Losing the Disability Tax Credit No Longer Closes an RDSP. It Freezes the Repayment Bill Instead
A beneficiary who stops qualifying for the disability tax credit no longer forces their RDSP to close. Since 2021, that alone does not end the plan. But the account’s repayment cap, the number that decides how much of a withdrawal the issuer has to send back to Ottawa, stops shrinking on schedule and freezes instead at the day eligibility ended. One change protects the account. The other reverses the timing advice that applies to every other RDSP holder, and on the plan we work through below it costs $20,000 on a single withdrawal.
The plan survives, and the reason is a distinction worth holding onto
Section 146.4(4)(p) of the Income Tax Act requires an RDSP to provide for amounts remaining to be paid to the beneficiary or their estate, and for the plan to be terminated, by the end of the calendar year following the earlier of the beneficiary’s death or the first year in which two conditions are both met: (A) the holder has requested that the issuer terminate the plan, and (B) throughout that year the beneficiary has no severe and prolonged impairment with the effects described in paragraph 118.3(1)(a.1).
Both conditions, not one or the other. So no plan closes automatically. The holder has to ask.
The second condition also rewards a close reading, because it is not the same test as losing the credit. Being a “DTC-eligible individual” is defined at s. 146.4(1) by whether an amount is deductible under section 118.3 for the year. Having no severe and prolonged impairment under 118.3(1)(a.1) is a question about the beneficiary’s condition. Those can come apart: a certification can lapse or a claim can fail while the impairment is unchanged, in which case the beneficiary is no longer DTC-eligible and condition (B) is still not satisfied, so the termination trigger cannot be met even with a holder’s request. That split runs through the whole of what follows. The repayment rules below turn on the DTC test. The termination rule turns on the impairment test.
This is a genuine change from the older regime. The election a holder once had to file to keep a plan open after a DTC loss, at ITA 146.4(4.1) through (4.3), was repealed by S.C. 2021, c. 23, s. 33, and regulations 5(1)(c) and 5.2 were repealed by the same statute. A transitional rule at ITA 146.4(4.01) covered plans that would otherwise have had to close after March 18, 2019 and before 2021. It has done its job and does not apply going forward.
What does not survive eligibility loss is new money, government and personal alike. Regulation 2(e) of the Canada Disability Savings Regulations lets the Minister pay a grant only where the beneficiary is DTC-eligible for the year the contribution is made and for the year or years it is allocated to, and regulation 3(e) applies the same eligibility test to the bond, for the year the bond is payable. ITA 146.4(4)(f)(i) goes further: the plan itself must prohibit contributions at any time the beneficiary is not a DTC-eligible individual for the taxation year that includes that time, with one exception, a specified RDSP payment. So the grant stops, the bond stops, and ordinary contributions stop with them. What is already inside the plan stays inside and keeps growing.
The rolling repayment cap stops rolling
Our companion piece on the three-for-one repayment rule sets out the ordinary position: while DTC eligibility holds, the assistance holdback amount is the total of grant and bond paid into the plan within the trailing ten years, less anything repaid in that period, and it ages out year by year as each payment clears its own tenth anniversary. Under regulation 5.3(1) an issuer repays the least of three dollars for every dollar withdrawn, the plan’s fair market value, and that rolling holdback.
Regulation 5.3(1) opens “Subject to section 5.4”, and regulation 5.4(1) is what takes over once “a disability assistance payment is made to a beneficiary who is no longer a DTC-eligible individual”. It keeps the three-for-one limb and the fair market value limb. It replaces the third with a formula, A plus B minus C, and the formula is where the freeze lives.
For a payment made before the calendar year the beneficiary turns 51, A under paragraph (c)(i) is the grant and bond paid into the plan within the ten years before the day eligibility ceased, less any part of that repaid within that same period. Not the ten years before the payment. B is any grant or bond paid in between the cessation day and the payment, which in practice is nothing, because regulations 2(e) and 3(e) have already closed that door. C is any grant or bond repaid since the cessation day. So the reference point stops moving, and the only thing that reduces the cap after that is making a repayment.
Take a plan credited with $4,000 a year in grant and bond from 2016 through 2025, $40,000 in total, with nothing paid in since. Assume each year’s grant lands at the start of the year and that eligibility ceases at the start of 2026, when the beneficiary turns 42. The plan is worth $95,000 when they take a $20,000 disability assistance payment in 2031.
| Scenario | Cap used | Repayment on the $20,000 payment |
|---|---|---|
| Eligibility ceased in 2026 (Reg 5.4) | $40,000, the ten years before the cessation day | $40,000 |
| Eligibility still held in 2031 (Reg 5.3) | $20,000, grant and bond credited 2021 to 2030 | $20,000 |
Same plan, same withdrawal, same year. The frozen cap costs $20,000 more, because the five years of holdback that would have aged out between 2026 and 2031 never get the chance to.
That is the practical point, and it inverts the standard advice. Every other RDSP holder can shrink the repayment by waiting for old grant to pass its tenth anniversary. For a beneficiary who is no longer DTC-eligible and not yet 51, waiting does not help, because the window the cap is measured over is pinned to a date in the past.
There is a corollary the formula makes plain, and it points the other way. C is grant and bond repaid since the cessation day, and it accumulates. Once the $40,000 above has gone back, every later payment computes A plus B minus C as $40,000 plus nil minus $40,000, which is nil, so no further repayment arises. The frozen cap is a bill that comes due once rather than a charge on every withdrawal. Taking the money in small slices does not reduce the total, it defers it while the plan stays pressed against the floor described below, and the annual maximum in ITA 146.4(4)(l) limits how fast it can be discharged in any case.
Two clocks run on the same plan
One thing does keep rolling, and it decides whether the withdrawal is allowed at all. ITA 146.4(4)(j) requires the plan to prohibit a disability assistance payment that would leave the plan’s fair market value, immediately after the payment, below the assistance holdback amount. That paragraph references the assistance holdback amount, and ITA 146.4(1) gives that term “the meaning assigned under the Canada Disability Savings Act”, which sends it to regulation 1. Under paragraph (b) of that definition it is still the trailing ten years before the moment in question, and it still ages out on schedule.
So a beneficiary in this position is running two clocks at once. The rolling holdback sets the floor the plan cannot be taken below. The frozen formula in regulation 5.4 sets how much goes back to Ottawa when a permitted payment is made. Waiting loosens the first and does nothing to the second.
The frozen cap narrows again through the fifties, then goes to nil
Past 50 and not yet past 59, the answer depends on when eligibility was lost.
Where it ceased before the year the beneficiary turned 50, regulation 5.4(1)(c)(ii) sets the lookback at 60 minus the beneficiary’s age on December 31 of the payment year, counted over a period ending before the cessation day. The cap does shrink as the beneficiary ages toward 60, just over a fixed historical window rather than a moving one. On the same plan and the same 2026 cessation:
| Beneficiary’s age at payment | Lookback window | Cap |
|---|---|---|
| 52 | 2018 to 2025, eight years | $32,000 |
| 55 | 2021 to 2025, five years | $20,000 |
| 59 | 2025, one year | $4,000 |
Where eligibility instead ceased after the year the beneficiary turned 49, regulation 5.4(1)(c)(iii) applies and the window is measured differently again: from January 1 of the year ten years before the payment year, ending the day before the cessation day. Someone who lost the credit at 54 is on that branch, not the one in the table.
For a payment made after the calendar year the beneficiary turns 59, paragraph (c)(iv) sets A at nil. With B and C nil as well, the cap is nil, and nil is always the least of the three limbs, so no repayment arises however large the withdrawal. Regulation 5.4(3) points the same way from another direction, switching off the repayment for a payment made in the year the beneficiary attains 60 or later where the year’s total payments do not exceed the ITA 146.4(4)(l) formula amount. For a beneficiary who is still DTC-eligible, regulation 5.3(3) does the job unconditionally: subsection (1) does not apply to any payment made after the calendar year they attain 59.
Regaining the credit restores the rolling cap
Regulation 5.4(1) applies by its own terms to a payment made to a beneficiary who is “no longer a DTC-eligible individual”. A beneficiary who qualifies again is not in that description, so a payment made while they are eligible falls back under regulation 5.3 and its rolling holdback. Regulations 2(e) and 3(e) work year by year on the same logic, testing eligibility for the year the contribution is made or the bond is payable, and ITA 146.4(4)(f)(i) prohibits contributions only at a time when the beneficiary is not eligible for the taxation year including that time. The freeze is a consequence of the beneficiary’s status at the moment money comes out, not a permanent mark on the plan.
The years themselves do not come back, though. Regulation 2(e) requires eligibility both for the year the contribution is made and for “the year or years to which the contribution is allocated”, so the ineligible years cannot be filled in later by a carry-forward contribution.
Death and plan termination run on a separate section
A different set of rules governs the beneficiary’s death or the plan’s termination, and it is worth keeping distinct from the withdrawal rules above. Regulation 5(1) sets the triggers: the plan is terminated, it ceases to be an RDSP under ITA 146.4(10)(a), or the beneficiary dies. Regulation 5(2) sets the amount, the lesser of fair market value immediately before the event and the assistance holdback amount immediately before it. Regulation 5(4) provides that “this section” does not apply where the event happens after the calendar year the beneficiary attains 59, and “this section” is section 5, so that is an off-switch for the death and termination repayment only, not for the three-for-one. Where the beneficiary is no longer DTC-eligible when death or termination occurs, regulation 5.1 replaces regulation 5 and runs the same four branches of A plus B minus C.
Some families reach an RDSP through a rollover rather than direct contributions, where a parent or grandparent dies and their registered plan passes to a dependent child’s RDSP. That specified RDSP payment is the one kind of money paragraph 146.4(4)(f)(i) still admits once DTC eligibility has ended, which makes RRSP rules on death worth reading beside this if the rollover is part of a family’s planning. It is not grant or bond, so it does not enlarge the holdback. It does raise the plan’s fair market value, and fair market value is one of the three limbs the repayment is the least of.
The specified disability savings plan works on the other clock
There is a route that takes the holdback to nil, and its limits matter here. Under ITA 146.4(1.1), where a medical doctor or nurse practitioner certifies in writing that the beneficiary is not likely to survive more than five years, the holder elects in prescribed form, and the issuer notifies the specified Minister, the plan becomes a specified disability savings plan. Paragraph (a) of the assistance holdback definition in regulation 1 then sets that amount at nil, which empties the third limb of regulation 5.3(1) and lets payments out without a repayment.
The distinction drawn at the top of this piece decides who can still use it. ITA 146.4(1.2)(c)(v) ends the status at the beginning of the first calendar year throughout which the beneficiary has no 118.3(1)(a.1) impairment, which is the impairment test and not the DTC test. So a beneficiary who has lost the credit while the impairment itself is unchanged can still make the election.
Read that against regulation 5.4 and the reach becomes clear. Regulation 5.4(1)(c) is the A plus B minus C formula and never references the assistance holdback amount at all, so taking the holdback to nil does not touch the cap that governs a beneficiary who is no longer DTC-eligible. What it does touch is the other clock: with the holdback at nil, the ITA 146.4(4)(j) floor disappears, and the constraint on how large a payment can be goes with it.
The status is also fragile. ITA 146.4(1.2) ends it at the earliest of several triggers, among them the holder electing out, a new contribution being made, the plan’s termination, taxable payments made from the plan while it held the status exceeding $10,000 in a year (or such greater amount as subparagraph (d)(i) requires), and the beginning of the first calendar year throughout which the beneficiary has no severe and prolonged impairment under 118.3(1)(a.1). Once a plan has lost the status, ITA 146.4(1.3) bars a new election for 24 months, and ITA 146.4(1.4) lets the Minister waive subsection (1.2) or (1.3) where it is just and equitable to do so. Regulation 5(3) reaches one step further: if the beneficiary of a specified disability savings plan dies, the issuer still repays any grant or bond paid into the plan within the ten years before the death that remains in the plan at that time. Subsection 5(4) names subsection (3) as well as subsection (1), so that repayment too falls away where the death occurs after the calendar year the beneficiary attains 59. Before that age, the nil holdback does not survive the death it was elected in contemplation of.
Disclaimer: The content on bestcanadianstocks.ca is for informational and entertainment purposes only and does not constitute financial advice. Past performance is not indicative of future results. Always consult a qualified financial advisor before making investment decisions. Canada Disability Savings Regulations (SOR/2008-186) sections 1, 2, 3, 5, 5.1, 5.3 and 5.4, and Income Tax Act section 146.4, both from the Justice Laws Website, current to September 3, 2026 and fetched September 25, 2026. The worked example is ours, from a script that first reproduces the ratios and lookback periods the regulations state before computing anything, and that refuses to run if any check fails. Its windows are compared in whole calendar years, which is exact only on the assumption stated in the article.
