Thursday, April 5, 2012

Transfers from an RESP to an RDSP

Those who care for, or work with, individuals with autism or other related disabilities may wish to attend The 2012 Vancouver Island Autism & Associated Conditions Conference, to be held in Nanaimo from May 10-12, 2012.  The conference is presented by Autism Community Training, a non-profit British Columbia society, and will focus on a broad range of issues (not RDSP issues).  For more information, see

After the birth of a child, many parents and grandparents immediately set up a Registered Education Savings Plan (an “Education Plan”, more commonly referred to as an RESP) to provide funds for the future post-secondary education of that child.  Many Education Plans are set up within a year of birth as part of the hopes and dreams that accompany a birth.
If a child has a disability that makes it unlikely that the child will be able to pursue post-secondary education, that disability is often not diagnosed until the child is in elementary school.  By that time, income will have built up inside the Education Plan but the child will never get access to that income.  Assuming that the disability is such that the child qualifies for the disability tax credit, the parents will likely put their original goals aside and establish a Registered Disability Savings Plan (a “Disability Plan”, more commonly referred to as a RDSP) in order to provide for a new set of goals for their child.
Starting in 2014, the federal government will allow the accumulated income inside an Education Plan to be transferred on a tax-deferred basis to a Disability Plan.  As a result, it will be possible for qualifying individuals to access that accumulated income by adding that income to their Disability Plans.
In order to implement the tax-deferred transfer, the child in question must qualify for the disability tax credit and must be a beneficiary of both plans.  In addition, one of the following three conditions must apply.
1.                  The child has a severe and prolonged mental impairment that can reasonably be expected to prevent the child from pursuing post-secondary education; or
2.                  the Education Plan has been in existence for at least 10 years, each beneficiary of the Education Plan is at least 21 years of age and no beneficiary of the Education Plan is pursuing post-secondary education; or
3.                  The Education Plan has been in existence for more than 35 years.
If the accumulated income inside the Education Plan is transferred to a Disability Plan, the original contributions made to the Education Plan will be returned on a tax-free basis to the person who made those original contributions.  That person is then free to retain those returned contributions or transfer them to the Disability Plan.
The transfer rules apply only to the accumulated income and the original contributions.  Any government grants that were paid into the Education Plan will have to be returned to the federal government.  If the original contributor to the Education Plan decides to contribute returned contributions to the Disability Plan, however, those contributions to the Disability Plan could result in the payment of government grants into the Disability Plan (based on the rules applicable to Disability Plans).  Private contributions to a Disability Plan can generate up to $90,000 in income-dependent federal government grants over the lifetime of the Disability Plan.  In order to generate a government grant, however, a contribution must be made before the disabled person turns 49.
Any investment income that is transferred from an Education Plan to a Disability Plan will not generate any government grants inside the Disability Plan.  Only contributions from a private individual can generate government grants inside a Disability Plan.
The aggregate lifetime limit on private contributions to a Disability Plan for any one disabled individual is $200,000 (any government grants paid to the Disability Plan are in addition to this $200,000 limit).  While transfers of accumulated income from an Education Plan to a Disability Plan will not generate any government grants inside the Disability Plan, such transfers will be treated as a private contribution for purposes of the $200,000 lifetime limit on contributions to a Disability Plan.
For many parents, these new rules -- not effective until 2014 -- will allow them to set aside additional funds for the future of their children.  The rules will also remove some of the risk in setting up an Education Plan in the early years of a child’s life.  If it turns out that a child has a severe mental impairment that will prevent the child from pursuing post-secondary education, it will be possible to transfer the Education Plan contributions and the income on those contributions to another form of tax-advantaged fund that will be more appropriate for that child’s future.
Blair Dwyer

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.