Written by: Enzo Morini, MBA, CPA, CA | Williams and Partners
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. A Registered Disability Savings Plan (RDSP) is a savings plan that is intended to help parents, relatives, and others save for the long term financial security of a person who is eligible for the disability tax credit.
Unlike other savings plans, there is no annual limit on contributions to an RDSP. However, the lifetime limit of contributions is $200,000, and no contributions can be made after the end of the calendar year in which the beneficiary attains 59 years of age.
Anyone can contribute to a specific RDSP as long as the holder approves the contribution amount in writing. Contributions made to the RDSP are not eligible for a tax deduction by the contributors; however, 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 Once the funds are withdrawn, the amount is taxed as income in the hands of the beneficiary.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 Money that contributed to the RDSP is not included as taxable income when it is withdrawn.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 additional grants received and included in the plan assets, are included in the beneficiary’s income for tax purposes when paid out of the RDSP.
An RDSP can be opened for a beneficiary who is a Canadian resident, who is eligible for the disability tax credit, has a valid social insurance number and is currently 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. The program allows only one RDSP per beneficiary and only one beneficiary per RDSP.
Canada Disability Savings Grant as a Part of the RDSP
The federal government will assist saving for the beneficiary of the RDSP by providing matching grants of up to 3 dollars for every dollar placed into the account by contributors. The maximum grant provided through the Canada Disability Savings Grant (CDSG) is $3,500 per year 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 on the beneficiary’s family income and inflationary factors but, if taxpayers meet the various criteria to apply for the grants, the grants to the RDSP are as follows: (based on 2016 thresholds)
If family income is less than or equal to $90,563:
For the first $500 that is contributed each year to the RDSP, the federal government will deposit $3 for every $1 contributed, up to $1,500 a year.
For the next $1,000 that is contributed each year to the RDSP, the government will deposit $2 for every $1 contributed, up to an additional $2,000 a year.
If family income is greater than $90,563:
For the first $1,000 that is contributed each year to the RDSP, the government will deposit $1 for every $1 contributed, up to $1,000 a year.
Canada Disability Savings Bond as a Part of the RDSP
The government also contributes funds to low- and modest-income Canadians through the Canada Disability Savings Bond (CDSB). Those who qualify can receive up to $1,000 per annum to a maximum of $20,000, depending upon family income. The government will not make any further contributions after the year in which the beneficiary turns 49. Also, it is possible to receive the bond even if contributions are not made to the RDSP.
Withdrawals & Repayments
As discussed above, a portion of withdrawals are taxable.
Because RDSPs are designed as long-term plans, a withdrawal of funds made within ten years of receiving CDSG or CDSB assistance triggers CDSG or CDSB 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 seek advice to understand the financial and income tax impact of early withdrawal, death or shortened life expectancy.