We know that the Registered Disability Savings Plan (RDSP) has a $200,000 lifetime personal contribution limit. However, let’s say that an RDSP holder tries to deposit $201,000 (for example) from their chequing account. How will the bank handle the transaction? Would the bank deposit $200,000 into the account and return $1,000 to the chequing account? Or just reject the transaction outright?
This is likely one of those in theory vs in practice scenarios. As per the RDSP rules, banks are required to ensure that contributions to an RDSP do not exceed the lifetime limit. However, because the $200,000 lifetime limit may include personal contributions made in different years and with different banks, the handling depends on the financial institutions tracking and whether they have accurate data regarding the lifetime limit when executing the transaction.
What might actually happen?
Some banking systems are programmed to accept up to the lifetime limit. Should an RDSP have a remaining limit of $200,000, and the account holder tries to deposit $201,000, the system will accept only $200,000 and immediately bounce the remaining $1,000 back to the account it was withdrawn from.
Older systems may outright reject the transaction because the deposit is above the lifetime limit amount. In this case, the account holder would have to redo the entire transaction to move an appropriate amount of money into the account.
Less sophisticated systems may not recognize there is a lifetime limit and/or fail to track the current limit of RDSP accounts. According to the Canada Revenue Agency (CRA), exceeding the $200,000 limit makes the account non compliant and could result in the termination of the RDSP. Closing the plan would trigger the Assistance Holdback Amount (AHA) rule, requiring the repayment of all government grants and bonds received in the previous 10 years.
What if an account holder has over contributed?
In the case where the account holder has accidentally over contributed to an RDSP, they should contact their bank and request an excess contribution withdrawal, also known as a return of excess contribution. Most banks have forms for registered accounts designed to undo a transaction as an administrative correction. By ensuring the bank processes this as a correction rather than a standard withdrawal, the account avoids triggering the 10-year proportional repayment rule and could proactively prevent the RDSP from being flagged as non-compliant.