Registered Disability Savings Plans
The federal government introduced Registered Disability Savings Plans (RDSPs) in the 2007 federal budget. These plans came into effect in 2008 with the most generous deposit matching and tax treatment features of any investment plan in Canada. The problem is that most people who qualify don’t know about them yet.
Canadians with disabilities who are eligible for the disability tax credit (or those who support them) can contribute up to $200,000 to an RDSP. While the contributions to these plans are not tax deductible, they can qualify for additional matching through Canada Disability Savings Grants (CDSGs) as well as non-matched contributions from Canada Disability Savings Bonds (CDSBs). With a self-contribution of $1,500 per year, this grant/bond combination can provide an additional contribution of up to $4,500 on top. Not many other places you can get a 300% return on your investment on day one!
To qualify, the beneficiary must be a Canadian resident, have a social insurance number, be under the age of 60 and qualify for the disability tax credit with Revenue Canada. Depending on the situation, the account holder may be the beneficiary themselves or a relative or guardian who is authorized to act on their behalf. Although a beneficiary can only hold one RDSP, contributions can come from anyone as long as they have the written authorization of the account holder. This allows multiple family members to contribute to the same plan.
There are two types of withdrawal options from an RDSP:
The Lifetime Disability Assistance Payment is a recurring monthly or annual payment that, once started, continues until the death of the beneficiary. This allows the plan to be structured in a way to provide long term, sustainable income once the supporting family members are no longer alive. These payments may begin at any age, but if not already started, must commence by the end of the year in which the beneficiary turns 60 years of age. Just like a RRIF, the total amount withdrawn from an RDSP each year is limited to a maximum annual amount (set by the government) to ensure the RDSP will be sustainable.
The Disability Assistance Payment is a lump sum payment made to the beneficiary or to the beneficiary’s estate. The maximum lump sum payment that is available is based on a calculation that takes into account the beneficiary’s age, life expectancy and a pre-determined formula set out by Revenue Canada.
When withdrawals are made, they are taxed in the hands of the beneficiary. The original contribution portion is not taxable but the grants, bonds and interest growth is. However, these amounts will not impact the payments from Old Age Security, Guaranteed Income Supplements, Canada Pension Plans, GST Benefits and most provincial disability support programs.
One of last year’s changes to the RDSP program made it possible to transfer RRSP or RRIF assets from a deceased individual’s estate over to the RDSP of a financially dependent child or grandchild. This amendment to the program was great news as it allows for significant estate planning work to be done to ensure the financially dependent beneficiary is taken care of. This must be set up ahead of time so it’s important to get it in place now.
The Registered Disability Savings Plan is a wonderful tool that, if utilized properly, can dramatically alter the financial future of a person living with a disability. It can provide significant government assistance and help to secure sustained income once caregivers pass on. If you or someone you know may qualify for this program, don’t hesitate to give me a call.