Today I’m going to write about something the Federal Government of Canada did back in December of 2008. They introduced the Registered Disability Savings Plan (also known as RDSP) in their 2007 budget. It wasn’t until December of 2008 the RDSP was finally made available as a way for those with a disability to be able to save money for the future.
The RDSP is a Government of Canada program designed to enable individuals with disabilities, with the assistance of family and friends, to save for their future. The Government of Canada also assists people to save with the Canada Disability Savings Program. This consists of the Canada Disability Savings Grant and Canada Disability Savings Bond. The Canada Disability Savings Grant matches personal contributions to varying degrees depending on the amount and up to a certain amount. The Canada Disability Savings Bond provides funding to RDSPs of people with low and moderate incomes.
Contributions are not tax-deductible, and earnings and growth accrue on a tax-deferred basis, which in this case means that, the contributions (anyone can contribute to the RDSP) grow tax-free until withdrawn, at that time a portion of the plan (both earnings and growth received) is taxable and will need to be declared as income in the hands of the beneficiary at that time. In most cases it should not affect eligibility for provincial disability benefits (which is the case for Ontario where I live). There are no maximum annuations. Contributions can be made up to the end of the year in which the beneficiary turns 59 years old.
To open an RDSP, you must:
- be eligible for the Disability Tax Credit
- be 49 or younger as of December 31 of the current year
- be resident of Canada
- have a valid Social Insurance Number
To qualify for the Disability Tax Credit you must be “markedly restricted” in at least one of the following categories:
- elimination (bowel or bladder functions)
- performing the mental functions of everyday life
- life-sustaining therapy to support vital function
- the recently introduced (as of this post) cumulative effects of significant restrictions.
Only one RDSP account may be set up per qualifying individual, and only that beneficiary is entitled to any payments from it. An RDSP arrangement must be between the issuer and either the beneficiary, a qualifying person in relation to the beneficiary or a legal parent who is not a qualifying person, but who is a holder of another RDSP of the beneficiary. A qualifying person can only establish and administer an RDSP on behalf of the beneficiary if the beneficiary lacks the mental capacity to do so themself. A disabled adult with mental capacity who wishes to benefit from an RDSP must establish the plan theirself. However, family members, friends or others could contribute to a plan established by the disabled person, with their permission.
The person receiving provincial disability benefits can set up an RDSP, without going through an asset-test and without it affecting provincial disability benefits, where applicable.
If the beneficiary’s income level is less than $21,287, that person should receive the annual Government of Canada Disability Savings Bonds, to a lifetime maximum of $20,000 per RDSP. Add also, the Canada Disability Savings Grant, if their income is $75,769 or less for an additional $3,500/yr,(for each $1.00 that is deposited to the RDSP, the government will match that up to $3.00 prorated to the beneficiary’s income) to a lifetime maximum of $70,000. This works out such that, if the beneficiary over the age of 18 meets the appropriate income levels, an initiation contribution of $1,500 can result in $3,500 in matching government funds. There are complex rules governing the withdrawal of funds from RDSPs that could potentially see the beneficiary having to repay government grant and bond moneys if withdrawals are made before the funds have vested for a period of 10 years.
Beneficiaries will only receive grant and bond moneys up until the year in which they turn 49 years old. Monies can be contributed to the RDSP until the end of the year in which they turns 59. Payments to them must begin when they turn 60.
If maximum matching contributions have been made since the child turned 18, then when they turns 38, there will be no further federal contributions available. The total of $90,000 grants and bonds available will already have been maximized. The growth on the total contributed will presumably be larger than if the plan is set up at a later age.
RDSP payments are “blended” on a proportional basis, since the contributions were made with after-tax dollars, while the grants and bonds, as well as interest/earnings on the whole plan, and are taxable.
RDSP income will not affect entitlement to Old Age Security (OAS) payments and GST credits.
In the event of the RDSP beneficiary’s death, the plan’s value is paid out to the beneficiary’s estate. Though it will still be subject to the 10 year assistance holdback rule already mentioned above.
The following is a list of providers of the RDSP:
- ATB Securities Inc.
- Bank of Montreal
- Central 1 Credit Union
- Central 1 Trust Company
- Community Trust Company
- Credential Qtrade Securities
- Investors Group Trust Co. Ltd.
- Fonds d’investissements FMOQ inc. (French only)
- Mackenzie Financial Corporation
- RBC Royal Bank
- TD Waterhouse Canada Inc.
- Natcan Trust Company