One of the most common fears for Registered Disability Savings Plan (RDSP) holders is having to periodically renew the Disability Tax Credit (DTC). What happens to an RDSP if the government decides the DTC recipient is no longer eligible? What if the person had a temporary condition and no longer meets the federal governments definition of disabled?
Previously, if an RDSP beneficiary lost their DTC eligibility, they were forced to close the account and repay all grants and bonds paid in the past 10 years. However, a rule change in 2021 now allows RDSPs to remain open indefinitely, and account holders are not required to close the plan or forfeit the government money solely because of a change in medical status. Additionally, losing the DTC does not trigger am automatic claw back of the grants and bonds already paid into the account.
While the RDSP of a beneficiary who is no longer qualified for the DTC is permitted to remain open forever, no new personal contributions are allowed into the account, and the government will stop depositing Canada Disability Savings Grants and Bonds.
What happens to withdrawals?
Withdrawals via disability assistance payment (DAP) and lifetime disability assistance payment (LDAP) can be made from the RDSP account even without a valid DTC, however, the 10-year claw back rule still applies as normal. If LDAPs have already begun, the beneficiary will continue to receive payments as normal. Losing DTC eligibility after age 60 has no effect on the function of an RDSP since the window for personal contributions and government grants and bonds has already closed.
What happens if a beneficiary regains the DTC after losing it or letting it expire?
If the DTC is reinstated or renewed, the RDSP resumes normal operation. Personal contributions can continue to be made, and the account remains eligible for government grants and bonds. Additionally, the plan can retroactively claim missed grants and bonds for any years the beneficiary was DTC eligible
What about taxes? Does the loss of a valid DTC affect income taxes?
Loss of the DTC doesn’t change how the RDSP is taxed, but it does reduce the amount of non-refundable tax credits available to the beneficiary by way of the Disability Amount. For 2026, the federal Disability Amount (T1 Line 31600) is approximately $10,138. Removing the DTC would negate this tax credit and potentially increase the tax bill of the beneficiary, depending on income.
For example:
With the Disability Amount, the first ~$26,000 of annual income would be tax free (Basic Personal Amount + Disability Amount)
Without the Disability Amount, only the first ~$16,000 is tax free (just the Basic Personal Amount). Anything above this threshold and the beneficiary would have to pay income tax at their marginal tax rate.
What about rollovers from a parent or grandparents RRSP/RRIF?
If a parent or grandparent passes away, they can only roll over their Registered Retirement Savings Plans (RRSPs) and/or Registered Retirement Income Funds (RRIFs) into the child’s or grandchild’s RDSP within 5 years of the beneficiary losing their DTC. Any funds that were previously rolled over are not affected.