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RRSP Rollover to RDSP…Can it be done?

kanata stittsville lawyer willYes, it is possible for a deceased’s RRSP to rollover to a beneficiary’s RDSP. Let’s start by looking at the tax treatment of RRSPs and RRIFs on death.

Deemed Disposition Upon Death

You may have heard that when a person dies, there is what is called a ‘deemed disposition’ of all of their assets. This means that the deceased’s assets are treated, for tax purposes, as being sold or cashed in immediately prior to death.

When it comes to RRSPs and RRIFs, generally speaking the fair market value of the RRSP/RRIF is included in the deceased’s income for the year of death. It is then taxed as ordinary income at the deceased’s marginal rate. As you can imagine, this often results in a significant tax bill for the deceased’s estate. However, in some circumstances, it is possible to defer the paying of this tax to a later time. This is generally known as a ‘rollover.  This blog will explore one of the available rollovers and that is from a deceased’s RRSP/RRIF to a beneficiary’s Registered Disability Savings Plan (‘RDSP’).

Rollover from RRSP/RRIF to RDSP

The proceeds from a deceased’s RRSP/RRIF can be rolled over to the RDSP of a child or grandchild if they were financially dependent upon the deceased due to a physical or mental disability. No taxes are due until the beneficiary withdraws from the RDSP. At that time, the funds are taxed in hands of the beneficiary at their marginal rate. Funds must be rolled over within 6 months of death.

It is important to note that the amount rolled over cannot exceed the child or grandchild’s available RDSP contribution room. At present, there is a lifetime personal contribution limit of $200,000.

Another thing to note is that the proceeds coming from the deceased’s RRSP/RRIF will not be eligible for the Canada disability savings grant. However, these funds may be withdrawn without penalty which is not the case for the funds in the RDSP to which the grants have attached.

I want the rollover of my RRSP to my son’s RDSP to be an option, who should I name as the beneficiary of my RRSP?

There are two options, each with its own pros and cons which should be carefully considered:

  1. Name the individual with a disability as the beneficiary of the RRSP

One benefit of this option is that the proceeds from your RRSP would flow outside of your estate and be paid directly to your son. As a result, these monies would not be available to any creditors that you may have at your death. Another benefit is that probate fees would not be payable on the value of the RRSP.

On the other, however, if your loved one is receiving benefits from the Ontario Disability Support Program (‘ODSP’), receiving the proceeds directly could impact their ODSP benefit at least until they could get them into their RDSP. There is also no guarantee that there will be any available contribution room in your beneficiary’s RDSP. Again, this could pose a real problem for their ODSP benefits.

  1. Name your estate as the beneficiary of your RRSP

Naming your estate as the beneficiary of your RRSP is another approach assuming that your loved one with the RDSP is also a beneficiary of your estate. You must take note however, that if you name your estate as the beneficiary of your RRSP, the proceeds will be available to any creditors you may have at your death. As well, your estate will have to pay probate on the value of the proceeds.

However, the benefit to this approach is that your executor will have the flexibility to do whatever is best for your beneficiaries at the relevant time. This may involve rolling some or all of the proceeds into the beneficiary’s RDSP if they have available contribution room. If your beneficiary does not have any RDSP contribution room, the proceeds could become part of a Henson Trust included for the benefit of your loved one with a disability in your Will. If you choose this approach, you will want to ensure that your Will gives your executor broad authority to deal with your RRSP.

Consult a Professional

With either approach, it may be necessary for your loved one to have an attorney for property or guardian for property if they are not capable of managing their finances. Before choosing an approach, consult with an experienced professional who can canvass the options with you.

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