For many years, individuals, and families of individuals with disabilities, have sought the best way to ensure long-term financial security. The Registered Disability Savings Plan (RDSP) is a federally regulated registered savings plan that helps to address this issue.
The RDSP is designed to provide for the long-term financial security of a person with disabilities. Contributions, with the added benefit of government grants and bonds, combined with tax deferred growth, make RDSP’s a powerful investment tool.
The person to whom the benefits of an RDSP accrue is referred to as a beneficiary. Any person can be a beneficiary if they:
The person who establishes an RDSP is referred to as the account holder; however, anyone can contribute to an RDSP provided they have written permission of the account holder. An adult who qualifies for the plan can be both the plan beneficiary and the plan holder.
In case the beneficiary is a minor or is not legally able to enter into a contract, another person will be qualified to become the account holder if that person is:
In the case that the beneficiary has reached the age of majority but is not legally able to enter into a contract, the qualified persons who can become the holders are:
The beneficiary can be added as an account holder once they have reached the age of majority and are legally allowed to enter into a contract.
The plan holder does not have to be a resident of Canada provided that the beneficiary was a resident of Canada when the loan was opened and contributions were made to the plan, the plan holder can also change during the lifetime of a plan.
There is no annual contribution limit to an RDSP; however, each RDSP has a lifetime contribution limit of $200,000.00 per plan.
All contributions must cease:
Contributions must also cease upon the death of the beneficiary.
An RDSP may be eligible for federal incentives called the Canada Disability Savings Grant (CDSG) and the Canada Disability Savings Bond (CDSB).
Canada Disability Savings Grant (CDSG)
The federal government provides the CDSG to RDSP beneficiaries based on the adult beneficiary’s net income and the amount of annual RDSP contributions. Where the beneficiary is a minor, the CDSG is based on the net income of the beneficiary’s family and the amount of the annual plan contribution.
The maximum CDSG amount is $3,500.00 per year for the beneficiaries or families with a net income of less than $75,770.00. The grant will contribute $3.00 for every $1.00 contributed on the first $500.00, and $2.00 for every $1.00 contributed on the next $1,000.00, up to the $3,500.00 annual maximum.
When the beneficiary turns 18 years of age, CDSG payments are based on their net income (and spouse if applicable).
The maximum lifetime CDSG is $70,000 per RDSP beneficiary and CDSG edibility ends December 31st in the year in which the plan beneficiary turns age 49.
Joe and Jane, who live in Ontario, opened an RDSP and began making annual plan contributions of $1,500.00 per year for six years on behalf of their young daughter, Charlotte, who has a disability.
Once Charlotte turns age 18, the CDSG annual maximum reverts to $3,500.00 based on $1,500.00 in annual contributions and assuming her income is below $75,700.00.
Annual contributions in excess of the amount required to receive the maximum annual CDSG will not attract additional CDSG. The maximum annual CDSG from the government remains either $1,000.00 or $3,500.00 per year, per beneficiary depending on the beneficiary or family net income.
Gerard, age 40, has $7,500.00 available to contribute to his RDSP. He wants to know if it is better to contribute the entire $7,500.00 to his RDSP now and reap the benefits of tax-exempt compounding or make annual $1,500.00 contributions over the next five years to reap the maximum benefits of the CDSG.
After speaking with his financial advisor Gerard has two scenarios to consider. [Assume a 7% rate of return on a combined deposit plus CDSG, compounded on an annual basis, with family net income of less than $75,769.00].
Scenario 2 provides a greater benefit to Gerard. While he does not benefit from the tax-exempt growth of the full $7,500.00 for the full five years, the benefit of receiving the $3,500.00 CDSG annually, ($17,500.00 over five years) nearly doubles the value of his investment.
In addition to the CDSG, the Canada Disability Savings Bond (CDSB) is available to beneficiaries or families with a net family income lower than $37,885.00. RDSP contributions are not required to be eligible to receive for CDSB.
Beneficiaries, with a net income of less than $21,288.00, may be eligible to receive government CDSB payments of $1,000.00 one year into an established RDSP. Where net income is more than $21,287.00, but, less than $37,885.00, a pro-rated CDSB payment of less than $1,000.00 will be paid into the RDSP.
Where the beneficiary is a minor, the CDSB is based on the net income of the beneficiary’s family. When the beneficiary turns 18 years of age, CDSB payments are based on their net income (and spouse if applicable).
The maximum lifetime CDSB is $20,000.00 per RDSP beneficiary and CDSB eligibility ends December 31st in the year in which the plan beneficiary turns age 49.
RDSP contributions are similar to Registered Education Savings Plans (RESPs) in that the contributions are not tax-deductible; however, the growth on RDSP contributions is tax-deferred held within the plan.
Investments that qualify for an RDSP are generally the same as those for Registered Retirement Savings Plan (RRSPs) and RESPs.
There are two types of payment from an RDSP: Lifetime Disability Assistance Payments (LAP) and Disability Assistance Payments (DAP).
LDAPs are recurring annual payments that, once started, must be paid until either the plan is terminated or the beneficiary has died. LDAPs may begin at any age but must commence by the end of the year in which the beneficiary turns 60. These payments are subject to an annual maximum withdrawal amount based on the beneficiary’s life expectancy and fair market value of the plan.
DAPs are a lump sum payment made from the RDSP to the beneficiary of the beneficiary’s estate. DAPs may be requested by the beneficiary when they turn 27, provided the total of CDSGs and CDSBs are greater than all plan holder contributions at the beginning of the calendar year.
Both LDAP and DAP can be used for disability and non-disability related expenses. Only the beneficiary will be permitted to receive payments from the plan.
CDSBs or CDSGs received from the federal government within 10 years of receiving either the DSAP or DAP must be repaid to the government. This is known as Assistance Holdback Amount.
LDAPs or DAPs are comprised of contributions and earnings (the amount over and above what was contributed, that is, the income, growth, CDSGs and CDSBs. Income tax applies only to the earnings portion and is paid on amounts withdrawn from the RDSP at the beneficiary’s combined federal and provincial or territorial tax rate.
Any assets that continue to grow inside the RDSP are allowed to do so on a tax-deferred basis.
Contributions are not taxable when withdrawn from the RDSP. In most provinces and territories, RSDP benefits do not impact existing provincial social assistance support programs. It is advisable that you check with government offices in your local area for RDSP benefit exemption details specific to your province.
If we have qualified you or your family member for the Federal Disability Tax Credit, there are numerous benefits to doing so. Contributions to your RDSP, while not tax deductible, will compound on a tax-deferred basis and over time can add significantly to the value of your plan. In addition, your ocntributions may attract an additional boost with the Canada Disability Savings Grant.
Even if you do not have the financial means to contribute to an RDSP, you may be eligible for the Canada Disability Savings Bond, which will help you build a more secure financial future.