RDSP withdrawal: contributions come out tax free, the rest is income

Which part of an RDSP withdrawal is taxable?

Everything except the original contributions. Grant, bond and investment growth are taxed when they come out, and contributions (including rollovers) are not canada.ca. You can't pick which pool a payment comes from, though. Every payment carries a fixed proportion of each, set by a formula in ITA s. 146.4(7) laws-lois.justice.gc.ca.

The non taxable portion is the lesser of the payment and A x B / C + D:

Whatever isn't the non taxable portion is income under s. 146.4(6): the beneficiary's if alive, the estate's if the payment goes out after death laws-lois.justice.gc.ca. The issuer reports only the taxable portion, in box 131 of the T4A, and the beneficiary includes it on line 12500 for the year received canada.ca. For what happens to the plan at death, see RDSP upon death.

What can a lump sum DAP do that an LDAP cannot?

Every payment out of an RDSP is a disability assistance payment (DAP). A lifetime disability assistance payment (LDAP) is a DAP that, once started, must be paid at least once a year until the plan runs out or the beneficiary dies canada.ca.

The LDAP formula sits in s. 146.4(4)(l): A is plan value at the start of the year, B is the greater of 80 and the beneficiary's age at the start of the year, C is that age, and D covers payments from certain locked in annuities laws-lois.justice.gc.ca. Under 80, the divisor is 83 less age. From 80 on, it's 3. Paragraph (4)(k) fixes the start date, and (4)(n.1) turns the same formula into a minimum once the beneficiary turned 59 before the year began laws-lois.justice.gc.ca.

Not every issuer offers lump sum DAPs, and each sets its own DAP rules canada.ca. Check before you plan a large one.

A $6,250 LDAP at 59 has $4,583.33 of taxable income

Your client's son turns 60 in 2026, so he is 59 on January 1. The plan is worth $150,000 that day, holds $40,000 of contributions, and has paid no DAPs before. His last grant and bond went in during 2015, the year he turned 49, so the holdback is nil. The LDAP is paid in January at that value.

He was already 59 when 2026 began, so $6,250 is the minimum for the year as well as the cap. And since this is the year he turns 60, no grant or bond is repaid on any DAP canada.ca. The $4,583.33 sits well under the $26,793 withholding threshold, so the issuer withholds nothing.

The CRA's own example runs the same arithmetic: a $261,448 plan at age 59 in 2046 pays a $10,893.67 LDAP, of which $8,333.33 is non taxable on $200,000 of contributions canada.ca.

How much can come out before 60, and what does it cost in grant and bond?

A plan is primarily government assisted at the start of a year when the grant and bond paid into the beneficiary's RDSPs in earlier years exceed the private contributions canada.ca. In such a year, total DAPs can't exceed the greater of the LDAP formula and 10% of plan value at the start of the year, under s. 146.4(4)(n) and the "specified maximum amount" definition laws-lois.justice.gc.ca.

Take a beneficiary who is 45 on January 1, 2026, in a primarily government assisted plan worth $120,000. The formula gives $120,000 / 38 = $3,157.89. Ten percent gives $12,000. The cap for the year is $12,000.

That $12,000 has a price. Before the year the beneficiary turns 60, each $1 withdrawn forces $3 of grant and bond back to the government, up to the assistance holdback amount: the grant and bond paid in the preceding 10 years, less any already repaid canada.ca. A $12,000 DAP could repay up to $36,000. The CRA's example: a $600 withdrawal on a $21,000 holdback repays $1,800 and leaves the holdback at $19,200 canada.ca. The grant and bond rules themselves are on RDSP grant and bond.

Closing the plan voluntarily, deregistration or the beneficiary's death repays the full 10 years instead canada.ca. A repayment of an amount previously included in income is deductible on line 23200 canada.ca.

When does the issuer withhold tax, and do benefits drop?

For 2026, a beneficiary can receive up to $26,793 of taxable lump sum DAPs and LDAPs before any withholding: the $16,452 basic personal amount plus the $10,341 disability amount canada.ca. After that, tax comes off the taxable portion of every remaining payment in the year.

The taxable portion is left out of income for the GST/HST credit, the Canada child benefit, the Canada workers benefit, the social benefit repayment and the refundable medical expense supplement canada.ca. Provincial support is a different story: withdrawals can affect provincial benefits in Quebec, New Brunswick and Prince Edward Island canada.ca.

Shortened life expectancy and lost DTC approval change the limits

A specified year is the year a doctor or nurse practitioner certifies the beneficiary isn't likely to live more than five years, plus the next five. In a specified year outside a specified disability savings plan, there's no cap on DAPs or LDAPs, but no DAP can take plan value below the holdback canada.ca.

Electing a specified disability savings plan goes further: taxable portions up to $10,000 a year come out with no holdback repayment, more if the LDAP formula requires it. The plan loses that status if taxable DAPs pass $10,000 (unless the formula requires more) or if a contribution, grant or bond goes in, and a new election waits 24 months canada.ca.

A beneficiary who loses DTC approval can keep the plan open with no new contributions. Withdrawals before the year they turn 60 repay grant and bond paid in the 10 years before approval was lost canada.ca. From age 50, that window shrinks by a year for each year over 50 if approval was lost before 50, so at 51 it's 9 years canada.ca.