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Income Tax Withholding on Registered Disability Savings Plans (RDSPs). Presenters. Dian Hardiman Joumana Nasrallah. Today’s Topics. Purpose of information session Background information on RDSP New withholding requirements Benefits of withholding Examples. Purpose of Information Session.

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Presentation Transcript
presenters
Presenters
  • Dian Hardiman
  • Joumana Nasrallah
today s topics
Today’s Topics
  • Purpose of information session
  • Background information on RDSP
  • New withholding requirements
  • Benefits of withholding
  • Examples
purpose of information session
Purpose of Information Session
  • Effective January 2014, financial institutions (FIs) will deduct income tax from RDSP payments.
  • Treasury Board of Canada Secretariat requires communication with stakeholders before implementing the regulatory changes.
  • Two stakeholders were identified:
      • Financial Institutions (FIs); and
      • associations representing persons with disabilities.
  • Information sessions are occurring from April to May with associations to inform them of the change.
what is an rdsp
What is an RDSP?
  • It is a long-term savings plan to help Canadians with disabilities and their families to save for the future.
  • In order to be an RDSP beneficiary, a person must first qualify for the disability tax credit (disability amount).
  • Contributions can be made until the beneficiary turns 59.
  • Contributions made to an RDSP are not tax deductible.
grants and bonds
Grants and Bonds
  • The Government of Canada contributes amounts to an individual’s RDSP:
    • Grants are matching payments made by the Government (up to $3,500 per year).
    • Bonds are payments made by the Government (up to $1,000 per year) for low and modest-income Canadians.
    • Individual contributions can be made by various individuals.
    • There is a lifetime limit for individual contributions.
about the rdsp payments
About the RDSP Payments
  • There are two types of payments made out of an RDSP:
    • lifetime disability assistance payments (LDAPs); and
    • disability assistance payments (DAPs).
  • Both payments can be made individually or at the same time within a calendar year.
rollovers from rrsps to rdsps
Rollovers from RRSPs to RDSPs
  • Effective July 1, 2011, amounts held in a deceased annuitant’s registered retirement savings plans (RRSPs) can be rolled over to an RDSP, if the beneficiary is financially dependent and qualifies for the disability tax credit.
  • The amount of the rollover is counted as a private contribution.
  • It must be treated as part of the earnings of a DAP or LDAP for determining the taxable portion of the RDSP payment.
taxable income
Taxable Income
  • The following amounts are taxable income when payments are withdrawn from the plan:
    • Canada disability savings grant;
    • Canada disability savings bond; and
    • investment income earned in the plan.
  • Individual contributions that are withdrawn are not taxable income.
reporting requirements
Reporting Requirements
  • FIs will issue a yearly T4A slip to beneficiaries for the taxable portion of any RDSP withdrawal.
  • Beneficiaries must include the amount reported on the T4A as income on their income tax and benefit return.
  • If a beneficiary passes away after a payment is made, it is included in the income of the beneficiary’s estate for the year the payment was made.
income tax act
Income Tax Act
  • In 2007, the Act was amended to require income tax to be withheld at source on payments made from an RDSP.
  • The amount to be withheld must be calculated according to the Income Tax Regulations (the Regulations).
  • Starting January 1, 2014, the FIs will be required to withhold income tax at source.
  • There are no retroactive provisions.
benefits of withholding at source
Benefits of Withholding at Source
  • If withholding is not done at source by the FIs, beneficiaries may have a tax liability.
  • Withholding on RDSP payments at source will reduce the financial burden on beneficiaries.
  • The rates established will ensure withholding is as close as possible to the tax liability.
about the rates
About the Rates
  • The rates will be determined based on the taxable portion of the RDSP payments.
  • The withholding rates will be:
  • Those rates will be applied to the taxable portion of the payments less the basic personal amount (BPA) and the disability amount (DA).
withholding rate for non residents
Withholding Rate for Non-Residents
  • Non-residents can also be RDSP beneficiaries.
  • A 25% withholding rate will be applied to the taxable portion of the RDSP.
  • The FIs will provide them with an NR4 slip.
  • For more information, individuals can call the International Tax Services Office at 1-855-284-5942 (for services in English) and 1-855-284-5943 (for services in French).
withholding on ldaps
Withholding on LDAPs
  • Estimate the running total of all LDAPs expected to be paid during the year.
  • Determine the taxable portion of the LDAPs.
  • Determine the withholding rate based on the taxable portion of the total of all LDAPs.
  • Apply the withholding rate to the LDAPs, less the BPA and the DA.
withholding on daps
Withholding on DAPs
  • Determine DAP payment (withholding will be applied on every DAP payment).
  • Determine the taxable portion of a DAP.
  • Determine the withholding rate based on the taxable portion of the DAP.
  • Apply the withholding rate to the DAP, less the BPA and the DA.
example 1
Example 1

1 DAP $65,000

  • Bond amount $ 0
  • Grant amount $10,000
  • Contributions $40,000
  • Earned investment $15,000

Questions:

  • What is the taxable amount?
  • What is the withholding rate?
answer to example 1
Answer to Example 1

1 DAP $65,000

Minus the contributions -$40,000

Equals the taxable amount $25,000

Applicable withholding rate is 30%

Calculation

Taxable amount $25,000

Minus the BPA and DA -$18,735

Equals amount subject to withholding $ 6,265

Tax withheld at 30%$ 1,880

example 2
Example 2

12 LDAPs of $1,850 $22,200

  • Bond amount $ 0
  • Grant amount $ 3,000
  • Contributions $15,000
  • Earned investment $ 4,200

Questions:

  • What is the taxable amount?
  • What is the withholding rate?
answer to example 2
Answer to Example 2

12 LDAPs X $1,850$22,200

Minus contributions -$15,000

Equals the taxable amount $ 7,200

Applicable withholding rate is 20%

Calculation

Taxable amount $ 7,200

Minus the BPA and DA -$18,735

Equals amount subject to withholding $ 0

Tax withheld at 20%$ 0

example 3
Example 3

12 LDAPs of $5,000 $60,000

  • Bond amount $ 0
  • Grant amount $10,000
  • Contributions $36,000
  • Earned investment $14,000

Questions:

  • What is the taxable amount?
  • What is the withholding rate?
answer to example 3
Answer to Example 3

12 LDAP X $5,000$60,000

Minus contributions -$36,000

Equals the taxable amount $24,000

Applicable withholding rate is 30%

Calculation:

Taxable amount $24,000

Minus the BPA and DA -$18,735

Equals amount subject to withholding $ 5,265

Tax withheld at 30%$ 1,580

example 4
Example 4

12 LDAPs of $3,000$36,000

2 DAPs: $21,000

    • 1 payment in May $9,000
    • 1 payment in Sept $12,000
  • Bond amount $ 0
  • Grant amount $13,000
  • Contributions $19,000
  • Earned investment $25,000

Questions:

  • What is the taxable amount?
  • What are the withholding rates?
answer to example 4
Answer to Example 4

12 LDAPs X $3,000$36,000

Minus contributions -$12,000

Equals the taxable amount$24,000

2 DAPs $21,000

Minus contributions -$ 7,000

Equals the taxable amount $14,000

Applicable withholding rates:

Taxable amount of LDAP of $24,00030%

Taxable amounts of DAPs total of $14,000

  • 1 payment in May $6,000 20%
  • 1 payment in Sept $8,000 20%
cont d answer to example 4
Cont’d Answer to Example 4

Calculation:

Taxable amount LDAP $24,000

Total taxable amount of DAPs $14,000

Minus the BPA and DA -$18,735

Equals amount subject to withholding $19,265

Taxes Withheld

Tax withheld at 30% on LDAP $3,380

Tax withheld at 20% on DAP payment $1,600

Total tax withheld on LDAPs and DAPs $4,980

open communication approach
Open Communication Approach
  • The Canada Revenue Agency (CRA) is committed to communicating with stakeholders and to providing them with information their members need.
  • More information about the RDSP is available on the CRA website.
  • The CRA may hold a webinar to inform stakeholders of the changes.
points of contact
Points of Contact
  • Visit our Web site:
    • For beneficiaries: www.cra.gc.ca/rdsp
    • For plan administrators: www.cra.gc.ca/tx/rgstrd/rdsp
  • Call the CRA’s individuals’ enquiries line at 1-800-959-8281.
  • For more information regarding the program, please visit the Web site of Human Resources and Skills Development at www.disabilitysavings.gc.ca.
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