Registered Disability Savings Plans help persons with disabilities save for the future.
Having a disability or caring for an individual with a disability can be emotionally and financially draining. The Canadian government, recognizing the need to assist in the future care of an individual with a disability, has created a vehicle for persons with disabilities and their families to save for the future.
As a Starter
The first step is to open an RDSP in the name of the beneficiary who must be a Canadian resident under the age of 60. If the beneficiary is 59, the plan must be opened before the end of the calendar year in which the individual turned 59. Other requirements for enrolment include the need to have a social insurance number and be eligible for the disability tax credit. The program allows only one RDSP per beneficiary and only one beneficiary per RDSP.
Determining the Holder
Once these criteria have been met, the RDSP holder (administrator) must be determined. The holder can be an individual or an organization. If the beneficiary is under the age of majority (the age of majority varies from province to province), the holder can be a parent, a legal representative or the provincial trustee.
If the beneficiary is over the age of majority but not capable of entering into the RDSP arrangement, specified family members may be able to open the RDSP on behalf of the disabled beneficiary until the end of 2018.
Choosing the Financial Institution
The RDSP must be administered through a financial institution participating in the program. Most banks, as well as a number of credit unions and trust companies, offer this service.
There is no annual contribution limit.
Contribution Limits
Unlike other savings plans, there is no annual limit on contributions to an RDSP. However, the lifetime limit of contributions is $200,000 and the threshold must be met by the end of the calendar year in which the beneficiary attains 59 years of age. The federal government actively contributes to an RDSP plan based upon family income levels.
Tax-Deferred Growth
Similar to the Registered Education Savings Plan (RESP), contributions made to the RDSP are not eligible for a tax deduction by the contributor(s) but income and capital gains within the plan grow on a tax-deferred basis. Once the funds are withdrawn, the amount is taxed as income in the hands of the beneficiary. Withdrawals include a blend of taxable and non-taxable amounts. Money that has been contributed to the RDSP is not included as taxable income when it is withdrawn. (The amount of non-taxable income is calculated according to a formula developed by the Canada Revenue Agency.) However, investment income and capital gains, plus any Canada Disability Savings Grant (CDSG) and Canada Disability Savings Bond (CDSB) amounts in the plan are included in the beneficiary’s income for tax purposes when paid out of the RDSP.
Contributions and Withdrawals
It may come as a surprise, but anyone can contribute to a specific RDSP as long as the holder approves the contribution amount in writing. Withdrawals must begin when the beneficiary turns 60. Annual withdrawals, Lifetime Disability Assistance Payments (LDAPs), continue until the death of the beneficiary. A beneficiary may make a one-time withdrawal under the Disability Assistance Programme (DAP).
Investment Criteria
The investment criteria mirror those of an RRSP investment in that investments can be made in mutual funds, fixed income investments, GICs and Canadian, U.S. and foreign equities, including new issues.
Canada Disability Savings Grant
The beauty of the RDSP is that the federal government will assist saving for the beneficiary by providing matching grants of up to 300% for every dollar placed into the account by contributors. The maximum grant provided through the Canada Disability Savings Grant tops out at $3,500 per annum and has a ceiling of $70,000 during the matching contribution period that ends when the beneficiary turns 49 years of age.
As can be expected, grant amounts are based upon the beneficiary’s family income and inflationary factors but, if you meet the various criteria to apply for the grants, the rewards to the RDSP are as follows:
If family income is less than or equal to $87,900:
- For the first $500 you contribute each year to the RDSP, the federal government will deposit $3 for every $1 you contribute, up to $1,500 a year.
- For the next $1,000 you contribute each year to the RDSP, the government will deposit $2 for every $1 you contribute, up to an additional $2,000 a year.
If family income is greater than $87,900:
- For the first $1,000 you contribute each year to the RDSP, the government will deposit $1 for every $1 you contribute, up to $1,000 a year.
The government also contributes funds to low- and modest-income Canadians through the Canada Disability Savings Bond. Those who qualify can receive up to $1,000 per annum to a maximum of $20,000, depending upon family income. The government will make no more contributions after the year in which the beneficiary turns 49. Note that it is possible to receive the bond even if contributions are not made to the RDSP.
Withdrawals from RDSPs
Because RDSPs are designed as long-term plans, withdrawal of funds from either the bond program or the grant program before the 10th anniversary triggers repayment requirements. Plan holders should be aware that the death of the beneficiary or a determination that the beneficiary may have a shortened life expectancy will create withdrawal or repayment requirements.
Because withdrawals or the death of the beneficiary will create different repayment or settlement terms, the beneficiary should understand the financial and income tax impact of early withdrawal, death or shortened life expectancy. Your CPA tax advisor, in conjunction with the financial institution representatives should be able to offer advice.
Excellent Means of Saving
RDSPs are an excellent vehicle for individuals with disabilities or those responsible for their future financial security. As in any program designed to look after the future welfare of those we care for, the earlier the program is registered, the more opportunity is available not only for government contribution but for the RDSP to grow and provide that financial security.
Dami Okunade CPA,CA,CFA
dami@dochateredacocuntant.com
416-219-5904
