A plan for those with disabilities – the RDSP
An introduction to registered plans – Part 5
What is the purpose of an RDSP?
“A Registered Disability Savings Plan (RDSP) is a savings plan that is intended to help parents and others save for the long term financial security of a person who is eligible for the disability tax credit (DTC).”*
Who qualifies for an RDSP?
The words above that are quoted from the Government of Canada website highlight the crucial point: The beneficiary must be eligible for the Disability Tax Credit. In addition, the beneficiary must:
- have a valid social insurance number
- be a resident of Canada:
- when enrolled in the plan
- when contributions are made
- be under the age of 60
Although there is a specific reference to parents in the opening paragraph, an adult may also open an RDSP on their own behalf if they qualify for the DTC due to the onset of disease or an accident.
What are the benefits of the RDSP?
As with the RESP (Registered Education Savings Plan) there are no tax deductions for contributions to an RDSP, nor are there taxes paid when the contributed capital is withdrawn. Again, like the RESP, the investments inside the account grow tax-free. When the accumulated assets are withdrawn, the contributed capital is not taxed. However, grants, bonds and investment income are taxed in the hands of the beneficiary.
The lifetime contribution limit to an RDSP is $200,000.
Canada Disability Savings Grant
The government will pay matching grants of up to 300% depending on the beneficiary’s adjusted family net income.
- Until the end of the year in which the beneficiary turns 18, the beneficiary’s adjusted family net income is based on the income information used to determine the Canada Child Benefit (CCB) for that beneficiary.
- From the beginning of the year in which the beneficiary turns 19 until the RDSP is closed, the beneficiary’s adjusted family net income is based on their income plus their spouse’s or common-law partner’s income, if applicable. The parents’ income is no longer applicable.
- There are additional rules if the beneficiary is under the care of a department, agency or institution.
- An RDSP can receive a maximum of $3,500 in matching grants in one year, and up to $70,000 over the beneficiary’s lifetime. Grants can be received on contributions made until December 31 of the year in which the beneficiary turns 49.
Canada Disability Savings Bond
The bond is paid by the government directly into the RDSP. Bonds of up to $1,000 per year are paid to low-income Canadians with disabilities. No contributions need to be made to get the bond. The threshold is adjusted with inflation. For the 2018 tax year the maximum $1,000 bond was receivable if adjusted family net income was $30,450 or less.
Not more than one RDSP
If you have an RDSP for yourself or another qualified person and you wish to open a new one at a different financial institution, make sure you close the existing RDSP when you open the new one. Failure to do so in a timely manner may delay government recognition of the new RDSP.
Beware of withdrawing too early
The RDSP is intended as a long-term savings plan. The grants and bonds are intended to encourage savings and should remain in an RDSP for at least 10 years.
If you withdraw money from an RDSP, all or a part of the grants and bonds may need to be repaid if they were not in the account for at least 10 years. You must repay $3 for every $1 that is taken out, up to the total amount of grants and bonds paid into the account within the last 10 years.
What happens if I cease to be disabled?
This is like the issue of early withdrawal from the account. If you no longer qualify for the Disability Tax Credit, grants and bonds that have been in the account for less than ten years must be repaid to the government. The balance will be paid to the beneficiary. Formerly, this action needed to be taken in the year following the first full year that the beneficiary became ineligible for the DTC. However, the 2019 budget proposed to remove the above time limitation on the period that an RDSP may remain open after the beneficiary loses eligibility for the DTC. A transitional rule is already in effect.
The rules around the RDSP are complex. However, your financial institution will work with you to properly establish the account. You will have one more tool that makes saving for someone with a disability just a little bit easier.
Click here to contact me for an appointment.
Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, accounting or legal decisions.