A registered disability savings plan (RDSP) is a federal government savings program that helps parents and others save for the long-term financial security of a person with a disability. After you set one up, you (and others) can contribute to it. The federal government kicks in matching dollars which, combined with tax-deferred growth, helps your savings grow over time.
“An RDSP can be a powerful tool for disabled people,” says Sara Kinnear, Director of Tax and Estate Planning at Investors Group. “It is an ideal way to help them secure a solid financial future.”
“An RDSP can be a powerful tool for disabled people. It is an ideal way to help them secure a solid financial future.”
Some people, though, may not be aware the program exists or, if they do, they’re not sure of the details. We explain.
Who is eligible for an RDSP?
An RDSP can be established for a beneficiary who is eligible for the federal disability tax credit (DTC), a non-refundable tax credit that provides tax relief for Canadians who have a severe and prolonged impairment in physical and/or mental functions. The person also has to be a resident of Canada, be younger than 60 – contributions can be made until the year the beneficiary turns 59 – and have a valid Social Insurance Number.
The holder – the person who opens and manages the plan – can be a parent, legal guardian or qualifying family member of the disabled individual. The disabled individual can also be the holder, provided they’re the age of majority in their province and legally competent to sign a contract. The holder determines contribution amounts, selects investments and manages withdrawals.
A lifetime maximum of $200,000 can be contributed to an RDSP. With the holder’s permission, friends or family can make contributions, which can help the holder maximize government grants and approach the lifetime contribution limit.
Like all investments, the earlier contributions are made to an RDSP, the more time the investment has to grow. During this time, no taxes are payable on the annual growth.
Government programs help savings grow
“The biggest advantages of RDSPs are the two government financial programs that can help your savings grow faster,” said Kinnear. “You apply for these through the financial organization where you have your RDSP.”
Canada Disability Savings Grant
The CDSG is a matching grant that the federal government deposits into the RDSP. Grants of up to 300% are available, depending on the amount contributed and the family income of the beneficiary. The maximum grant per year is $3,500; the maximum over the beneficiary’s lifetime is $70,000. Grants are payable until the end of the year the beneficiary turns 49.
Canada Disability Savings Bond
The CDSB is available to Canadians who have a low or modest family income. The bond can be deposited into an RDSP even if no contributions are being made. The maximum bond per year is $1,000; the maximum over the beneficiary’s lifetime it $20,000. Bonds are payable until the end of the year the beneficiary turns 49. People can receive both the CDSG and the CDSB.
Withdrawing money from an RDSP
When money is taken out of an RDSP, it is called a disability assistance payment (DAP). A DAP can also be a lifetime disability assistance payment (LDAP).
Disability assistance payment (DAP)
DAPs that are not LDAPs are one-time lump sum payments from the RDSP that can be made at any time to a beneficiary or a beneficiary’s estate.
Lifetime disability assistance payment (LDAP)
LDAPs are annual payments that must begin no later than the end of the calendar year in which the beneficiary turns 60. Once started, they continue for the life of the beneficiary, and are subject to minimum withdrawal limits set by the federal Income Tax Act.
If you choose to withdraw a DAP (including an LDAP), there will be maximum withdrawal limits if the government contributions in the RDSP exceed private contributions, and any grants or bonds received within the last 10 years must be partially repaid. (This is why grants and bonds stop being paid after age 49 – so there’s at least 10 years between the last grant/bond and the year the beneficiary turns 60.) The maximum claw-back amount is $3 for every $1 that you withdraw. So, if a beneficiary was withdrawing $1,000 from the RDSP, and in the past 10 years the RDSP had received $30,000 of grants and bonds, then the plan would have to pay the government back $3,000.
Taxation of withdrawals
Each DAP consists of a taxable and non-taxable portion. The portion of the DAP that relates to private contributions is non-taxable, but the rest, which relates to the federal contributions (CDSB and CDSG) and income or growth from the RDSP account will be taxed as income at the beneficiary’s tax rate.
Fortunately, any money withdrawn, even the taxable portion, does not impact other federal benefits, such as Old Age Security, Canada Child Benefit, Goods and Services Tax credit, Employment Insurance, Guaranteed Income Supplement, or Canada Pension Plan benefits, says Kinnear.
All provinces and territories in Canada provide financial support to disabled adults who are unable to earn a living due to disability. These programs have “asset” and “income” tests, but will typically either totally or partially exempt the funds in an RDSP from their asset tests, and withdrawals from the RDSP from their income tests. This allows the disabled person to accumulate savings even while receiving social assistance, says Kinnear.
“RDSPs are worth looking into if you or a family member lives with a disability,” she says. “They are a government-assisted savings option that can give individuals more options for living their life.”
The Canada Disability Savings Grant (CDSG) and the Canada Disability Savings Bond (CDSB) are provided by the Government of Canada. Eligibility depends on family income levels. Speak to an Investors Group Consultant about special RDSP rules; any redemption may require repayment of the CDSG and CDSB.