Canada's Registered Disability Savings Plan (RDSP): Canada's ...

I have today received a letter dated May 16, 2012, from the Honourable James M. Flaherty, Minister of Finance. I had no idea why I did not get a reply to my correspondence when I knew others had, so I am very pleased to finally get Mr. Flaherty?s letter. It does not give me what I?d like to hear, but it stops my guessing regarding the use of the beneficial Registered Disability Savings Plan for my son and the disabled family members of other such Canadian-American families.

He has confirmed that the RDSP (as well as the TFSA and RESP) are not recognized in the Canada-United States Income Tax Convention but that my concerns on this matter will be considered when the Convention is next open for renegotiation.

Mr. Flaherty has made it clear that the RDSP, which is used as a retirement tool (versus using a Registered Retirement Savings Plan) for many disabled persons,

as: Money paid out of an RDSP will not affect a person?s eligibility for federal benefits, such as the Canada Child Tax Benefit, the Goods and Services Tax credit, Old Age Security or Employment Insurance benefits. In addition, RDSPs will have little or no impact on provincial and territorial social assistance payments. For further details, contact your provincial or territorial government.

should only be used if the Beneficiary or the Holder of the RDSP is NOT also a US Person. It is not a beneficial tax-saving tool when such persons are US Citizens in Canada. Such persons are by virtue of their US citizenship, Second-Class Canadians, discriminated against and deprived of saving for their retirement by the use of an RDSP so their federal and provincial benefits will not be affected (vs the use of RRSP). It is apparent these Second-Class disabled Canadians must miss out (or be subject to US tax) on the following:

To encourage savings, the Government of Canada introduced the Canada Disability Savings Grant and the Canada Disability Savings Bond.

The Canada Disability Savings Grant is a matching grant that the Government deposits into the RDSP. Each year, the Government will match contributions made by paying up to $3 for every $1 paid into the plan, depending on the amount contributed and on the beneficiary?s family income. The Government will deposit a maximum of $3,500 each year, with a lifetime limit of $70,000. Grants will be paid into the RDSP until the year the beneficiary turns 49.

For example
If the beneficiary?s family income is less than or equal to $83,088*:
? The Government will deposit $3 for every $1 on the first $500 contributed to the RDSP and $2 for every $1 on the next $1,000.
If the beneficiary?s family income is over $83,088*:
? The Government will match $1 for every $1 contributed on the first $1,000.
* Income amounts will be updated yearly based on the rate of inflation.

The Government of Canada will also pay a Canada Disability Savings Bond of up to $1,000 a year to low-income and modest-income Canadians. The good news is that no contributions are required to receive the bond; simply open an RDSP and fill out an application form at the financial organization where you have your RDSP. Bonds will be paid into the RDSP until the year the beneficiary turns 49. There is a bond limit of $20,000 over the beneficiary?s lifetime.

For example
If the beneficiary?s family income is less than or equal to $24,183*:
? The Government will deposit $1,000 each year into the RDSP.
For beneficiary family incomes between $24,183 and $41,544*:
? The Government will deposit a portion of the $1,000. As your income increases, the bond amount paid decreases.
* Income amounts will be updated yearly based on the rate of inflation.

From Mr. Flaherty?s letter to me:

Thank you for your correspondence of November 14 and 21, 2011 and January 4, 2012 regarding the taxation by the U.S. of income earned by dual Canadian-American citizens resident in Canada, as well as the requirement for these individuals to file tax and information reporting forms in the U.S. Please excuse the delay in replying.

In your correspondence, you draw attention to financial interests held in Canadian deferred income arrangements, such as Registered Disability Savings Plans (RDSPs), Tax-Free Savings Accounts (TFSAs), and Registered Education Savings Plans (RESPs). While I cannot comment on the specifics of your situation, I would like to make the following general remarks.

Canada and the U.S. have agreed in the Canada-United States Income Tax Convention to exempt from withholding tax dividends and interest paid to a trust, company, organization or other arrangement operated exclusively to administer or provide pension or retirement benefits, such as a Registered Retirement Savings Plan or a Registered Retirement Income Fund. Accordingly, when the above requirements are not met, dividends and interest are subject to income tax.

Since an RDSP, a TFSA or an RESP can be set up to pursue financial objectives other than he exclusive provision of pension or retirement benefits, they do not meet the criterion set out above and, consequently, they do not receive an exemption from U.S. income tax under the Convention.

Your concerns on this matter will be considered when the Convention is next open for renegotiation.

The rest of the letter relates to our requirement to file a Foreign Bank Account Report (FBAR) and what has been reported in the Finance Minister?s correspondence to others. It also highlights the December 7, 2011 IRS guidance on U.S. tax return and FBAR filing requirements for citizens living in Canada and other countries.

It reiterates that penalties imposed by the IRS under FBAR will NOT be collected by the Canada Revenue Agency (CRA) on their behalf and that the CRA does not and will not collect the U.S. tax liability of a Canadian Citizen if the individual was a Canadian Citizen at the time the liability arose (whether or not the individual was also a U.S. Citizen at that time).

The Fact Sheet was enclosed for information purposes only, not to be viewed as tax advice.

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