eligible, turned 60 years of age or ceased to be resident, as well as contributions in excess of a $200,000 lifetime limit and non-director contributions made without consent.

Paragraph 146.4(12)(c) provides the Minister with the authority to waive the application of the provisions of subsection 146.4(11) that would otherwise cause the plan to become non-compliant when a non-permissible contribution has been made, if the contribution is withdrawn from the plan within such period of time as specified by the Minister.

Where the withdrawal condition is satisfied and the Minister agrees to the application of paragraph 146.4(12)(c), the prohibited contribution is deemed never to have been made, thus ensuring that it does not cause the plan to be considered non-compliant under subsection 146.4(11). In addition, the withdrawal is deemed not to be a disability assistance payment, thus ensuring that no portion of the payment is taxable under new subsection 146.4(6). Finally, the withdrawal is deemed not to be in contravention of paragraph 146.4(4)(g), thus ensuring that the plan is not deregistered for having made a non-permissible payment.

Paragraph 146.4(12)(d) deals with situations in which the beneficiary of a registered disability savings plan dies or ceases to be a DTC-eligible individual, and the plan is not terminated by the end of the following year, as required under paragraph 146.4(4)(n). Under normal circumstances, the plan would become non-compliant immediately after the deadline set out in paragraph 146.4(4)(n).

However, if the failure to terminate was due either to the issuer not being aware of the beneficiary having died or having ceased to be DTC-eligible or to there being some uncertainty with respect to the beneficiary’s DTC status, paragraph 146.4(10)(d) allows the Minister to specify a later date as of which the plan must be terminated. (The date so chosen must, in the Minister’s opinion, be sufficient to allow for the plan to be terminated in an orderly manner.) This later date is then considered to be the date as of which the Act and the plan required the plan to be terminated. If the plan is not subsequently terminated by that date, it becomes non-compliant at that time.

This provision will allow a registered disability savings plan in respect of which the beneficiary’s DTC status is uncertain or in dispute to continue until such time as the issue is resolved. The practical effect of the provision is that, where the Minister is of the opinion that the beneficiary is no longer a DTC-eligible individual but the directors or the beneficiary disagree, the Minister can indicate that there is no requirement to terminate the plan until a definitive determination of the beneficiary’s DTC status has been made. If DTC eligibility is subsequently confirmed, then no termination is (or was ever) required. If, on the other hand, it is determined that the beneficiary is no longer DTC-eligible, the Minister will set a new deadline as of which the plan has to be terminated.

Obligations of Issuer

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146.4(13)

New subsection 146.4(13) of the Act imposes obligations on the issuer of a registered disability savings plan. Where the issuer of a registered disability savings plan fails to comply with an obligation imposed under this subsection, the issuer will be subject to a penalty, under subsection 162(7) of the Act, equal to $25 per day of default (subject to a $100 minimum and a $2,500 maximum).

If an entity becomes a director of a registered disability savings plan after the plan is entered into, paragraph 146.4(13)(a) requires that the issuer notify the specified Minister (i.e., the Minister of Human Resources and Social Development), in prescribed form containing prescribed information, of the new directorship. It requires that the issuer do so no later than 60 days after the later of the day on which the issuer is notified of the new directorship and the day on which the issuer is provided with the new director’s Social Insurance Number or business number, as the case may be. (The registration condition in new paragraph 146.4(4)(c) prohibits a new director from acting as a director before the issuer is provided with this information.)

Paragraph 146.4(13)(b) requires that the issuer of a registered disability savings plan not amend the plan without prior written notification from the Minister of National Revenue that, in the Minister’s opinion, a plan with terms identical to the terms of the amended plan would comply with the conditions in subsection 146.4(4).

If the issuer of a registered disability savings plan becomes aware that the plan is (or is likely to become) non-compliant as described in paragraph 146.4(11)(a) or (b) – i.e., it does not comply with the conditions in subsection 146.4(4) or is not being administered in accordance with its terms – paragraph 146.4(13)(c) requires that the issuer notify the Minister of National Revenue and the Minister of Human Resources and Social Development of this fact within 30 days of becoming so aware. For this purpose, non-compliance is determined without regard for the discretionary provisions of subsection 146.4(12).

Paragraph 146.4(13)(d) requires that the issuer of a registered disability savings plan exercise the care, diligence and skill of a reasonably prudent person to minimize the possibility that a director of the plan may become liable to pay tax, in connection with the plan, under new Part XI of the Act. That Part imposes taxes on registered disability savings plan directors in connection with various transactions relating to the plan, such as the acquisition of non-qualifying investments and the disposition of assets for inadequate consideration.

Clause 15

Trusts under Registered Disability Savings Plans

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149(1)

New paragraph 149(1)(u.1) of the Act exempts from tax under Part I trusts governed by a registered disability savings plan, to the extent provided by new section 146.4. Subsection 146.4(5) provides that no tax is payable under Part I on the taxable income of a trust governed by a registered disability savings plan, except in very limited circumstances where the trust borrows money, carries on a business or holds non-qualified investments. For more details, refer to the commentary to that subsection.

This amendment applies to the 2008 and subsequent taxation years.

Clause 16

Withholding

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153(1)(i)

Section 153 of the Act authorizes the withholding of tax from any of the payments described in subsection 153(1).

New paragraph 153(1)(i) is added to authorize the withholding of tax on payments from a registered disability savings plan. It is intended that Part I of the Income Tax Regulations be amended to require such withholding. It is expected that the Regulations will allow $15,000 to be withdrawn each year without being subject to withholding and that payments in excess of that amount will be subject to the same withholding rates that apply to payments from a registered retirement income fund in excess of the minimum amount. Only the taxable portion of the payment (as determined under subsections 146.4(6) and (7) of the Act) will be taken into account in determining the applicable withholding rate.

This amendment applies to the 2008 and subsequent taxation years.

Clause 17

Joint and Several Liability – Registered Disability Savings Plan

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160.2(2.3)

New subsection 160.2(2.3) of the Act applies to registered disability savings plans. In general terms, it makes the director jointly liable with the beneficiary (or the beneficiary’s estate) for taxes arising in connection with the deregistration of a non-compliant plan in accordance with new subsection 146.4(10).

If a registered disability savings plan loses its registered status, paragraph 146.4(10)(b) deems the plan to have made a disability assistance payment to the beneficiary (or, if the beneficiary is deceased, to the beneficiary’s estate) immediately before the deregistration of the plan. In limited circumstances, paragraph 146.4(10)(c) deems an additional disability assistance payment to have been made to the beneficiary (or the beneficiary’s estate). By virtue of subsection 146.4(6), the taxable portion of these deemed payments is included in the income of the beneficiary (or the beneficiary’s estate) for the year in which the payment is deemed to have been made. For more details, refer to the commentary on subsection 146.4(10).

New subsection 160.2(2.3) provides that, where a taxpayer (the beneficiary or the beneficiary’s estate) is required to include in income an amount in respect of a disability assistance payment that is deemed by subsection 146.4(10) to have been made from a registered disability savings plan, each director of the plan is jointly and severally, or solidarily, liable for the portion of the taxpayer’s tax that is attributable to the deemed payment. The Minister of National Revenue may reassess each director for such a liability under subsection 160.2(3).

The expression “director” is defined in subsection 146.4(1). A director of a registered disability savings plan is generally the person that has (or the persons that have) the principal decision making authority with respect to the plan.

This amendment applies to the 2008 and subsequent taxation years.

No Limitation on Liability

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160.2(2.4)

New subsection 160.2(2.4) of the Act provides that the provisions of new subsection 160.2(2.3), which makes a director of a registered disability savings plan jointly liable with a taxpayer for taxes arising in connection with the deregistration of the plan, do not limit the liability of the taxpayer under any provision of the Act. It also provides that there is no limitation on the liability of the director for the interest for which the director is liable under the Act on an assessment in respect of an amount that the director is liable to pay because of subsection 160.2(2.3).

This amendment applies to the 2008 and subsequent taxation years.

Rules Applicable – Registered Disability Savings Plans

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160.2(6)

New subsection 160.2(6) of the Act provides that a payment by a director of a registered disability savings plan, on account of the director’s joint liability under subsection 160.2(2.3) for a portion of a taxpayer’s tax, reduces the joint liability to the extent of the payment. However, a payment by the taxpayer on account of the taxpayer’s tax liability reduces the joint liability of the director only to the extent that the payment reduces the total liability of the taxpayer to an amount that is less than the amount in respect of which the director was made jointly liable under subsection 160.2(2.3).

This amendment applies to the 2008 and subsequent taxation years.

Clause 18

Tax on Old Age Security Benefits – Definitions

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180.2(1)

“adjusted income”

Subsection 180.2(1) of the Act defines a number of terms for the purpose of the special recovery tax on old age security (OAS) benefits.

The definition “adjusted income” is amended to exclude payments from a registered disability savings plan from the income base upon which the tax on OAS benefits is calculated.

This amendment applies to the 2008 and subsequent taxation years.

Clause 19

Taxes in respect of Registered Disability Savings Plans

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Part XI

New Part XI of the Act imposes taxes in connection with various transactions relating to registered disability savings plans. The taxes are intended to discourage transactions that could put at risk the government support provided in connection with registered disability savings plans through both the tax system and Canada Disability Savings Bonds and Grants to the detriment of the long-term financial security of the beneficiary.

In general terms, the transactions that give rise to tax under Part XI are buying or selling property for inadequate consideration, investing in non-qualifying investments, extending supplementary advantages and using trust property as security. These transactions are similar to those transactions that give rise to sanctions in connection with RRSPs.

Liability for the tax is generally imposed on the director of a registered disability savings plan. However, new section 146.4 of the Act imposes an obligation on the issuer of the plan to take reasonable steps to minimize the possibility of Part XI tax arising. More specifically, paragraph 146.4(13)(d) requires that the issuer of a registered disability savings plan exercise the care, diligence and skill of a reasonably prudent person to minimize the possibility that a director of the plan may become liable to pay tax, in connection with the plan, under Part XI.

Part XI applies to the 2008 and subsequent taxation years.

Definitions

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205(1)

New subsection 205(1) of the Act defines a number of terms that apply for the purposes of new Part XI.

“advantage”

An “advantage” in relation to a registered disability savings plan is any supplementary benefit or loan that is in any way dependent on the existence of the plan. Exceptions are provided for disability assistance payments, contributions by or with consent of a director, transfers, Canada Disability Savings Bonds and Grants, associated administrative or investments services and contribution loans. An advantage could include, for example, trips, appliances, interest-free loans and plan investments that do not reflect commercial terms.

The definition is relevant for the purpose of new section 206.2, which imposes a tax if an advantage in relation to a registered disability savings plan is extended to any person who is, or who does not deal at arm’s length with, a beneficiary under, or a director of, the plan.

“allowable refund”

The “allowable refund” of a person for a calendar year is the total amounts refundable to the person for the year under new subsection 206.1(4) as a result of the disposition of a non-qualified investment. The definition is relevant for the purposes of new subsections 207(1) and (2).

“benefit”

Subsection 205(1) defines “benefit” in relation to a registered disability savings plan to include any payment or allocation of an amount that is represented to be a return on investment on property held by the plan trust, but which cannot reasonably be considered to be on market terms and conditions. The definition is relevant for the purpose of the definition “advantage”.

“qualified investment”

The definition “qualified investment” sets out the types of property that a trust governed by a registered disability savings plan is permitted to hold. The types of investments that qualify for a registered disability savings plan are generally the same as those that qualify for an RRSP. In general terms, the following are defined to be qualified investments for a registered disability savings plan:

The definition is relevant for the purpose of new section 206.1, which imposes a tax if a trust governed by a registered disability savings plan acquires property that is not a qualified investment, or if property held by the trust ceases to be a qualified investment. It is also relevant for new subsection 146.4(5), which taxes investment income earned by a trust governed by a registered disability savings plan on investments that are not qualified investments.

Definitions in Subsection 146.4(1)

ITA
205(2)

New subsection 205(2) of the Act provides that the definitions in subsection 146.4(1) apply for the purposes of Part XI. The key definitions are “director” and “issuer”. The “director” of a registered disability savings plan is generally the person that has (or the persons that have) the principal decision making authority with respect to a registered disability savings plan. The “issuer” of a registered disability savings plan is the trust company with whom the plan is entered into.

Tax Payable Where Inadequate Consideration

ITA
206

New section 206 of the Act imposes a tax for a calendar year if, in the year, a trust governed by a registered disability savings plan acquires or disposes of property for consideration that differs from its fair market value so that the value of the trust is reduced. The tax is intended to guard against the possibility of artificial transactions being used to enable a director to gain access to plan funds for their own benefit to the detriment of the interests of the beneficiary.

Subsection 206(1) sets out the charging provision for the tax. A separate tax is payable for each such acquisition or disposition.

Subsection 206(2) provides that the amount of the tax is equal to the difference between the consideration referred to in subsection 206(1) and the fair market value.

Subsection 206(3) provides that each person who is a director of the plan, at the time that the tax is imposed, is jointly and severally, or solidarily, liable to pay the tax.

Subsection 206(4) provides authority to the Minister to pay any tax collected back into the beneficiary’s plan if it is just and equitable to do so and the Minister is satisfied that neither the beneficiary nor any of the current directors were involved in the transaction that gave rise to the tax.

Subsection 206(5) ensures that any payment made under subsection 206(4) is not treated as a contribution for the purposes of section 146.4.

Tax Payable on Non-qualified Investment

ITA
206.1

New section 206.1 of the Act imposes a tax for a calendar year if, in the year, a trust governed by a registered disability savings acquires property that is not a qualified investment, or property held by the trust ceases to be a qualified investment. It also provides for a refund of that tax when the plan trust disposes of the property. “Qualified investment” is defined in subsection 205(1).

Subsection 206.1(1) sets out the charging provision for the tax. A separate tax is payable for each such acquisition or cessation.

Subsection 206.1(2) provides that the amount of the tax is equal to 50 per cent of the fair market value of the property, which fair market value is to be determined at the time it was acquired, or at the time immediately before the time it ceased to be a qualified investment, as the case may be.

Subsection 206.1(3) provides that each person who is a director of the plan, at the time that the tax is imposed, is jointly and severally, or solidarily, liable to pay the tax.

Subsection 206.1(4) provides that the persons who were liable to pay the tax are entitled to a refund if the plan trust disposes of the non-qualified investment before the end of the calendar year following the calendar year in which the tax arose (or such later time permitted by the Minister of National Revenue). The amount of the refund is equal to the lesser of the amount of the tax and the proceeds of disposition. However, no refund is available if it is reasonable to expect that any of those persons knew or ought to have known at the time the property was acquired by the plan trust that the property was not, or would cease to be, a qualified investment.

Subsection 206.1(5) provides that, where two or more persons are entitled to a refund under subsection 206.1(4) in respect of a particular property, the refund must be shared. If the persons cannot agree on portions to be claimed by each, the Minister of National Revenue may fix the portions.

Subsection 206.1(6) provides a special rule that applies where a non-qualified investment subsequently becomes a qualified investment while being held by the plan trust. This could occur, for example, where the shares of a corporation are re-listed on a designated stock exchange. In these circumstances, subsection 206.1(6) provides that the trust is deemed to have disposed of the property for proceeds of disposition equal to its fair market value and to have immediately reacquired the property at a cost equal to that value. This rule ensures that a refund is available under subsection 206.1(4), without the need to actually dispose of the property.

Tax Payable Where Advantage Extended

ITA
206.2

New section 206.2 of the Act imposes a tax for a calendar year if, in the year, an advantage in relation to a registered disability savings plan is extended to any person who is, or who does not deal at arm’s length with, a beneficiary under, or a director of, the plan. “Advantage” is defined in subsection 205(1).

Subsection 206.2(1) sets out the charging provision for the tax. A separate tax is payable for each such advantage.

Subsection 206.2(2) provides that the amount of the tax is equal to:

Subsection 206.2(3) provides that each person who is a director of the plan, at the time that the tax is imposed, is jointly and severally, or solidarily, liable to pay the tax. If, however, the advantage is extended by the issuer of the plan or by a person not dealing at arm’s length with the issuer, the issuer is liable to pay the tax and not the directors.

Tax Payable on Use of Property as Security

ITA
206.3

New section 206.3 of the Act imposes a tax for a calendar year on the issuer of a registered disability savings plan if, in the year, with the consent or knowledge of the issuer, a trust governed by the plan uses or permits to be used any property held by the trust as security for indebtedness of any kind. The amount of the tax is equal to the fair market value of the property at the time the property commenced to be used as security.

Waiver of Liability

ITA
206.4

New section 206.4 of the Act allows the Minister of National Revenue to waive Part XI tax where it is just and equitable to do so, having regard to all factors (including whether the tax arose because of a reasonable error and the extent to which the same transaction also gave rise to tax under another provision of this Part).

Return and Payment of Tax

ITA
207(1)

New subsection 207(1) of the Act provides that a person liable for tax under Part XI for a calendar year must file a return for the year, and pay any tax owing (net of the person’s allowable refund, as defined in subsection 205(1), for the year), within 90 days after the end of the year.

Refund

ITA
207(2)

New subsection 207(2) of the Act requires the Minister of National Revenue to refund a person’s allowable refund for a calendar year, to the extent that it has not been applied against the person’s tax payable for the year.

Multiple Directors

ITA
207(3)

New subsection 207(3) of the Act provides two rules that apply where two or more directors of a registered disability savings plan are jointly liable with each other to pay a tax under this Part.

Paragraph 207(3)(a) provides that a payment by any of the directors on account of the joint liability reduces the joint liability to the extent of the payment.

Paragraph 207(3)(b) provides that, if one of the director files the required return, only that return need be filed.

Provisions Applicable to Part

ITA
207(4)

New subsection 207(4) of the Act provides that certain provisions of Part I relating to returns, assessments, payments and appeals apply for the purposes of this Part with any required modifications.

Clause 20

Tax on Income from Canada of Non-resident Persons

ITA
212(1)(r.1)

New paragraph 212(1)(r.1) of the Act imposes withholding tax on payments made from a registered disability savings plan to a non-resident, to the extent that the payment would have been included in income under Part I if it were made to a resident.

This amendment applies to the 2008 and subsequent taxation years.

Clause 21

Where Taxpayer Information May be Disclosed

ITA
241(4)(d)

Subsection 241(4) of the Act authorizes the limited communication of taxpayer information to government officials outside of the Canada Revenue Agency.

New subparagraph 241(4)(d)(vii.5) allows information to be communicated to an official for the purposes of the administration and enforcement of the proposed Canada Disability Savings Act.

This amendment applies to the 2008 and subsequent taxation years.

Clause 22

Definitions

ITA
248(1)

Subsection 248(1) of the Act defines a number of terms that apply for the purposes of the Act.

“disposition”

The expression “disposition” is used throughout the Act, particularly in provisions relating to transactions involving property. Paragraph (f) of the definition generally avoids a disposition in the case of certain simple trust-to-trust transfers, such as transfers of property between trusts governed by an RESP, involving no change in beneficial ownership. For paragraph (f) to apply, the transferor trust is required to be the same type of trust as the transferee trust.

Paragraph (f) of the definition is amended so that it also applies to trusts governed by a registered disability savings plan. This will ensure that a transfer of property between registered disability savings plan trusts, which can occur when one registered disability savings plan replaces another, will generally not be treated as a disposition.

This amendment applies to the 2008 and subsequent taxation years.

“registered disability savings plan”

Subsection 248(1) is amended to introduce the definition “registered disability savings plan”, effective for the 2008 and subsequent taxation years. For information, refer to the commentary on the definition in new subsection 146.4(1).

Clause 23

Investments in Limited Partnerships

ITA
253.1

Section 253.1 of the Act applies for specified provisions of the Act and Regulations where a trust or corporation holds an interest as a limited partner in a limited partnership. It provides that the trust or corporation will not, solely because of its acquisition and holding of the limited partnership interest, be considered to carry on any business or other activity of the partnership.

Section 253.1 is amended so that it also applies for the purpose of paragraph 146.4(5)(b), which provides that a trust governed by a registered disability savings plan is taxable on any business income it may earn. The amendment to section 253.1 ensures that the acquisition and holding of a limited partnership interest by a trust governed by a registered disability savings plan will not expose the trust to taxation, provided the interest is a qualified investment for the trust.

This amendment applies to the 2008 and subsequent taxation years.

Income Tax Regulations

Clause 24

Information Returns – Qualified Investments

ITR
221(2)

Subsection 221(2) of the Income Tax Regulations requires certain types of corporations and trusts to file an information return in respect of a taxation year whenever the corporation or trust claims that its shares or units are a qualified investment for RRSPs or other certain registered plans.

Subsection 221(2) is amended to extend the requirement for filing an information return to a corporation or a trust that claims that its shares or units are a qualified investment for registered disability savings plans. This amendment, which applies to the 2008 and subsequent taxation years, is consequential on the introduction of registered disability savings plans.

Clauses 25 and 26

Qualified Investments

ITR
Part XLIX

Part XLIX of the Regulations lists a number of types of property that are prescribed to be qualified investments for trusts governed by RRSPs and other registered plans.

Part XLIX is amended so that it applies for the purposes of the definition “qualified investment” in new subsection 205(1) of the Act that applies to trusts governed by a registered disability savings plan. With the exception of property described in subsections 4900(6) and (12) of the Regulations, the amendments to Part XLIX provide that the types of property that are prescribed to be a qualified investment for a registered disability savings plan are those that are prescribed for an RRSP.

Several provisions in subsection 4900(1) restrict eligibility of a particular investment if the issuer of the investment is a person who is an annuitant, a beneficiary, an employer or a subscriber under the governing plan, or any other person who does not deal at arm’s length with that person.

These provisions are amended so that the restrictions also apply to investments that are issued by a person who is a director of, or a beneficiary under, a registered disability savings plan, or any other person who does not deal at arm’s length with that person. To improve readability, this is accomplished by introducing a new definition “connected person” in subsection 4901(2).

These amendments apply to the 2008 and subsequent taxation years.

Consequential Amendments

Clause 27

Definitions

EIA
144

“income”

Section 144 of the Employment Insurance Act defines a number of terms for the purpose of the repayment rules for employment insurance (EI) benefits.

The definition of “income” is amended to exclude payments from a registered disability savings plan from the income base upon which EI benefit repayments are calculated.

This amendment applies to the 2008 and subsequent taxation years.

Clause 28

Definitions

OASA
2

“income”

Section 2 of the Old Age Security Act defines a number of terms for the purpose of that Act.

The definition of “income” is amended to exclude payments from a registered disability savings plan from the income base upon which certain benefits payable under that Act are calculated.

This amendment applies to the 2008 and subsequent taxation years.


Overview of the Proposed Canada Disability Savings Bonds and Grants

Overview of the Proposed Canada Disability Savings Bonds and Grants

The purpose of the proposed Canada disability savings bonds and grants is to enhance the long-term financial security of Canadians with severe disabilities by creating incentives for families, friends and people with disabilities themselves to save for the future.

The proposed bonds and grants stem from recommendations made by an Expert Panel created in 2006 to study the issue of using savings vehicles to assist families to provide for the financial security of children with severe disabilities. Budget 2007 acted on the recommendations of the Expert Panel by proposing a new Registered Disability Savings Plan (RDSP) with a Canada Disability Savings Grant (CDSG) and a Canada Disability Savings Bond (CDSB).

The framework for the RDSP would be created through amendments to the Income Tax Act. These amendments would set out the rules to establish the plans and detail certain design features of the RDSP such as the eligibility criteria. The proposed Canada Disability Savings Act (CDSA) would set out the design and conditions for receiving the bond and grant. Under the proposed CDSA, grant and bond payments will be made from the Consolidated Revenue Fund, the government’s general financial account.

The Canada Disability Savings Grant would be provided at matching rates of 1 for 1, 2 for 1, and 3 for 1, that will apply to annual contributions, depending on family income and the amount contributed, up to a maximum lifetime limit of $70,000.

  • $3 for every $1 on the first $500 of contributions;
  • $2 for every $1 on the next $1,000 of contributions.
  • $1 for every $1 on the first $1,000 of contributions.

In order to better support low- and modest-income families, children in care, and adults without family support, the Government of Canada would contribute through the Canada Disability Savings Bond. The CDSB provides up to $1,000 per year to RDSPs up to a maximum lifetime limit of $20,000. CDSBs would not be dependent on contributions. The maximum annual amount for the CDSB would be $1,000 and would be paid to an RDSP where family net income does not exceed $20,883. The CDSB would be decreased gradually for those with family net income between $20,883 and $37,178. These income thresholds are in 2007 dollars and will be indexed to inflation for 2008, when RDSPs become operational, and for subsequent years.

While the beneficiary is a child (i.e. until the end of the year in which the beneficiary turns 18), the net family income of the beneficiary’s parents or legal guardian would be used to determine whether the beneficiary would be eligible for the bond and matching grant amounts. Thereafter, the net family income of the beneficiary would be used, even if they live with their parents or legal guardian.

A RDSP will be eligible to receive both CDSBs and CDSGs up until the end of the year in which the plan beneficiary attains 49 years of age.

To be eligible to open an RDSP and receive the bonds and matching grants, the beneficiary would have to qualify for the Disability Tax Credit (DTC) and be a Canadian resident. In addition, the Social Insurance Number (SIN) of the beneficiary and the parent or legal guardian would be required.

The Expert Panel recommended and Budget 2007 proposed a bond and grant repayment rule to ensure that RDSPs are used only to promote long-term savings and to ensure government funds contributed in previous years are not withdrawn and used to leverage matching grants thereafter. The rule requires the repayment of all CDSGs and CDSBs transferred to an RDSP in the ten years preceding one of the following events:

1. A withdrawal from the plan;

2. The loss of eligibility for the DTC; or

3. The death of the beneficiary.

For example, if money is withdrawn from a RDSP, any bond and grant, and associated investment income, received in the previous ten years must be repaid. The repayment rule will be defined in the Canada Disability Savings Regulations.

Under the proposed CDSA, the Governor in Council would have authority to make regulations to further carry out the purpose and provisions of the proposed Act. The areas covered by these regulations could include conditions on CDSG and CDSB payments, terms and conditions to be applied to agreements between the government and issuers of the RDSP, repayment of CDSG and CDSB to government and earnings on them, and the waiving of requirements to prevent undue hardship.

As stated in Budget 2007, it is intended that RDSPs will be available in 2008.

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