A Registered Disability Savings Plan (RDSP), which was introduced by the federal government in 2007, was designed to assist parents and others to save for the long-term financial security of a child with a severe disability. Specifically, an RDSP is a tax deferred savings plan that allows parents and others to make non-deductible contributions to a savings plan up to a lifetime maximum of $200,000. Any investment income earned in the RDSP will accrue tax-free and will be included in the beneficiary’s income when paid out.
An RDSP can be established for any resident in Canada who qualifies for the disability tax credit (DTC) and is under age 60. In this regard, in order to qualify for the DTC, a prescribed form (T2201, Disability Tax Credit Certificate) certifying that a disability is severe and prolonged must be completed and signed by a health care professional and then subsequently approved by the Canada Revenue Agency (CRA).
As illustrated in a recent court case, the need to qualify for the DTC in order to open an RDSP has proven to be an area of contention for taxpayers whose request for a DTC certification was denied by the CRA. In this specific case, the taxpayer did not need the DTC to reduce his tax payable but he did require the approval of the DTC by the CRA to open an RDSP and as a result challenged the CRA’s decision on the DTC at the Tax Court of Canada. The decision by the court highlighted a flaw in the income tax system as it does not allow an individual to appeal a determination concerning eligibility for the DTC unless that determination affects an individual’s tax payable.
In response to the decision in this case, the federal government has announced that it intends to introduce legislative amendments so that individuals can, in every case, appeal a determination concerning eligibility for the DTC.
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