Normally we think about rolling RRIFs and RRSPs to the surviving spouse upon death, however, there are other options. One such option is to roll it on a tax-deferred basis to a child or grandchild’s Registered Disability Savings Plan (RDSP).
A June 26, 2020 Technical Interpretation discussed the ability to roll funds from a deceased taxpayer’s RRIF to an RDSP for a financially dependent child or grandchild eligible for the disability tax credit. This results in the RRIF funds not being taxable to the deceased and only being taxable to the beneficiary when funds are withdrawn from the RDSP.
CRA noted that there is a rebuttable presumption that the child is not financially dependent if their income for the year prior to the parent’s death exceeds the basic personal amount plus the disability amount. For 2020, the basic personal amount ranges from $12,298 to $13,229, while the disability amount is $8,576. Where the child’s income exceeds the threshold and/or the child did not reside with the deceased, they may still qualify, depending on all of the facts and circumstances.
Based on the facts of the specific case CRA reviewed, they indicated that it was reasonable to consider this child to be financially dependent on the taxpayer, such that the rollover would be available. The facts included:
- the child suffered from a mental impairment which made him unable to work;
- the child previously resided with the parents but now resided in a group home, as the parents’ advancing age made it difficult for them to provide necessary care;
- the child resided with the taxpayer on weekends and holidays;
- the child’s sole income, from provincial disability support, did not exceed the basic personal amount plus the disability amount (that is, the income test was met);
- the child’s income covered only basic room and board, with all other financial needs provided by the taxpayer;
- the financial support provided by the taxpayer was provided on a regular and consistent basis and consisted of more than merely enhancing or supplementing an adequate lifestyle for the child; and
- the child received no other financial support.
CRA noted that, in addition to funds from a RRIF, an RRSP or a pooled registered pension plan (PRPP), and some registered pension plan (RPP) receipts, can be similarly transferred to an RDSP for a financially dependent child on the death of the taxpayer.
ACTION ITEM: If you have a child or grandchild that is financially dependent on you and eligible for the disability tax credit, consider leaving your RRIF/RRSP to them in their RDSP.