Canada’s Registered Disability Savings Plan (RDSP): Canada’s Finance Minister Flaherty responds regarding this, as well as the RESP and TFSA

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.


20 thoughts on “Canada’s Registered Disability Savings Plan (RDSP): Canada’s Finance Minister Flaherty responds regarding this, as well as the RESP and TFSA

  1. It is nice that you heard back but definitely a bit of a downer. I would not be pleased, for sure.
    Am not at sure I understand all the info about Canada Disability Savings Bond/ and Grant. It sounds like they are deposited into an RDSP which isn’t going to help you at all.
    In addition to this and all the other recent hoopla (Saverin, the RCMP “easing us” into the idea that American law enforcement will be acting on our soil) – I begin to feel rather uneasy again.

  2. @Calgary: That is huge disappointment–but not a surprise. As you said, Canadians of American origin or heritage are being treated as second class Canadian citizens–especially ones with disabilities who were born here. What a travesty this is for this superb program and for Canada as a whole.

    These words from Flaherty don’t exactly instill confidence: “Your concerns on this matter will be considered when the Convention is next open for renegotiation.” IT seems like quote the brushoff. When will the treaty be renegotiated? What does “will be considered” mean? By whom? Why won’t he do anything in the meantime to protect the rights of Canadian citizens with disabilities to equally participate in financial planning regardless of national origin of a parent?

    Since my form letter response from Flaherty a few months ago, I have sent him three e-mails requesting he: Advise Canadian banks they must adhere to Canadian laws and Advise Canadians that Canadian laws will not be changed to meet the demands of a foreign government. I have tyhad absolutely no response from him.

    As Tiger says, over the past few months, Flaherty’s “silence has been deafening.”
    That may be a good thing or a bad thing, but at the moment, I’m losing hope that it is good thing.

  3. While our hearts race with anxiety about what lies ahead, the Canadian government moves at the pace of a sloth. I warned Flaherty in my e-mail (no response) that the effects of a future FATCA could produce a further strain on the Canadian healthcare system. Something always breaks when under stress. The deafening silence is not acceptable. If the intention is to eventually throw us to the wolves, at least give us fair warning. I haven’t much sympathy for a government which seems to have so little sympathy for the disabled who are as Canadian as you or I, except for one small identifier. They could fix this glitch and quickly too if they wanted. In the meantime, calgary411, I hope it helps a little that we are on your son’s side and thanks for explaining the RDSP. It’s a good Canadian program and should not be undermined by the intransigence of the IRS.

  4. @calgary411, thank you for sharing the letter re RDSPs (and related ‘forbidden by the US’ Canadian TFSAs, RESPs, etc.). This is blatant discrimination against those Canadians and permanent residents with disabilities, (and against all those who could qualify to use the TFSAs and RESPs – and soon, the PRPPs for retirement savings). It creates and disadvantages distinct classes of taxpayers, citizens and residents in Canada who pay Canadian taxes just like anyone else, but cannot equally avail themselves of savings (and matching programs) that others can benefit from. I cannot see how this should remain unaddressed until some potential and uncertain future treaty talks.

    We all know how long the problem with RRSPs has been around – and there is only a partial and complex ‘fix’. The impetus to change the situation, seems to be – ironically, from US professionals, not Canada (see: and ) Now that compliance and enforcement are continuing to be ramped up by the US – applied in an extra-territorial manner to those in Canada’s sovereign land, and that of other countries – it is even more urgent that the Canadian government meets this head on.

    How can Canada AFFORD to have a million or more citizens who cannot avail themselves of Canadian federal programs and grants – because of US demands? Obviously Canada believes strongly that RDSPs, TFSAs, RESPs, and the proposed PRPPs provide a significant social benefit – not just to the individuals that hold them, but to Canadian society as a whole. Otherwise, they would not exist and be blessed with favourable contribution and taxation rules. Why should Canada allow discrimination, and to indirectly support and subsidize US extraterritorial citizenship based taxation within it’s borders? Particularly when renouncing is impossible for those with particular cognitive disabilities, or those who cannot satisfy the IRS or pay through the nose to obtain 5 years of PTIN certified filings – many or most of which will result in zero US tax owed. This is an outrage.

  5. @nobledreamer, Blaze, Em, badger and recalcitrant (who I have heard from by email since we share this discrimination of our disabled family members) — thank you for your words of support.

    This is an outrage for many, in fact all of us, for whom taking part in tax-protected Canadian (or other countries’) savings plans for its citizens is detrimental as the US considers such benefits taxable and reportable with extra forms such as 3520 and 3520A for “foreign trusts”, FBARs, FATCA’s 8938.

    I will continue to advocate on this issue for my family, for other families with disabled family members and for, essentially, all of us who are rendered second-class citizens of the countries of our residence.

  6. @ calgary411
    When I said they could fix this and quickly I meant it. Why can’t the Canadian government issue your son an “honorary” Canadian birth certificate — born in Ottawa for instance? (He is after all born in the hearts of all sympathetic Canadians.) So there you go, problem solved and the IRS is out of his life forever. It just takes some creative, lateral thinking. When there is an extraordinary injustice it seems perfectly reasonable to me to come up with an extraordinary solution.

  7. @calgary411
    Thank you for posting the letter from our Minister of Finance. But how disappointing it is – how is it possible that all disabled in Canada are not treated in the same manner. Isn’t that what we, as a country, are all about?
    As Blaze said above, I have found Flaherty’s silence over the last few months absolutely deafening. I realize that there might be things going on in the background between our two countries. And that they may need to keep those things out of the press until agreements are reached.
    However, I become more doubtful that all things will work out, when it is reported (as it was on another thread this week) that a Canadian insurnace company (Sun Life), now has on its application – “Where were you born” – I believed that was an absolute NO/NO in Canada. Other articles we have read here since the May 15th meeting in DC have indicated that ‘the Canadian government is staying out of the fray’.

    Of the many letters that I wrote to government officials during the last several months, the response that I received that seemed the most heartfelt and thoughtful was from Elizabeth May, Leader of the Green Party. She herself as a born in America, Canadian is caught up in all of this. In her letter to me, she asked that I keep her posted through her constituency office. I wonder if letters to her might garner some response and also if she were made aware of the particular difficulties of Canadian disabled who happen to have American citizenship.
    Letters can be sent to:
    Elizabeth May, O.C., M.P.
    Member of Parliament
    Leader of the Green Party of Canada
    1 – 9711 Fourth Street
    Sidney, BC
    V8L 2Y8

  8. @Em: Calgary’s son WAS born in Canada. He does not need an “honorary” Canadian birth certificate. He has a real one. IRS considers him a US citizen because his parents were born in US. They will not allow him to renounce because he does not have the mental capacity to understand its meaning because of his disability. Calgary cannot renounce for him legally–although she was legally required to register this Canadian born citizen for the selective service (military draft) when he was between the ages of 18 and 25 or face fines up to $250,000 or up to give years in prison.

    I hope I have all of that info correct, Calgary. We have come to know this travesty well through you.

    @Tiger: My experience with Elizabeth May has been different. I have not even had an acknowledgment of my letters or e-mails to her.

  9. @ Blaze
    Okay now I get it but still I don’t. Canada should claim him solely as our own (upon calgary411’s request as legal guardian) and make some legislation saying hands off America! It would be our citizenship rules against theirs. We may be a mouse but we should still be able to roar at an injustice.

    I always get a good response from Elizabeth May. I seem to be able to connect with her but anything I send to Harper’s office must be too politically incorrect for them to acknowledge.

  10. @Em: Agree. It is a total mystery as to why this government–which established the absolutely brilliant and superb Registered Disability Savings Plan–would not expect and demand every Canadian have the exact same rights to participate in and benefit from it. They should be advocating even stronger for someone with a developmental disability who cannot advocate for himself or herself (which is the reason Calgary is doing it on her son’s behalf).

    Same dilemma with TFSAs and RESPs. Check out this article from Globe and Mail last year about how education savings plans in Canada are affected for two teenage girls who never lived or worked in US and never had US passport. I don’t know what the final result was…

    Like you, anything I send to Harper or to Minister of Citizenship and Immigration, Minister of Foreign Affairs and my Conservative MP seems to fall into an abyss. . Same for Flaherty recently. Very discouraging.

  11. @Blaze and Em,

    Right, my son was born in Calgary to parents born in the US, as was my daughter. LOL — I’ve certainly been on this since the inception of Isaac Brock and many know my story well, the numerous times I’ve told it. I feel bad about that sometimes but then there are always new people who I can educate on this aspect. He was never registered with the US, does not have a social security number, was raised in Canada, never lived in the US or had ANY benefit from the US.

    And, it is true that he, as any other US male, including those developmentally delayed with the help of a family member or friend, must register for the US military — another of their laws that apply to those considered US citizens in other countries. Who knows if they would / could come after him or me for that? The questions are endless.

    The absurdity is endless — for those like my son on one end of the spectrum and Eduardo Saverin on the other end. I consider Eduardo has complied with US law and paying what he owes. He, too, wants to get on with his life and his business endeavours. Both Eduardo and my son (and others like them) are punished. My son for $0.00 owed; Eduardo Saverin for complying with the law in the tremendous amount he pays to the US but it still is not enough.

    I would be glad for Canada to step in and say enough is enough; hands off. It would be not only for my son though and I don’t want special treatment for him — it needs to be for all that are likewise affected. And, I think there are / will be many.

    Thanks, you guys!!

  12. I have just thanked Finance Minister Flaherty:

    Dear Honourable Minister Flaherty.

    I want to acknowledge and thank you for your response regarding my queries and comments on Canada’s fine Registered Disability Savings Plan (as well as Canada’s RESP and TFSA) that are of no benefit to Canadians who are also considered US citizens. The cost just to report them to the US is staggering – for little or no taxes owing to the US.

    I have posted your response on the Isaac Brock site, where many from all over the world are discussing the overreach of the US for tax returns and financial reporting —

    I thank you for expressing that my concerns, not only for me and my family but for the many others that are and will be affected by this, will be considered when the Canada-United States Tax Convention is next open for renegotiation. Can you tell me the earliest date that can occur and how others concerned can have input?

    I also thank you for reiterating that Canada Revenue Agency will not collect any penalties imposed by the IRS under the Foreign Bank Account Reporting (FBAR) and that CRA will not collect U.S. tax liability of a Canadian CITIZEN if that individual was a citizen at the time the liability arose (whether or not the individual was also a U.S. citizen at that time).

    This is indeed a stressful period for Canada’s one million US citizens, whether they are aware of their requirements to the US yet or not. We want our Canadian Government to protect our privacy and economic rights. We want to benefit from the tax-protected savings plans that all other Canadians can benefit from. It is a sad time in the history of US relations with other countries. The reality of FATCA is soon to hit every Canadian as well, a cost to all of us and our country, not just those with a US presence. Please, please continue to stand up for us as we have no effective representation in the US.

    Once again, I appreciate your response. I will continue to advocate for those in Canada who do not have the voice to do so.

    Calgary, Alberta, Canada

  13. @ calgary411
    That was a perfect response … measured, respectful and calm but still making it clear that listening to Canadian’s concerns, reinforcing the still needed reassurrance and taking action as soon as possible are expected and the right thing to do. Well done!

  14. @calgary411
    You are to be congratulated. What a wonderful response. Shame on all of those that ignore our pleas and do not come forward to ease the minds and hearts of people like yourself and the many others who are law-abiding citizens caught in this trap.

  15. @Calgary411, beautiful response to a very disappointing letter from Flaherty. Even if he doesn’t read it (not likely) someone in his office must, and surely it will evoke some sort of emotional response, how could it not? Maybe it will actually get someone THINKING!

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