Rollovers from one RRSP (or RRIF) to another RRSP
On the death of a parent or a grandparent, under certain conditions the RRSP or RRIF of the parent or grandparent may be rolled over to a child’s RRSP on a tax-deferred basis if the child is dependent due to a mental or physical disability, regardless of the age of the child. Generally speaking, a disabled child is considered to be “financially dependent” if the child’s income for the year preceding the year of death was less than $17,621 (for 2010).
Where the disabled child’s income exceeds the “financially dependent” threshold, financial dependence may still be established, depending on the factual evidence, including:
- the income of the child;
- the cost of living;
- the ability of the child to support himself or herself;
- support provided by others.
However, if the disabled child is an ODSP recipient and needs to maintain ODSP eligibility, the child cannot own assets totalling more than $5,000. For purposes of determining eligibility for Ontario Disability Support Plan (ODSP) payments, an RRSP is considered an asset and is not exempt. If the value of the RRSP exceeds the asset limit, the child’s ODSP payments will be reduced or eliminated.
Rollovers from an RRSP/RRIF to an RDSP
To have an RDSP, a person with a disability must qualify for the federal Disability Tax Credit (DTC). Meeting the criteria for ODSP eligibility does not guarantee eligibility for the DTC. In fact, meeting DTC eligibility can be much more difficult for some individuals.
As of July 1, 2011, for deaths occurring after March 3, 2010, the existing RRSP and RRIF rollover rules will be extended to allow a rollover of a deceased individual’s RRSP or RRIF proceeds to the RDSP of a deceased person’s financially-dependent child or grandchild. Certain lump-sum amounts paid from registered pension plans (RPP) may also be eligible for the rollover.
If the death of an RRSP or RRIF annuitant occurs after 2007 and before 2011, transitional rules can provide a similar result. To be eligible, the contribution to an RDSP can only be made after June 30, 2011. If the death of the parent or grandparent occurs after 2007 and before 2011, the contribution must be made before 2012. This means there are only six months during which the contribution can be made to the RDSP.
What is ‘Financially Dependent’? How Much can be Rolled Over to the RDSP?
Dependency is determined in one of two ways. Either there is a relationship of dependency such as when the parents or grandparents provide care or financial support or the person is financially dependent because their income is below $17,621 (for 2010).
The amount rolled over to an RDSP cannot exceed the child’s or grandchild’s available RDSP contribution room ($200,000 minus any contributions already made to the RDSP).
Under ODSP rules, an RDSP does not count as the ODSP recipient’s asset and will, therefore, not affect ODSP eligibility. In some circumstances, ODSP eligibility may not be a concern. This might be the case if there were enough assets to support the child or grandchild without ODSP income or if the child or grandchild were age 65 or older and no longer receiving ODSP.
Disclaimer: The information provided in this blog (and this website generally) is not intended as legal or tax planning advice. The reader is advised to seek the professional advice of a lawyer or accountant who is knowledgeable about tax and estate planning for a beneficiary with a disability.
Reproduction of this blog is permitted if the author is credited. If you have questions or if you would like more information, please call us at 613 836-9915. This blog is not intended to be legal advice but contains general information. Please consult a lawyer or other professional to determine how the information in this blog might apply to you.
Blog posts pre-dated December 1, 2015 were originally published under Neff Law Office Professional Corporation.