It is well understood that the Registered Disability Savings Plan (RDSP) is tax-deferred, meaning it is not taxed until withdrawn. So how are Lifetime Disability Assistance Payments (LDAPs) taxed? Are the taxes paid by the beneficiary or the account holder? Are they subject to withholding taxes the same way withdrawals from Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) are? Is the entire payment taxable?
The key to LDAP taxation is understanding that not all funds within the account are treated equally. Instead, each payment is viewed as a combination of four separate “buckets” of money:
Bucket A – Personal Contributions – The money the beneficiary or their family and friends deposited into the RDSP. Since this was contributed with after-tax dollars, this portion is never taxed upon withdrawal.
Bucket B – Government Grants and Bonds – The Canada Disability Savings Grants (CDSG) and Bonds (CDSB) paid into the account.
Bucket C – Investment Growth – Any interest, dividends or investment income earned inside the plan. The CRA doesn’t distinguish between investment growth earned on personal contributions vs investment growth earned on government contributions. Interest is interest, and it is all part of the same bucket.
Bucket D – Tax deferred proceeds from another registered account – A deceased parent’s or grandparent’s RRSP/RRIF/RPP funds can be transferred into their financially dependant child’s or grandchild’s RDSP as a tax deferred personal contribution. Secondly, a beneficiary’s own RESP can be rolled over into an RDSP provided certain criteria are met. Lifetime Personal Contribution limits into the RDSP still apply ($200,000), and the beneficiary must 59 years of age or younger.
Bucket A is non-taxable and can be withdrawn tax free. Buckets B, C and D are taxable at the beneficiary’s marginal tax rate.
Who actually pays the taxes?
Payments from an RDSP are taxed as income for the beneficiary regardless of their age, and not by the plan holder or anyone else who makes a personal contribution.
What is withholding tax?
Withholding tax is an advance payment made directly to the CRA (or Revenu Québec) towards the beneficiary’s income taxes owed. The bank holding the RDSP is responsible for calculating the required withholding taxes using a legislated formula. These withholding taxes are applied once annual LDAP payments exceed the total of the following two federal non-refundable tax credits, namely, the Basic Personal Amount (BPA) and the Disability Amount (DA). Note that the DA is only applicable if the beneficiary qualifies for the Disability Tax Credit (DTC).
Example – In 2026, the first $26,793 ($16,452 BPA + $10,341 DA) of taxable LDAP payments would be exempt from withholding taxes. Once payments exceed that threshold, withholding rates would apply based on the predetermined formula (10%, 20% or 30%; OR 5%, 10%, or 15% if in Quebec).
Impact from other income sources
The method in which other income sources such as provincial disability payments impact with LDAPs is very favourable. In Ontario, RDSP withdrawals are completely exempt as income for ODSP purposes. This means a beneficiary can withdrawal money from their RDSP, regardless of which “bucket” the money originated from (see buckets above), without seeing any reduction in their monthly ODSP payments. BC, Alberta, Saskatchewan, Manitoba, Ontario, Nova Scotia, Newfoundland & Labrador, Yukon, Nunavut and NWT also have fully exempt RDSP withdrawals, where Quebec, New Brunswick and Prince Edward Island are only partially exempt.
RDSP withdrawals (both DAPs and LDAPs) do not reduce payments from Old Age Security (OAS) and the Guaranteed Income Supplement (GIS).
RDSP withdrawals will not reduce payments for the GST/HST credit, the Canada Child Benefit (CCB), or the Canada Workers Benefit (CWB).
RDSP withdrawals will not impact weekly Employment Insurance (EI) benefits if the beneficiary is unemployed or on sickness leave.
Lastly, receiving CPP or CPP-D does not result in RDSP payments being clawed back. However, because CPP/CPP-D is taxable income, it will use the Basic Personal Amount and Disability Amount tax credits of the beneficiary ($16,452 BPA + $10,341 DA), which could result in them paying more tax on the taxable portion of any RDSP withdrawals than if they had no other income.
Use the LDAP Calculator to estimate LDAP payments, calculate withholding taxes based your province, and provide a clear breakdown of the taxable versus non-taxable portions of withdrawals from an RDSP.