Treatment of RDSPs by the US Internal Revenue Service

We continue to have numerous inquiries about the US tax liabilities of RDSP beneficiaries and holders.  We posted on this question back in August: click here for the post. Our advice remains substantially the same – consult a cross border tax specialist.  We would add, do so with some caution as we have heard stories of people racking up huge expenses trying to deal with this issue.

The issue also needs to be dealt with on the public policy side.  Cross border taxes are dealt with by the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital. Article XXVIII deals with pensions and subsection 3 mentions “disability plan” but Registered Disability Savings Plans are not dealt with explicitly.

If there is an understanding between the two states that an RDSP is a pension plan and that income, which would be exempt from tax in one state will be exempt from tax in the other state, then the Government of Canada should communicate this broadly and explicitly.

If this understanding does not exist, then Canada needs to add this to the agenda next time the Convention is reviewed.  US citizens, who are Canadian residents and often Canadian citizens, need to know that income earned in RDSPs, which is exempt from taxation in Canada by way of being held in a Registered Disability Savings Plan, is also exempt from taxation in the United States.