When the beneficiary of a Registered Disability Savings Plan (RDSP) passes away in Ontario, the plan must be closed. Any government grants and bonds paid into the account over the previous 10 years must be returned to the federal government, while the remaining balance falls into the deceased’s estate to be distributed.
The Registered Disability Savings Plan (RDSP) is an incredibly powerful financial tool in Canada, designed to help families build long-term financial security for a person with a severe and prolonged disability. Through the Canada Disability Savings Grant (CDSG) and Bond (CDSB), the federal government heavily matches personal contributions. However, navigating the rules surrounding an RDSP can feel like a maze, particularly when the beneficiary of the plan passes away.
Unlike RRSPs or TFSAs, which can easily be rolled over to a spouse or passed directly to a named beneficiary to avoid the Ontario Superior Court of Justice, an RDSP operates under much stricter guidelines. Whether the deceased lived in Hamilton, Kingston, or Toronto, the RDSP cannot simply be handed over to a sibling. It must be dismantled according to strict federal rules. In this guide, we will explain the step-by-step process of closing an RDSP, repaying the government, and handling the remaining inheritance. 📊
Step-by-Step Process for Closing an RDSP Upon Death
Handling an RDSP after death requires coordination between the Estate Trustee, the financial institution holding the account, and the federal government. Here is how the process generally unfolds in Ontario.
Step 1: Notify the Financial Institution
As the Estate Trustee (executor), your first step is to provide the bank or financial institution holding the RDSP with an original, death certificate. You must formally instruct them that the beneficiary has passed away. By law, an RDSP must be closed by December 31st of the year following the year of the beneficiary’s death. 📄
Step 2: Calculate the Assistance Holdback Amount (AHA)
This is the most critical part of the process. The federal government requires the repayment of all CDSG and CDSB funds deposited into the RDSP within the 10 years immediately preceding the beneficiary’s death. This 10-year repayment rule is known as the Assistance Holdback Amount (AHA). You do not have to calculate this yourself; the bank’s RDSP system will automatically determine the exact amount owed.
Step 3: Repayment to the Federal Government
Before any money can be released to the estate, the financial institution will extract the Assistance Holdback Amount directly from the RDSP balance. These funds are transferred back to Employment and Social Development Canada (ESDC). You cannot stop or appeal this repayment; it is a mandatory condition of having an RDSP. 💳
Step 4: Distribute the Remainder to the Estate
Once the government has taken back its 10-year holdback, the remaining funds-which consist of personal contributions, government grants/bonds older than 10 years, and all the investment growth-are liquidated. Because Ontario law generally does not allow direct beneficiary designations on an RDSP, the bank will issue a cheque payable to the “Estate of the Deceased.”
Step 5: Probate and Final Distribution
Because the money falls into the estate, it is now subject to Ontario’s Estate Administration Tax (probate). As the Estate Trustee, you must include the RDSP value in your probate application. Once probate is granted and taxes are paid, you will distribute the remaining RDSP funds according to the deceased’s Will (or Ontario’s intestacy laws if there was no Will). ⚔️
How Much Does This Process Cost?
Dismantling an RDSP involves significant financial clawbacks and potential taxes. Here is a breakdown of what the estate can expect to pay.
| Expense / Clawback | Estimated Cost in CAD | Details |
|---|---|---|
| Government Repayment (AHA) | Up to $35,000+ | All grants and bonds from the last 10 years are returned. |
| Ontario Probate Tax | 1.5% of the remainder | The remaining RDSP funds are subject to Estate Administration Tax. |
| Income Tax on Growth | Varies | Investment growth and retained grants are taxable to the estate. |
| Bank Processing Fees | $50 to $150 | Standard administrative fees charged by the bank to close the plan. |
It is highly recommended to consult an estate accountant to properly report the taxable portion of the RDSP payout on the deceased’s final tax return. 💵
How Long Does the Process Take?
Once you provide the death certificate to the bank, the financial institution typically takes 30 to 60 days to calculate the holdback, return the funds to the government, and issue the final cheque to the estate. However, because the money becomes part of the estate, the beneficiaries will not actually see the money until the entire Ontario probate process is complete, which often takes 8 to 14 months depending on court backlogs.
Frequently Asked Questions (FAQ)
Is the RDSP payout taxable upon death?
Yes, but only a portion of it. The original personal contributions are returned tax-free. However, any government grants or bonds older than 10 years that remain in the account, plus all investment growth, are fully taxable and must be reported on the deceased’s final tax return.
Can I name a direct beneficiary to bypass probate?
In Ontario, unlike RRSPs or TFSAs, you generally cannot name a direct beneficiary on an RDSP account. The proceeds must be paid directly into the beneficiary’s estate, making them subject to probate fees and creditor claims.
Can the RDSP be rolled over to a disabled sibling?
No. When the beneficiary dies, the specific RDSP must be closed. While the inheritance might eventually go to a disabled sibling through the Will, the RDSP account itself cannot be directly transferred or merged with another person’s RDSP.
What happens if the deceased had no Will?
If the beneficiary died intestate (without a Will), the remaining RDSP funds fall into their estate and are distributed according to Ontario’s Succession Law Reform Act. Typically, this means the funds go to their parents, or to their siblings if the parents have already passed away.
Does the government take the personal contributions too?
Absolutely not. The federal government only takes back the matching grants and bonds (CDSG and CDSB) it provided within the last 10 years. All personal contributions made by family members remain in the account and are paid out to the estate.
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