Managing Your RDSP When DTC Eligibility Changes

The Registered Disability Savings Plan (RDSP) is closely tied to the Disability Tax Credit (DTC). If a beneficiary loses eligibility for the DTC, it can trigger serious consequences for the RDSP. However, recent rule changes have provided more flexibility, allowing time to restore eligibility without immediately collapsing the plan.

Understanding what happens, and how to respond, ensures you protect the long-term benefits of your RDSP.

The Role of the DTC in Maintaining an RDSP

To open and maintain an RDSP, the beneficiary must be eligible for the DTC. However, eligibility can change over time due to:

Shifts in medical assessments.
Administrative errors or reassessments by the Canada Revenue Agency (CRA).
Changes in personal circumstances.

Losing DTC eligibility does not immediately eliminate your RDSP, but it does require proactive management.

Suspension Period: Keeping the RDSP Open Temporarily

If a beneficiary loses DTC eligibility, the RDSP enters a “suspension period”:

The suspension period lasts for up to four years.
During this time, the RDSP remains open, but:
- No new contributions can be made.
- No new government grants or bonds will be paid.
Existing investments continue to grow tax-deferred.
Withdrawals can still be made according to normal RDSP rules.

This suspension period provides a critical opportunity to regain DTC eligibility without collapsing the plan.

What Happens After the Suspension Period?

If DTC eligibility is not restored by the end of the suspension period:

The RDSP must be closed at the end of the fifth year after losing DTC eligibility.
Government grants and bonds received in the 10 years prior must be repaid.
Remaining personal contributions and investment growth are paid out to the beneficiary, with taxable portions reported as income.

Optimize helps you plan around these deadlines to minimize negative impacts.

Regaining DTC Eligibility and Reinstating the RDSP

If DTC eligibility is restored during the suspension period:

The RDSP becomes fully active again.
Contributions can resume.
Government grants and bonds eligibility resumes as well.
The suspension period ends with no penalty or loss of benefits.

Even if eligibility is restored after the suspension period ends, you can reopen a new RDSP, but lost grants or bonds may not be recoverable. Acting quickly is crucial.

How Optimize Helps You Manage RDSP Suspension and DTC Loss

At Optimize, we guide you through the complex process of managing RDSPs when DTC eligibility is lost. We help you:

Track suspension period timelines and key deadlines.
Support DTC reapplication efforts, providing documentation guidance.
Plan RDSP contributions and withdrawals strategically during suspension.
Minimize grant and bond repayment risks by managing timing and withdrawals.
Coordinate your RDSP with other income sources, ensuring overall financial stability.