Unlike RRSPs, there is no provision in the Canadian Bankruptcy and Insolvency Act to specifically deal with funds in a Registered Disability Savings Plan (RDSP) in the event the beneficiary files for bankruptcy. We discuss a recent case of an individual who went bankrupt and, after a court ruling, was able to keep their RDSP.
In addition to talking about whether you lose your RDSP in a bankruptcy, we talk with Alan Whitton about the ins and outs of RDSPs. This is a subject close to Alan as he and his wife found themselves having to set up an RDSP for their son.
RDSPs Exempt From Seizure in Bankruptcy in Canada
This matter was dealt with in a recent BC Supreme Court ruling that held funds in a RDSP can not be seized by a Licensed Insolvency Trustee (Trustee in Bankruptcy) for the benefit of creditors in the event the beneficiary of the RDSP declares bankruptcy.
What are RDSPs?
An RDSP is a registered savings plan designed to help Canadians with disabilities save for the long-term financial needs of a disabled person, including medical, care and living costs. RDSPs can only be setup for someone who is eligible to receive the Disability Tax Credit.
If this is for your child, you can only begin making contributions after your child is diagnosed with an eligible disability. You can also apply for an RDSP on your own behalf as an adult.
Like an RESP, an RDSP allows a disabled person, and their family members, to set aside funds in a separate trust account for a designated beneficiary – in this case the disabled individual. Contributions are not tax deductible but income earned on the funds are tax-deferred until they are withdrawn. The government provides additional support through matching grants and bonds.
RDSPs were introduced in 2008 as part of the Canada Disability Savings Act. Interestingly, in the same year the federal government made changes to the Bankruptcy and Insolvency Act to protect RRSP and RRIF contributions, but did not include RDSPs.
Facts in recent RDSP and bankruptcy court case
Ms. Alary was disabled and entitled to the disability tax credit under section 118.3 of the Canadian Income Tax Act. Mrs. Alary had an eligible RDSP with the Royal Bank of Canada, taken out in 2010. She was was the sole beneficiary and holder of her RDSP. The fund consisted of $6,800 in private funds provided by her parents in 2012. Once income growth and grants were calculated in, her funds held a total of $32,250 in trust.
In 2015, Ms. Alary filed an assignment in bankruptcy under the Bankruptcy and Insolvency Act. Her trustee notified the Royal Bank of her filing and requested Royal Bank to forward the private funds originally contributed to the plan to the trustee for the benefit of Mr. Alary’s creditors. The trustee made this claim because there was no specific provision in the Bankruptcy and Insolvency Act or the Income Tax Act governing how RDSPs should be treated during insolvency.
The Royal Bank refused to release the funds claiming that the money held in the plan was exempt from seizure. As such, they could not release the funds to the trustee.
Under the terms of section 146.4 of the Income Tax Act, funds held in an RDSP are held in trust “exclusively for the benefit of the beneficiary under the plan”. However the terms of the trust permitted the court the ‘discretion’ to direct that the funds be released for the benefit of creditors of the bankrupt.
Madam Justice Bruce found that there must be a balancing between the fact that the funds are held in trust for the benefit of the beneficiary and the rights of the creditors under the Bankruptcy & Insolvency Act. In this case, requesting the release of a portion of the funds permitted under the terms of the trust would trigger a requirement for Ms. Alary to repay a significant amount in the government-assisted portion of the fund. Madam Bruce found that the court should be guided by what was “just and equitable” and as such refused to order the release of any funds.
What this means for your RDSP
The court did not rule that all RDSPs are exempt from seizure. The court made its decision not to release the funds to the trustee based on the facts of this case. It is apparent that this means future cases will be dependent on the Court’s ability to exercise its discretion. In the absence of clearer legislative exemptions in the Bankruptcy & Insolvency Act, Licensed Insolvency Trustees will also likely exercise discretion in whether to seek court direction about the release on any RDSP funds to the estate.
Resources mentioned in this show:
- UPDATE: Clarifications from Alan Whitton on RDSPs
- Canajun Finances RDSP page
- Government of Canada website on RDSP Grants and Bonds
- Milburn Drysdale asdfunding.com
- Disability Tax Credit eligibility requirements
- Canada Disability Savings Act
- RDSPs and bankruptcy
FULL TRANSCRIPT show #165 About RDSPs and Seizure in Bankruptcy with Alan Whitton
Doug Hoyes: We’ve talked many times here on Debt Free in 30 about RSPs and RESPs but we have never before addressed another savings vehicle that is also known by a four letter acronym, RDSP. What is an RDSP? What happens to an RDSP if you go bankrupt? That’s today’s topic here on Debt Free in 30.
So, to get today’s show started let’s welcome back to the show a man who I consider to be an expert on this topic, the Big Cajun Man also known as Alan Whitten, Alan welcome back. So, let’s start with the basic question, what does RDSP stand for?
Alan Whitton: Registered Disability Savings Plan.
Doug Hoyes: Oh there you go.
Alan Whitton: The literal answer is always the easy one.
Doug Hoyes: It’s always the easy one. So, okay so Registered Disability Savings Plan, okay what is it, how does it work, who’s eligible for it? Just dump me what’s in your brain on this topic.
Alan Whitton: So, I’ll precurse this with what I told you before, which is the real expert on RDSPs is my wife who has done a lot of work on the Disability Tax Credit side of things and made sure that this is all well understood by me as well because I have a son that’s on the autism spectrum. So, this is the reason I have any expertise in this area.
What’s it for? It’s for either family or parents to put money away for a disabled family member or someone who is disabled to put money away themselves. I found that one out from a reader who sent me a really good email explaining a whole bunch of stuff that he had done.
Doug Hoyes: Now so I’ll just fire some questions and you can answer yes or no if you know the answer, if you don’t then we can skip over it.
Alan Whitton: Oh there won’t be any no’s, I’m an expert.
Doug Hoyes: There you go, that’s right, whether I know the answer or not I’m going to give you the answer.
Alan Whitton: I’ll make it up.
Doug Hoyes: So my understanding is you can contribute up to the age of 49, is that correct?
Alan Whitton: Yeah, it becomes an issue with when the money gets withdrawn for the person involved and after 55 or something like that because they’re close enough to collecting CPP there’s a whole bunch of interesting stuff so 49 seems to be the stop point.
Doug Hoyes: So there are complicated rules that –
Alan Whitton: It is possibly the most interestingly complicated savings plan I’ve ever seen in my life.
Doug Hoyes: Which is why on your website you’ve got numerous articles as you kind of, you know, driven the boat through the waters trying to figure all this out, that’s really what it’s all about that’s really what it is.
Alan Whitton: Yeah we started off working with Toronto, well with TD Canada Trust, with their direct investing group with this. And this was, we were the first people to actually ask for this where we lived. And we killed like I don’t know 20 trees worth of forms and we still didn’t quite get it right. Because the poor lady working on it had never worked with this system either.
Doug Hoyes: Yeah this is not as well known as an RRSP, which every bank branch does thousands of every year and RESPs as well and even TFSAs. So, let’s take a very simple scenario here. Let’s assume that one of my dependents, my children, has been diagnosed with something where they qualify for the Disability Tax Credit.
Alan Whitton: Right.
Doug Hoyes: Because that’s the key.
Alan Whitton: That’s the crux of it.
Doug Hoyes: If you don’t qualify for the Disability Tax Credit than an RDSP is not an option. So, as you said in your case your son is on the autism spectrum so obviously there was medical evaluations and forms to fill out.
Alan Whitton: And it’s one of the harder side of things.
Doug Hoyes: Takes forever. But eventually someone at Revenue Canada says yes you qualify on behalf of your son for the Disability Tax Credit.
Alan Whitton: Yes. Now you’ve got to get your doctor and/or another group of professionals to sign off on the T2201 evaluation forms. In the case where you have a child that’s got a physical disability it’s a lot easier because the box becomes a simple my child is in a wheelchair these kind of things.
When it comes to dealing with brain stem injuries or however they’re, my wife could say this better than I could. But especially in the autism case, doctors, especially pediatricians, are leery to fill in the forms sometimes because they’re not positive they’re filling it out right. And the CRA is really looking for very specific vocabulary about oh, what did my – my wife actually put this down somewhere so I should be careful what I say here. But, yeah so they’re going to look for significant effects on everyday life is what needs to be in the form. It needs to be proven that this disability is something that’s going to screw up your loved ones life before they’re going to start thinking about the DTC and giving it to you.
Having said that, the CRA has actually put a nurse practitioner on their Twitter feed or at least available for a consultation with other medical professionals to help them out because I get a lot of emails from people saying my doctor doesn’t know how to fill this in or I applied and my doctor didn’t fill in the form correctly or the CRA didn’t like how my doctor filled in my form, what do I do now? The answer is you reapply.
Doug Hoyes: Try again.
Alan Whitton: You can keep reapplying and trying but you better make sure you have a good story and maybe try and consult with the CRA and say why did this get turned down? Because it’s a tricky system, I mean with my own son, he was evaluated and we got the DTC and then at age 10 they said you got to do it again because we said this was for 10 years so how he’s been evaluated, nd he receives the DTC and I can put money in my RDSP because of it up to age 18. But when he turns 18 we’re going to have to do this all again. And this time you’re going to have to do it with him sort of being the driving force running through it.
Doug Hoyes: He’s an adult at that point.
Alan Whitton: Exactly.
Doug Hoyes: So can you tell me that phrase again then as to what, specifically to qualify for a Disability Tax Credit when you boil it right down to it, it’s essence it comes down to.
Alan Whitton: Significant effects on everyday life.
Doug Hoyes: Significant effects on everyday life, okay. And which is very easy to say but much more difficult to quantify.
Alan Whitton: Exactly. So the doctor has to be able to show how this disability is going to mess up their lives and why they’re going to need help from the government and get the DTC because as you said without the DTC, the RDSP doesn’t happen.
Doug Hoyes: So if I need glasses because I have bad eyesight well okay that’s not going to have significant impact on my life.
Alan Whitton: No.
Doug Hoyes: If I’m blind.
Alan Whitton: Yes.
Doug Hoyes: Then probably that will have a significant impact on my life.
Alan Whitton: Right.
Doug Hoyes: And therefore I would qualify. So, okay so and again this is a very complicated area and we’re certainly not going to try to answer every possible question on it. But you – so, if there is a disability you go through the process, get the doctors to sign off and you qualify for the Disability Tax Credit, which now makes you eligible to set up an RDSP.
Alan Whitton: Right.
Doug Hoyes: So give me a real simple example. Because I understand how it works with an RESP, a Registered Education Savings Plan. If I put $1,000 into an RESP the government gives a grant of X number of dollars, that increases the RESP. There are limits, you can only put in so much, you can only put it in for a kid up to a certain age, they have to draw it out for education, there’s clearly defined rules. An RRSP, same deal, there’s a maximum amount you can put in each year and the government doesn’t give you any money but it’s a tax deduction. With an RDSP you don’t get a tax deduction when you put the money in.
Alan Whitton: No, it’s after tax money.
Doug Hoyes: Okay, which makes it different than an RRSP. With an RRSP, a Registered Retirement Savings Plan, I get a tax deduction when I put it in and it grows tax free until I take it out. With a RDSP I don’t get a tax break when I put it in.
Alan Whitton: Nope.
Doug Hoyes: So, why would I do it?
Alan Whitton: You get grants from the government based on either the contributor’s parents, in my son’s case, income levels. So, if I was not making a lot of money but I was still able to open the RDSP there might be some money that would go in there even if I put no money in, if my income is low enough.
Doug Hoyes: Very low income, okay.
Alan Whitton: That’s very low income. In my case I make a good enough income. I have a limited amount of money I can put in that they will match and then put grants on top of that. And the grants are very generous. I mean the RDSP program is well designed in this concept of trying to help disabled people in the future so that they’re not going to be drag on society and things like that. They’re going to have some money to help them out. The problem is so many banks really don’t want to set it up because there’s not a lot of money in it.
Doug Hoyes: Yeah there’s a maximum that can go into it so there will never be a hundred million dollars in a plan.
Alan Whitton: No.
Doug Hoyes: So just give me some ballpark numbers then. So, let’s say that I was able to come up with a thousand dollars to put money in. If I am – so, what is the range of grants? I looked this up going through all the links that are on your website and it looks to me like it could be somewhere in the range of one to three times to what I put in.
Alan Whitton: Yeah in my case it’s pretty much a one to one matching. And I can put in a maximum of about $2,000 a year. So, they’ll be about $2,000 to $2,500 worth of grant on top of that that will go into what to match what I put in . But if I put more money in, there won’t be any more money from the government. But it’s still a savings plan for my son.
Doug Hoyes: And you can’t put unlimited money in though.
Alan Whitton: No.
Doug Hoyes: There’s a cap on what you can put in. So, if you put in, and again we’re just giving an example here, every situation’s going to be different as you said based on the parent’s income in the case of a minor child. But, you know, if I put $1,000 in potentially the government’s also going to put $1,000 in, you know, plus or minus. If I put $100,000 in, well I can’t, that’s more than you’re allowed to put in. But even so the maximum they put in is an extra thousand or whatever.
Alan Whitton: Exactly.
Doug Hoyes: They’re obviously clearly defined rules to it. So the reason you would set one of these up is number one, the government will in most circumstances kick some extra money in.
Alan Whitton: Right.
Doug Hoyes: And number two it is growing tax free within the plan.
Alan Whitton: Yes.
Doug Hoyes: Until you take it out.
Alan Whitton: Right.
Doug Hoyes: And in the case that you’ve described with your son, it will be your son taking the money out presumably when he’s older.
Alan Whitton: Right. And he’ll be – the money from the grants that he’s receiving will be I believe, and the growth, will be the tax portion.
Doug Hoyes: The money you put in isn’t taxed.
Alan Whitton: Because it was after tax money in the first place.
Doug Hoyes: Right, I got you. So, that’s where it’s a little different than an RRSP, every dollar you get out of an RRSP gets added to your income, which is potentially subject to tax. But an RDSP that’s not the case, the money you’ve put in then comes back out.
Alan Whitton: So it’s similar to a RESP in that kind of way.
Doug Hoyes: Got it, got you, no tax going in, modified tax coming out. So, it makes sense for somebody who has a minor child who’s been diagnosed with a disability because it allows you to build up funds for the future. But it would potentially also make sense if I happen to be 25 years old at the time that I find out I have a condition that perhaps is going to deteriorate over time. I’m still working now but it’s projected that I’ll be able to work less and less in the future so while I have income now, I’ll put it in the RDSP and therefore I’m building up money in the future. Would that be another common example?
Alan Whitton: Yeah and that’s what I’m hearing from as well. I mean I’ve written really from the perspective of parent but I’m hearing more from people that are disabled and there’s questions about well, if I find out about my disability when I’m 30, is it worth setting up an RDSP? The answer of course is it depends on the situation. But, you know, as you said if the limit is at 49 to put money in and you find out you’re disabled at 48 well maybe this is not the way you’re supposed to be going.
Doug Hoyes: Right. You got to really crunch the numbers. So, I’m going to put myself in your shoes and I’ve got a child who is let’s say 10, 12, 15 years old and I’ve got $500 to invest, should I put it in a RDSP or should I put it in a RESP or should I pick some of the other initials RRSP, TFSA, how do I decide what I should do with it?
Alan Whitton: And luckily there’s so many choices. It ends up being the ternary of choice but you, with the RDSP, depending on your income, like if you’re a lower income person and you have $500 to spare the RDSP would definitely be the place to put it. Because I mean you’ve got the disability bond, you’ve got really low income. So there will be free money going into the RDSP anyway. But the grant money will be much, will increase more if you put it in the RDSP. You’ll get more bang for your buck on the RDSP side of things to begin with.
In my instance I have an RDSP for my son but I have an RESP as well. I put as much as I can into the RDSP because I will get the most growth out of that just from government grants. Putting money into the RESP is a well if he does make it to a university or a college or, you know, some post-graduate or post-secondary program that helps him out, that money is there too.
Doug Hoyes: Yeah so it is a tricky one. The first dollar it probably does make sense to go into the RDSP because unless your income is massively high you’re probably getting, you know, one times, two times maybe even three times as much from the government.
Alan Whitton: Exactly.
Doug Hoyes: But there is a limit as to what you can put in and which point you start –
Alan Whitton: See, you’ve got to be careful with that. And I mean that’s where the TFSA can come in as well. But the RDSP again if the program was better understood, better advertised and easier for folks to be able to use it and get into it, I think life would become a lot simpler. And I think that’s where I became an expert on this because I just saw how hard it was for a lot of people.
Doug Hoyes: Well and so it seems to be if there was something out there that is really good but also really complicated then there’d be a whole lot of I don’t know crooks out there who would here, I’ll help you out, I’ll give you advice, give me some money and I’ll navigate you through the shark infested waters here. And I don’t want you to start mentioning names because I don’t want to get sued, but is that the case, are there things we should be watching out for?
Alan Whitton: There are a lot of firms out there that are helping people.
Doug Hoyes: Helping people, okay.
Alan Whitton: So, the different, you know, they offer services, they’ll give you a doctor to help you out, fill in your forms correctly so that you can get your DDC. And what they’re really going after is the settlement you’ll get from the CRA if your disability gets say moved back to –
Doug Hoyes: Retroactive to five years ago, so now there’s five years worth of payments.
Alan Whitton: Yeah. So you’re getting say $10,000 in money back from the CRA. They’re going to take anywhere from 10% to 25% of that money. Now I’ve had a few people from those firms talk to me and say 25% less is better than nothing.
Doug Hoyes: Yeah, you’re still getting 75%.
Alan Whitton: But speaking of someone who’s got a family member with a disability every dollar counts and giving away that kind of money, there’s just too many of these firms out there that are trying to make money on this for me to think that, you know, they’re just after the wellbeing of people. Now yeah there are some organizations that are out there to help. And I’m not tarring everyone with the same brush but if you’re taking 25% off the top and I don’t even know if that’s 25% of the settlement or 25% of whatever you’re going to make in perpetuity off that.
I couldn’t find out on some of these sites, the websites that I’ve been looking at. And it’s – I’m not happy with the situation and I’ve written a bunch of posts saying please do it yourself, get help. Hospitals will help you do it, your doctor should help you how to do it. If they can’t find a nurse practitioner that was just added to the RDSP and DTC rules that you can actually talk to a nurse practitioner and have her fill out the T20, or him, sorry don’t want to sound sexist, T2201 forms.
So, the government’s trying to make it easier for you. If you really feel you can’t get it done or you’ve failed a whole bunch of times, okay get help but don’t give up that much of your money. That’s crazy.
Doug Hoyes: Yeah, paying someone like an accountant or whatever for an hour or two or five of their time is one thing, paying a percentage of the whole thing is –
Alan Whitton: Yeah and every time I see a service that says you don’t have to pay a dime for this until your settlement comes in, I don’t know, I get cold shivers down my back and I start wondering –
Doug Hoyes: Yeah. Well and so, our advice for people then, and you just said it, is to do it yourself. So, you have a lot of this information on your website.
Alan Whitton: Yep.
Doug Hoyes: And what I really like about it is you’ve got a ton of links.
Alan Whitton: Yes.
Doug Hoyes: So it’s not here’s what I think, here’s the CRA pages and a whole bunch of other resources.
Alan Whitton: Well, there’s a really good resource out in BC person called Milburn Drysdale at asdfunding.com who has page by page explanations of what you can do and how you get this stuff done. And I mean it makes life so much simpler, I’ve used it because this is a fantastic resource.
Doug Hoyes: So, what is the address of your website where people can find all these links?
Alan Whitton: So http://canajunfinances.com. And yeah, if you just type that in and then put /RDSP then you’ll find my RDSP page, which has not just information about RDSP but about disabilities, about DTCs, the whole nine yards.
Doug Hoyes: All sorts of stuff. So, that’s canajunfinances.com and if you put /RDSP you’ll get all these articles. So, that’s fantastic. I appreciate you coming back to talk about that.
We’re going to take a quick break and then I’m going to go through what happens to an RDSP if you go bankrupt? So, if you’ve got an RDSP set up for your child for example, you’ve put money into it over a few years and then you yourself end up having to go bankrupt, what happens to it? There’s some implications there.
Alan Whitton: I’ll be listening closely to that one myself.
Doug Hoyes: We’ll take a quick break and be right back with that, thanks Alan.
Alan Whitton: Thank you.
Doug Hoyes: So now that we know what an RDSP is what happens if you have an RDSP and you go bankrupt? This is a tricky question. Section 67 of the bankruptcy and insolvency act says that if you go bankrupt you lose all of your assets expect for assets that are otherwise expect from seizure. Section 67 specifically says that RRSPs and RIFS are exempt except for contributions in the last 12 months.
Some assets like most clothing, household goods and inexpensive car are exempt from seizure due to provincial legislation. But there is nothing in the bankruptcy and insolvency act about RESPs, TFSAs or RDSPs. They are not specifically exempt from seizure if you go bankrupt. That’s a problem if you’re considering bankruptcy.
However there was a recent court case where the judge determined that the trustee could not seize a RDSP from a bankrupt. In this particular case the RDSP was started in 2010 and the bankrupt’s parents contributed around $7,000 to her RDSP back in 2012 and by 2015 with income growth and grants the RDSP had funds of over $32,000.
This person filed for bankruptcy in 2015 and since there are no specific provisions in the law to make an RDSP exempt, the trustee attempted to seize the money but The Royal Bank, who held the funds, said no, so it went to court. The court decided that if the trustee was permitted to seize the funds the bankrupt would be required to pay a significant amount of the government assistance in the fund and so the court decided that it was just an equitable to now allow the trustee to seize any of the funds.
So, what does this court case mean if you go bankrupt? Well, it means that the court could decide to let you keep the funds in your RDSP or it may decide the other way. It’s not clear. All we know is that in this specific case the court did not allow the trustee to seize the funds.
Now in my experience it is relatively rare for someone going bankrupt to have funds in an RDSP at the time of bankruptcy. RDSPs are not well known. While I see people with RRSPs all the time RDSPs are relatively rare. And as we learned earlier in the show you can only contribute funds to an RDSP for someone who is eligible to receive the Disability Tax Credit.
So, unlike an RESP that you can contribute to as soon as your child is born you typically would not begin to contribute to a RDSP for at least a few years after your child is born and only when they are diagnosed with an eligible disability. So, that again makes them less common.
However if you own an RDSP either for yourself or on behalf of your minor children what should you do if you’re considering bankruptcy? Well, the obvious answer is that you should immediately talk to a Licensed Insolvency Trustee. We can review your RDSP paperwork and review your options. One obvious option may be to file a consumer proposal because in a consumer proposal you don’t lose your RDSP bankor anything else so for many that’s the obvious solution.
I suspect there will be more court cases on this topic and I also suspect that the government will eventually change the rules to give RDSPs the same treatment as RRSPs so that there is no confusion as to what happens in a bankruptcy. However we aren’t there yet so that’s why expert advice is essential.
That’s our show for today. Full show notes including a transcript and links to everything we discussed today can be found at hoyes.com that’s h-o-y-e-s-dot-com. I’ll include some great links to the big Canajun man’s Canadian personal finance blog which has the best source of information on RDSPs anywhere on the internet, at least in my opinion. You can find it at canajunfinances.com. And again full links are in the show notes over at hoyes.com.
I’m Doug Hoyes, until next week thanks for listening that was our special RDSP edition right here on Debt Free in 30.
- Do I have to go to court if I file for bankruptcy?
- What are My Options When In Debt if My Income is from Social Assistance, Pensions, or Support Payments?
- How One Man Survived a Layoff After 20 Years at Canada’s Biggest Company
- RRSP, Registered Savings Accounts and Bankruptcy Laws
- Realization and Distribution of Assets in a Bankruptcy