Registered Disability Savings Plans (RDSP) were implemented by the federal government in 2008. The purpose of the program is to provide financial support to families living with disabled children or adults. RDSPs are not designed to meet all the financial needs these families have, but they can help cover the extra expenses inherent to the situation of persons living with disabilities. The program is especially generous to lower-income families, who can benefit most from the assistance.
Who can apply?
Registered Disability Savings Plans aren’t as well known as Registered Savings Plans (RSPs), Registered Education Savings Plans (RESPs) or even Tax-Free Savings Accounts (TFSAs), because they are available only to individuals who qualify for the Disability Tax Credit (DTC). If applicable, it’s important to apply for the DTC retroactively, to maximize contributions to the RDSP. The beneficiary of an RDSP must have a Social Insurance Number (SIN), be a resident of Canada, and be under the age of 60.
The Canada Revenue Agency (CRA) estimates that 1.1 million Canadians are eligible for the Disability Tax Credit, with fewer than half being seniors. It seems many Canadians who are eligible for an RDSP are not taking advantage of this government program since in 2012-13, only 620,000 people claimed the credit.
What are the benefits and conditions?
The main benefit of RDSPs is that the federal government will match any sums contributed on behalf of the beneficiary. With written permission from the plan “holder” (the person or organization that opens and manages the RDSP), anyone can contribute to an RDSP until the end of the calendar year in which the beneficiary turns 59 years of age. The holder can be one of the following:
- The beneficiary
- A legal parent of the beneficiary
- A guardian, tutor, curator, or an individual legally authorized to act on behalf of the beneficiary
- A public department, agency or institution legally authorized to act on behalf of the beneficiary
- A qualifying family member (beneficiary’s parent(s), spouse or common-law partner)
- A qualified entity that is given rights under the RDSP as successor or assignee of a plan holder
There are 2 ways in which the federal government contributes to the plan.
1) Canada Disability Savings Grant (CDSG)
Depending on the beneficiary’s family income and the amount contributed to the RDSP, the Government of Canada may pay matching grants of 300%, 200%, or 100%. The grant is based on the beneficiary’s family income and the threshold is indexed annually. For 2016, the threshold is $90,563 and the grant is calculated as follows:
For a family income of $90,563 or less:
- On the first $500 contribution, the grant will be $3 for every dollar contributed capped at $1,500 per year
- On the next $1,000 contributions, the grant will be $2 for every dollar contributed capped at $2,000 per year
For a family income over $90,563:
- On the first $1,000 contribution, the grant will be $1 for every dollar contributed capped at $1,000 per year
2) Canada Disability Savings Bond (CDSB)
Low-income families can benefit from a bond paid by the federal government regardless of whether contributions are made. The bond is based on the beneficiary’s family income and the threshold is indexed annually. For 2016, the bond amount is calculated as follows:
- If the beneficiary’s family income is $26,364 or less (or if the holder is a public institution), the bond is $1,000
- If the beneficiary’s family income is between $26,364 and $45,282, the amount will be paid based on a formula from the Canada Disability Savings Act
- No bond is paid if the income is in excess of $45,282.
There is a lifetime limit of $200,000 in contributions to a Registered Disability Savings Plan. This limit can be a combination of cash contributions (for which a grant is available), or a roll-over from eligible persons’ RSPs, RIFs or RPPs. However, there is no grant available for roll-overs from these plans. As well, there is no annual limit on how much can be contributed. The federal government’s matching grants is capped at $70,000 over the beneficiary’s lifetime. They will also contribute up to a maximum of $20,000 for the Canada Disability Savings Bond over the beneficiary’s lifetime.
Funds may be contributed to the beneficiary’s account until the beneficiary reaches age 59. Once beneficiaries turn 49, they are no longer eligible to receive grants or bonds.
Withdrawals from an RDSP
With regard to withdrawals, there is a 10-year rule that must be respected: any person receiving a grant or bond from the federal government under the plan must wait 10 years after the last contribution before they can withdraw funds from the RDSP. This makes the RDSP a long-term savings plan.
Sums withdrawn from an RDSP don’t affect disability benefits or any other government benefit such as OAS. Similarly, RDSP benefits don’t affect most provincial disability and income assistance programs. However, if withdrawals are made before the end of the 10-year period following the last contribution, the beneficiary will have to pay back any bonds or grants received. Since 2014, in certain situations, a prorated refund is applicable for those who decide to make withdrawals early.
Speak with your financial planner
There is a lot of flexibility built into RDSPs. Amounts withdrawn do not have to be used for specific purposes. It’s left to the family’s discretion how to best use the funds. There’s also a large amount of flexibility in the types of investments that can be used to fund a Registered Disability Savings Plan.
As with most tax-sheltered plans, a key benefit is the ability to have investments grow in value without being immediately taxed. Investment income earned in the plan accumulates tax-sheltered. Grants, bonds, and investment income earned in an RDSP are included in the beneficiary’s income for tax purposes when paid out of the plan.
There are other conditions and features that are beyond the scope of this brief article. Speak with your financial planner to explore this relatively unknown federal program, and find out which estate-planning opportunities and income support solutions RDSPs offer for disabled family members.
Find more information on the CRA website at www.cra-arc.gc.ca/rdsp
Maryse Ouellette helps time-pressed professionals develop and achieve their financial goals through various stages of life. She provides a comprehensive suite of financial, tax and estate planning services to high-net-worth clients, including inter-generational wealth transfers for families.
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