Mr. and Mrs. Caring have a son named Chris who has a significant mental infirmity. They are getting older, and Chris is now an adult. Chris is unable to work due to his mental infirmity and his only source of income apart from his parents is the provincial disability support program. The Carings still care for Chris at home; however, that is becoming more difficult, and they anticipate that Chris may move into a group home in the future.
The Carings want to arrange their affairs so that Chris will be as well provided for as possible. They are aware that taxes would reduce the amount available to Chris. They are also aware that Canadian tax law contains specific provisions addressing disability because Chris receives the disability tax credit. The Carings decide to book a meeting with their tax advisor to discuss the best way to arrange their affairs to support Chris. Their advisor Sam recalls seeing CRA technical interpretations that would be relevant to this question and decides to review them in preparation for the meeting.
Transfer to a Register Disability Savings Plan ("RDSP")
The first technical interpretation Sam reviews addresses a rollover from a registered retirement income fund ("RRIF") to an RDSP when the person who had the RRIF (the "annuitant") dies.1 The amount available for this rollover is capped. We will say more about the cap later in this article. Subject to the cap, the rollover would prevent immediate tax as a result of the death. There are a number of requirements which must be met in order for the rollover to be available which are set out in section 60.02 of the Income Tax Act ("ITA"). One of the requirements is that the beneficiary of the RDSP be an eligible individual as defined in section 60.02. An eligible individual is a child or grandchild of the deceased annuitant who was dependent on the deceased at the time of death due to physical or mental infirmity. This rollover is also available for certain other plans such as an RRSP that has not yet been converted to a RRIF.
Chris is the child of the Carings and has a mental infirmity. Assuming the requirements for an RDSP are met (those requirements are beyond the scope of this article), the outstanding question would be whether Chris is dependant on his parents and would continue to be until the time of their deaths.
Chris' income is below the basic personal amount plus the disability amount so the rebuttable presumption of lack of dependency in subsection 146(1.1) of the ITA would not apply. Dependency would be based on the facts which may change before the time of death. In Chris' case, it is likely that he will move from residing with his parents into a group home before either of them dies.
In the technical interpretation, the CRA addressed a situation where the child had already moved into a group home. The CRA indicated that on the facts of the situation presented the child did appear to be dependent. As such, in the CRA's view, living apart from the parent does not preclude a finding of dependency where the other factors support that finding. For instance, in the scenario the CRA considered, the provincial disability support program only covered basic room and board at the group home and all other financial needs were covered by the mother. The CRA also pointed to a number of factors that they would look at when considering dependency. That portion of the technical interpretation reads as follows:
The CRA generally considers a child to be financially dependent on the deceased for support at the time of death if the child ordinarily resided with and depended on the deceased, and the child's income does not exceed the above threshold. It is important to note that a child who did not ordinarily reside with the deceased, or whose income exceeded the threshold, may still be considered to be financially dependent on the deceased if determined by the facts. Some of the factors that may be considered in making this financial dependency determination include the income of the child from all sources, the cost of living (including the cost of the child's medical or special care requirements) and the ability of the child to provide for self-support, and any support received by the child from other sources.
Depending on how Chris' situation continues to change during their lifetimes, a rollover to an RDSP may be an option for the Carings to consider.
The total contributions to an RDSP in favour of an individual use as Chris are limited to $200,000 during the individual's lifetime. The Carings have two choices. They may make contributions out of after-tax dollars during their lives ("After-Tax Contributions"). In the alternative, they may arrange for contributions on a rollover basis on death ("Rollover Contributions").
Some of the payments out of the RDSP to Chris are taxable. Some are non-taxable. Generally speaking, contributions corresponding to the principal amount of After-Tax Contributions are non-taxable.2 Distributions corresponding to the principal amount of Rollover Contributions are taxable.3 Income accumulates on a tax-deferred basis while it is retained in the RDSP.4 However, distributions of income are subject to tax.5
While RDSPs are not subject to the 21-year deemed disposition rule because they are excluded from being a trust for that purpose by paragraph (a) of the definition of "trust" in subsection 108(1)", they are required to begin making payments once the beneficiary reaches age 60.6
In Ontario, RDSPs do not affect eligibility for provincial disability support pursuant to sections 28(1) 26.1; 42.17; 43(1)15.4, 15.5, 15.6 and (5.1) of Ontario Regulation 222/98 under the Ontario Disability Support Program Act.
Transfer to a Lifetime Benefit Trust
One common way to make arrangements for a person with an infirmity is a Henson trust, name after Ontario v. Henson, [1987] 26 O.A.C. 332, 28 E.T.R. 121 (Ont. SCJ). Henson trusts are intended to preserve the beneficiary's entitlement to provincial disability support. If drafted to meet the statutory definition, a Henson trust may also qualify as a lifetime benefit trust.
The second technical interpretation that Sam reviews considers a rollover to a lifetime benefit trust.7 Under section 60.011 of the ITA, certain register plan proceeds can also be rolled over to a lifetime benefit trust for the purchase of a qualified trust annuity when the requirements are met.8 The taxpayer who is the beneficiary of the trust must be a mentally infirm spouse, common-law partner, child, or grandchild. If they are a child or grandchild, they must have been dependant on the deceased due to that infirmity immediately before the deceased died. The trust itself must be a personal trust under which no one else can receive or otherwise obtain the use of any income or capital of the trust during the taxpayer's lifetime. In addition, the trustees must be able to make payments to the taxpayer and be required to consider the taxpayer's needs when deciding whether or not to make a payment.
In the technical interpretation, the CRA notes that this provision does not define mental infirmity. This provision does not refer to the disability tax credit either. As a result, the CRA concluded that it is not necessary for the beneficiary to qualify for the disability tax credit in order to have a mental infirmity for this purpose. Indeed, a person who was eligible for the disability tax credit on the basis of physical infirmity alone would not qualify as the lifetime benefit trust provisions specifically refer to mental infirmity.
In this case, Chris does have mental infirmity and it is significant enough to meet the requirements for the disability tax credit. As such, a trust drafted to qualify as a lifetime benefit trust may be another option for the Carings to consider.
Lifetime benefit trusts do not appear to be exempt from the 21-year deemed disposition rule. However, the CRA's technical interpretation indicated that they are subject to the usual taxation of trust distributions in exchange for a capital interest in the trust.9 The 21-year rule may be a disadvantage, especially if Chris is expected to live significantly more than 21 further years. On the other hand, the ability to roll property out of the trust could be beneficial.
Considerations in Determining the Most Suitable Option
Both of the possibilities discussed in these technical interpretations are focused on rollovers from certain registered plans. They are, therefore, more likely to be good options for the Carings if the funds the Carings want to leave for Chris are currently in registered plans. Both possibilities also require that Chris, as a child of the deceased, be dependent on the deceased at time of death. As such, the Carings and their advisors will need to consider if that requirement can continue to be met.
While a rollover to an RDSP and lifetime benefit trust are similar in some respects, they do have key differences. A Henson trust that qualifies as a lifetime benefit trust may be a better option when a 21-year timeframe is sufficient, or an annuity structure is appropriate. If the support timeframe is longer, an RDSP with its age-based trigger for withdrawals may be more appropriate. Another key factor is the amount that the Carings are able to provide. If it exceeds the $200,000 RDSP limit they may want to focus on a lifetime benefit trust or use both an RDSP and a lifetime benefit trust.
The discussion in this article is focused on the issues raised in the technical interpretations. It is not an exhaustive discussion of RDSPs or lifetime benefit trusts. There are other important tax and non-tax considerations the Carings should consider.
Footnotes
1. CRA Technical Interpretation, 2019-0806541E5 — Financial dependency
2. subsection 146.4(7)
3. paragraph 146.4(1)"contribution"(d)
4. Subsection 146.4(5)
5. subsection 146.4(6)
6. paragraph 146.4(4)(k)
7. CRA Technical Interpretation 2019-0823751E5: Lifetime Benefit Trust
8. This provision preserves the subsection 60(l) deduction for the beneficiary though the annuitant is the trust. Section 75.2 then deems the income from the annuity to be the income of the beneficiary.
9. See section 107.
A version of this article originally appeared in Tax Topics published by Wolters Kluwer.
These comments are of a general nature and not intended to provide legal advice as individual situations will differ and should be discussed with a lawyer.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
