What are Registered Disability Savings Plans and who can benefit from them?
You might be surprised to know.
In the 2007 Budget, the federal government introduced the Registered Disability Savings Plan (RDSP) to encourage parents and families who care for people with prolonged disabilities to save for their long-term financial security. This article provides an overview of the benefits of RDSPs as well as how they work.
What is an RDSP?
An RDSP is a tax-assisted savings plan designed to help parents and others to save for the long-term financial security of individuals with severe and prolonged disabilities. The RDSP is eligible to receive government assistance in the form of grants and bonds. Both private and government contributions will grow in a tax-deferred manner.
An RDSP can be established for a beneficiary who is a Canadian resident aged 59 and under (excluding plan transfers), is eligible for the Disability Tax Credit (DTC) and has a valid Social Insurance Number (SIN).
Who can open an RDSP account?
A beneficiary, who has reached the age of majority and is legally competent to enter into a contract, can open an RDSP and become a sole holder of the plan.
If the beneficiary is a minor or is an adult who is not contractually competent, then a qualified person(s) can open the RDSP as a plan holder. He/she must be legally authorized to act on behalf of the beneficiary.
A qualified person is:
- A legal parent of the beneficiary;
- A guardian, tutor, or curator of the beneficiary;
- An individual who is legally authorized to act for the beneficiary; or
- A public department, agency, or institution that is legally authorized to act for the beneficiary.
A plan holder who is not a beneficiary of the plan does not have to be a resident of Canada but must have a valid SIN or Business Number (for institutions, departments, or agencies) in order to establish a plan.
If an RDSP holder is no longer qualified, they must be removed from the plan, and another qualified person must be added as a successor or assignee of a holder.
Contributions to an RDSP:
- No annual contribution limit, however there is a lifetime maximum limit of $200,000
- Contributions are made with after-tax dollars
- Contributions to the plan are not tax deductible
- Anyone can contribute to the plan with the written permission of the plan holder
- Contributions are permitted until the end of the year in which the beneficiary turns age 59.
Federal Assistance to RDSP: Two types of financial assistance are available.
1. Canada Disability Savings Grants (CDSGs):
- Annual CDSG will be paid to the plan at a matching rate of 100%, 200% or 300% depending on family net income and the amount contributed up to a maximum lifetime limit of $70,000.
- The beneficiary is eligible to receive the CDSG until the end of the year in which they turn age 49.
- CDSG will match RDSP contributions as follows:
2. Canada Disability Savings Bonds (CDSBs):
- Eligibility is not contingent on contributions but is based on the beneficiary’s family net income.
- The maximum lifetime CDSB limit is $20,000.
- The beneficiary is eligible to receive the CDSB until the end of the year in which they turn age 49.
• Where family net income is:
The chart below illustrates the annual maximum federal assistance a beneficiary can receive based on family net income.
* Family net income thresholds are in 2010 dollars. These income thresholds will be indexed to inflation annually based on upper income limit of the 22% tax bracket.
If the beneficiary is a minor, the net family income will be based on the combined net income of the minor’s parents or legal guardians. If the beneficiary has attained the age of 18, then the net family income will be based on the income level of the beneficiary (and any spouse or common-law partner).
Payments from an RDSP:
There are two types of payments that can be made to the beneficiary of an RDSP:
1. Lifetime disability assistance payments (LDAPs):
- Once started, payments must be made annually until the plan is terminated or the beneficiary has died.
- LDAPs must be started by the end of the year in which the beneficiary turns 60.
- Payment is subject to an annual maximum withdrawal limit based on the beneficiary’s age and the fair market value of the plan, but an ability to encroach on capital is provided.
2. Disability assistance payments (DAPs):
- One-time payment subject to certain conditions.
- Generally, the beneficiary can receive a DAP anytime after the RDSP is established.
- A DAP cannot be paid if it causes the value of the RDSP to fall below the assistance holdback amount
Generally, there are no restrictions on when the funds can be withdrawn or for what purpose. However, any Grant or Bond received within 10 years prior to a payment must be repaid for a DAP.
It’s important to remember the RDSP has been designed for long term saving. To avoid negative consequences whereby the grant and bond must be repaid to the government, the beneficiary must wait 10 years after the last grant or bond is received before a payment is made from the RDSP.
Each dollar paid is comprised of contributions, CDSGs or CDSBs and income. The CDSG, CDSB and income components are fully taxable to the beneficiary, while contributions are not taxable. Contributors will not receive a refund for their contributions.
Amounts paid out of an RDSP will not be taken into account for the purpose of calculating income-tested benefits and credits delivered through the federal income tax system such as the Canada Child Tax Benefit and the Goods and Services Tax Credit. Also, RDSP payments will not reduce Old Age Security or Employment Insurance benefits. Refer to the section on Provincial treatment of RSDPs for provincial requirements.
Provincial treatment of RDSPs in determining eligibility for provincial disability benefits:
The following table summarizes the provincial treatment of RDSP assets and income for individuals currently receiving disability benefits across Canada. This information is for reference only, as the legislation and/or regulations may have changed since this article was published. Please refer to the respective provincial website for up-to-date information.
To learn more about the RDSP and how this savings plan can help provide peace of mind and financial security for yourself or family members with disabilities, please speak to your advisor.