What Happens to My RDSP If I Move to the US?

The Registered Disability Savings Plan (RDSP) is one of Canada’s most generous tax-sheltered accounts. For a qualifying beneficiary, it provides tax-deferred growth, government matching grants (Canada Disability Savings Grant, up to $3,500/year), and government bonds (Canada Disability Savings Bond, up to $1,000/year). The lifetime contribution limit is $200,000, and the account can grow for decades before withdrawals begin.

When the beneficiary moves to the US, the RDSP does not come with them in any practical sense. Canada continues to hold the account, but the benefits erode and the US tax treatment creates new costs.

The DTC problem

The RDSP requires an eligible beneficiary who qualifies for the Disability Tax Credit (DTC). The DTC certificate (Form T2201) must be approved by CRA. When the beneficiary moves to the US and becomes a non-resident of Canada, CRA will generally not renew the DTC certificate.

Without a valid DTC certificate, the RDSP must be closed. CRA provides a grace period after the DTC certificate expires (the plan can remain open for a period while the beneficiary attempts to obtain a new certificate), but for someone who has permanently left Canada, renewal is unlikely.

The clawback: when an RDSP is closed, any Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs) received in the 10 years before the closure must be repaid to the government. This is the “10-year rule” (also called the assistance holdback amount). If you received $20,000 in grants and bonds over the past 10 years, closing the RDSP costs you $20,000 in clawback, on top of losing the future benefits.

Timing consideration: if you are planning a move to the US and have an RDSP, the 10-year clawback window means that delaying the move (or the account closure) until older grants and bonds fall outside the 10-year window reduces the clawback. Each year you wait, one more year of grants/bonds ages out of the clawback period.

Government grants and bonds stop

The Canada Disability Savings Grant (CDSG) matches private contributions up to $3,500 per year (depending on family income), with a lifetime limit of $70,000. The Canada Disability Savings Bond (CDSB) provides up to $1,000 per year to low-income beneficiaries, with a lifetime limit of $20,000.

Both the CDSG and CDSB require the beneficiary to be a Canadian resident. Once the beneficiary becomes a non-resident, no further grants or bonds are deposited. The account continues to hold the existing grants and bonds (subject to the 10-year clawback if closed), but the government matching stops.

US tax treatment: foreign trust

The US does not recognize the RDSP. There is no treaty provision that shelters RDSP income (unlike the RRSP, which is covered by Article XVIII(7) of the Canada-US treaty). The US treats the RDSP as a foreign trust.

Foreign trust reporting:

• Form 3520 (Annual Return to Report Transactions with Foreign Trusts): the beneficiary (or the person who made contributions) must file Form 3520 annually, reporting contributions, distributions, and the beneficiary’s interest in the trust
• Form 3520-A (Annual Information Return of Foreign Trust with a US Owner): if the US person is treated as the “owner” of the trust (grantor trust rules), Form 3520-A is required

The penalties for failing to file Form 3520 are severe: the greater of $10,000 or 35% of the gross reportable amount. For Form 3520-A, the penalty is $10,000 per year, with additional penalties for continued failure.

Annual income taxation: if the RDSP is treated as a grantor trust (the beneficiary is the deemed owner), the US taxes the annual investment income inside the RDSP as it is earned, not when it is withdrawn. This eliminates the tax-deferral benefit that makes the RDSP valuable. Interest, dividends, and capital gains inside the RDSP are reported on the beneficiary’s 1040 each year.

If the RDSP holds Canadian mutual funds, the PFIC rules compound the problem: each Canadian mutual fund is a passive foreign investment company, and the PFIC reporting applies on top of the foreign trust reporting.

Withdrawals

RDSP withdrawals (Disability Assistance Payments, or DAPs) include two components:

1. Non-taxable portion: the private contributions (the money put in by the beneficiary or their family). This is the adjusted cost base and is not taxed in either country.

2. Taxable portion: the grants, bonds, and investment growth. This is Canadian income, reported on the beneficiary’s T4A slip, and subject to Part XIII withholding when paid to a non-resident (25% default rate, potentially reduced by treaty).

Canadian treatment: the taxable portion is Canadian-source income. Part XIII withholding applies. The treaty does not provide a specific reduced rate for RDSP income (it is not a “pension” under Article XVIII). The default 25% withholding rate likely applies, though the characterization depends on the specific nature of the payment.

US treatment: the taxable portion is US income (it is income from a foreign trust). The Canadian withholding generates an FTC on Form 1116. The FTC category depends on the nature of the income (investment income is passive category).

Should I close the RDSP before I move?

The answer depends on the timing of the move and the size of the account:

Close before moving (if the 10-year clawback is small): if the RDSP has been open for a long time and the grants/bonds received in the past 10 years are small relative to the account balance, closing the RDSP before departure avoids the ongoing US foreign trust compliance. The clawback is paid, the remaining balance is distributed, and the Canadian tax on the taxable portion is the final cost.

Keep open (if the 10-year clawback is large): if substantial grants and bonds are within the 10-year window, closing now triggers a large clawback. It may be better to keep the account open and wait for the grants/bonds to age out of the clawback period. The ongoing US compliance cost (Forms 3520/3520-A, annual income taxation) is the price of waiting.

Consider the DTC timeline: if the DTC certificate will expire and CRA will not renew it for a non-resident, the account will be forced closed regardless. The question becomes whether to close voluntarily (on your timeline) or wait for the forced closure (on CRA’s timeline).

What should I do next?

If you have an RDSP and are planning to move to the US, map out the 10-year clawback window and calculate the cost of closing now vs later. Check the DTC certificate expiry date. Restructure any Canadian mutual funds inside the RDSP into GICs or individual stocks before departure (to avoid PFIC issues on the US side). Budget for the ongoing US reporting if you keep the account open.

• What can a US citizen in Canada invest in without PFIC problems?, the investment restructuring guide
• I’m leaving Canada for the US: a tax checklist, the broader departure framework
• Part XIII withholding: what gets withheld when you leave Canada?, the withholding on RDSP withdrawals

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.