When the beneficiary of a Registered Disability Savings Plan (RDSP) passes away, the account must be closed and all remaining funds paid out by December 31 in the year after the year of death. For example, if the beneficiary passes away in 2026, the account must be closed by December 31, 2027.
The administration of an RDSP when the beneficiary dies involves three primary stages:
Stage 1 – AHA
The full Assistance Holdback Amount (AHA) must be repaid back to the government.This includes all grants and bonds paid into the plan within the 10 years prior to the beneficiary’s death, as well as any grants or bonds paid between the date of death and the date the plan is closed. If the last grant or bond was received more than 10 years ago, no repayment is required. The financial institution should handle this repayment directly before any funds are released to the estate.
Stage 2 – The will
After the applicable government portion has been repaid, all remaining assets in the plan are paid out according to the beneficiary’s will. If there is no will, the funds are distributed according to provincial intestacy laws.
Stage 3 – Taxes
Much like other registered plans, the estate is responsible for paying taxes on any funds distributed from the account. Payments from the RDSP are taxed similar to regular withdrawals:
Non-taxable portion – Private contributions made to the plan are not taxed.
Taxable portion – Investment earnings, grants/bonds that were not subject to repayment and rollovers from a parents or grandparents RRSP/RRIF are considered taxable income. This taxable amount is included in the income of the beneficiary’s estate (reported on a T4A) for the year the payment is issued and not included on the beneficiary’s final income tax return.