Friday, December 16, 2011

Why the RDSP is failing?

Tax Policy Branch: Department of Finance

L’Esplanade Laurier 16th Floor, East Tower
140 O’Connor Street
Ottawa, Ontario K1A 0G5
Facsimile: 613-943-5597

1. Sales and marketing 2. The identity of the holder

1. Sales In conversations with financial advisors and mutual fund agents they have stated that the commission for selling an RDSP are so small it’s not worth their efforts to prospect for 5% of the Canadian population that have a child with a disability and then target 3% of that group for parents who have a child under age 18 with enough disposable income to invest in the plan. Mutual fund commissions on new deposits are 4%, out of which 2% is paid to the agent and 2% goes to the dealer. Commissions are only payable on the initial RDSP deposit and not on the grants or bonds. To prospect for 5% of the population and then target 3% of that group for a $1,500 deposit to earn $30.00 and a .05% annual trailer fee of $2.09 a month on the total assets of $5,000 has little incentive for the agent.

In addition a mutual agent is required to submit $15,000, $20,000 or more of investment deposits per month or their contract with their dealer will be terminated. Add to this their monthly expenses for gasoline, mortgage, food, utilities and other items and their financial needs prohibit them from leaving their current lucrative sales efforts to prospect for 3% of the population who have $20,000 of disposable assets to invest in an RDSP. Furthermore there is the requirement of annual reviews and the concern that many of these families will not continue to deposit $1,500 a year or $125 a month for 20 years. Already Financial institutions complain that they spend thousands of dollars administering hundreds of thousands of RESP’s that families started and never continued.

1.1 Marketing Since 1989 I have dedicated my financial planning practice to planning for families or people with a disability. I can attest that leaving the family market to concentrate on families who have a child with a disability takes a lot of effort and time. From 1989 to 2001 758 families purchased a LifeTRUST Life insurance policy I designed to provide their child with a lifetime income they cannot outlive. I have conducted over 400 seminars to families on life planning for people with a disability. I am the registered ISBN author of “lifetime Security Planning Kit” and “Just Imagine” a board member of my local Community Living association, and a fee for service life planner who is recognized as being instrumental in helping to shape provincial and federal policy that makes life planning possible, helping hundreds of Ontario families have peace of mind that would not have been possible without my efforts.

Merrill Lynch, Tri/Mark, Met Life, Prudential of America, Northwest mutual, Mutual Life of New York and Protective Life insurance of Birmingham Alabama who established “Estate Planning for people with Disabilities”, are major financial institutions in the United States. They established divisions dedicated to financial products for families who have a child with a disability. Over the years I have met and spoken to all of them, but all their programs failed. Met Life, Tri/Mark and Prudential of America continue to have a disability presence within their companies, but they all failed for the same reason. Protective life told me we found that “you can’t turn a financial advisor into a social worker and you can’t turn a social worker into a financial advisor”. They failed for one simple reason, they were selling product.

Solution The solution to this dilemma is the creation of foundations similar to the ones that market and sell RESP’s which the RDSP was modeled after. Foundations such as Heritage education and the Canadian Scholarship trust successfully sell RESP’s through a sales force that can earn a living wage selling RESP’s. Or a pooled RDSP that offers GIC’s only. A pooled trust offering GIC’s only will allow organizations, associations, agencies, family members, individuals and the more than 75,000 deposit agents and financial advisors across the country who offer GIC’s to sell RDSP’s in which the beneficiary can be the holder .

2. The identity of the holder The second reason the plan is failing is because of the interpretation of a holder set out in the regulations. Below is your definition of a holder.

The holder of the RDSP is the person or organization that opens and manages the RDSP.

* For beneficiaries under the age of majority, the holder can be a legal parent, legal representative or public department.
* For beneficiaries over the age of majority, the holder is generally the beneficiary. In certain circumstances, a guardian, legal representative or public department may be eligible to become the holder.

One of my clients attempted to open an RDSP for his niece who is in receipt of the Ontario Disability Support Program (ODSP). When his niece applied for the ODSP it was found that she has an IQ of 71, 1 point above the cutoff for the ODSP program. ODSP accepted her and she applied for an RDSP and named herself the holder. This was rejected. She completed a Power of Attorney naming her uncle as her power of attorney, the bank rejected the application. Her uncle emailed the director of the plan at the bank asking why he could not be the holder. The email reply he received from the major bank is set out in italics below. The name of the bank is anonymous.

2.1 THE BANKS COMMENTARY ON THE DEFINITION OF A HOLDER As you are no doubt aware, the scenario you have outlined on the legal representation of the RDSP has caused great concern to all parties involved with the RDSP, as we have all clearly heard in the sessions hosted by CRA on the RDSP 3 year review.

The RDSP is not a bank product governed by the Bank Act but is a Trusteed Plan governed under the Income Tax Act with a Trustee and a Bank as an agent. The RDSP was clearly not intended as a transactional type account. The whole concept of the RDSP makes the RDSP plan more complex that a savings account, with federally funded grant and bond payments, multiple investment options, and the impacts of making a withdrawal.

The current definition of who can be a Holder to open an RDSP is very restrictive; parent of a minor child, a legal guardian, or the beneficiary (over 18). If the beneficiary is to be the Holder we require that the beneficiary is capable of entering into a contractual agreement and managing their finances.

I believe the issue is more around the restrictive requirements of opening a plan, than the underlying investment decisions. Once the plan is opened, the Sales Person would engage the Holder in the discussion of appropriate investments within the plan; mutual funds or GIC.

From my understanding of the situation you have described, our hands are tied in opening a RDSP that follows the current definition of an RDSP Holder. Your (relative) would require the appointment of a legal guardian, of which I can completely understand the reasons for you not wanting to do so.

The Finance Department is clearly aware that legal representation of the RDSP is an issue and as part of the 3 year review has specifically reached out to the industry (including Providers, provincial Public Guardian & Trustee, Associations for Community Living etc) to review potential solutions.

As you can see their legal department has interpreted your definition of the “legal Holder” of the plan as, very restrictive. The government of Saskatchewan has sent out their definition of a holder in a booklet they printed for the public. Their interpretation is pasted below

2.2 Why is mental capacity important? “To set up an RDSP and manage it, a person must enter a contract with a financial institution. For contracts to be binding, the person signing the contract must have the capacity to understand the nature of the document and the consequences of signing the contract. Many persons with physical or mental disabilities have that capacity. However, some persons with extreme mental disabilities do not have the capacity to enter a contract. In this case, the person requires a legal representative appointed to sign the contract to set up an RDSP” province of Saskatchewan Office of “adult guardianship and trustee” booklet on the RDSP

2.3 What is Legal Capacity? The banks answer was “did the beneficiary of the plan know that if they withdrew $10.00 from the plan they would lose $45,000”. They are referring to paying back all the grants and bonds if a partial withdrawal from the plan is taken. This was something I was not aware of and none of the people in the review session I attended were aware of. If that is the test of capacity, how many of the parents who now hold an RDSP for their child is aware of the consequences of this regulation? I would venture that less than 1% or none.

Valued social inclusion of people with a disability is an important commitment in the United Nations Charter on people with a disability. People with an intellectual disability have the same rights as other citizens and have the right to live and participate in the community. They have the right to open a bank account, sign documents with the Ontario Disability Support program, and they should have the right to participate in the RDSP program. Denying them the right to own an RDSP denies their right to belong to the community and participate in the plan.

2.4 What is the benchmark to determine legal capacity? What is the measure or benchmark that the banks and issuers of the RDSP use to determine if the beneficiary is competent and has the capacity to be the holder of their RDSP? Is the benchmark the way they write or cannot write their name, their manner of speech, facial expression or mobility? In the absence of a clear definition we are left with the interpretation of eight corporate legal opinions. If you asked eight lawyers for a legal opinion you’ll get eight different answers, that’s par for the course.

I have a large number of people with a disability who have placed their assets in a segregated fund to exempt them from the ODSP asset rule and none of these applications have been denied. They own their own plan. In the absence of a clear definition of what the capacity of the holder is the plan will fail. If legal guardianship is the only benchmark of a holder as was stated at the seminar, the plan will not proceed.

2.5 Solution

* If the holder of the RDSP is the person or organization that opens and manages the RDSP, the organization that supports the person with a disability should be allowed to be a holder.

* A power of attorney for property should allow the POA to be the holder

* Allow a foundation established to help people with a disability be a holder.

* Establishment a deposit trust with a pooled RDSP fund offering guaranteed fixed assets only and the person with the disability can hold their RDSP.

* Remove the restriction that ONLY a trust company can offer a RDSP. This will allow life insurers to offer RDSP’s through their segregated funds.

Submitted by
John Dowson Ex. Director
LifeTRUST Planning
60 Harrison Drive Newmarket On L3Y 4P4
Toll free 1 800 638-7256 fax (905) 836-5458
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