When the owner or beneficiary of a Registered Disability Savings Plan (RDSP) becomes a non-resident of Canada, several important rules and cross-border tax implications come into play.
This article explains how non-residency affects the RDSP itself and the associated government contributions, such as the Canada Disability Savings Grants (CDSG) and Bonds (CDSB).
1. Impact on the RDSP Account
Even if the beneficiary becomes a non-resident, the RDSP can remain open. However, keep in mind:
- Contributions: You can still contribute to the RDSP, but the account loses its eligibility for new government grants or bonds once non-residency is established.
- Tax-Deferred Growth: The account continues to grow tax-deferred, even while the beneficiary is a non-resident.
2. Government Contributions: Grants and Bonds
When a beneficiary becomes a non-resident, any government contributions received within the past 10 years may trigger the “assistance holdback” rule:
- Assistance Holdback Rule:
- If funds are withdrawn or the beneficiary ceases Canadian residency within 10 years of receiving CDSG or CDSB, the government may require repayment.
- The repayment is calculated as the lesser of the total contributions received in the past 10 years or three times the amount withdrawn.
- New Contributions:
- During non-residency, the RDSP becomes ineligible to receive any new grants or bonds.
3. Disability Tax Credit (DTC) Eligibility
- Maintaining Eligibility:
- The RDSP is linked to the Disability Tax Credit (DTC). If the beneficiary remains eligible for the DTC even after becoming a non-resident, the RDSP can continue to operate.
- Loss of Eligibility:
- Should the beneficiary lose DTC eligibility—and fail to regain it within a specified timeframe (usually by the end of the following year)—the RDSP might need to be closed, and previously received grants and bonds may require repayment.
4. Withdrawals While Non-Resident
- Canadian Withholding Taxes:
- Withdrawals made while the beneficiary is a non-resident can trigger Canadian withholding taxes on the taxable portion of the funds (including government contributions and earnings).
- Tax Treaty Considerations:
- Depending on the tax treaty between Canada and the beneficiary’s new country of residence, additional reporting and tax implications may apply.
- Form Requirements:
- Note that RDSPs no longer require filing Form 3520 or 3520-A.
5. Cross-Border Considerations for U.S. Persons
For U.S. beneficiaries or contributors:
- IRS Treatment:
- The IRS does not recognize RDSPs as tax-advantaged, which means U.S. persons may face annual reporting requirements (such as FBAR, PFIC, or Form 8938) and taxation on investment income.
- Compliance:
- U.S. taxpayers must carefully track contributions, earnings, and withdrawals to remain compliant with U.S. tax laws.
Summary of Key Points
- RDSP Account Status:
- The RDSP remains open for non-residents, but it cannot receive new government grants or bonds.
- Government Contributions:
- Grants and bonds received in the 10 years prior to non-residency are subject to the assistance holdback rule.
- Tax Implications:
- Withdrawals may incur Canadian withholding taxes and additional cross-border tax reporting requirements, especially for U.S. persons.
- DTC Eligibility:
- Maintaining Disability Tax Credit eligibility is crucial; loss of DTC may necessitate closing the RDSP.
- Cross-Border Challenges:
- Non-resident U.S. persons must navigate additional IRS reporting and potential taxation on RDSP earnings.
For anyone planning to move or already residing outside Canada, consulting with a cross-border tax and financial advisor is essential. Understanding these rules can help you manage your non-resident RDSP effectively and avoid unexpected tax liabilities.
