Over the years we have touched on many different savings and investing vehicles: Non-Registered accounts, TFSA’s, RESPs, and RRSPs. However, one thing we haven’t talked about until now is the Registered Disability Savings Plan or RDSP.
Disabilities are a fact of life. Many people go years, if not their entire lifetime, managing and coping with some level of disability. The Canadian government has recognized this hardship. In response, they have provided a savings vehicle specifically for those with a disability.
There is no greater disability in society, than the inability to see a person as more.Robert M. Hensel
Although RDSPs have similar characteristics to RESPs and RRSPs, there some rules and characteristics unique to them. In what follows, we will look at RDSPs more in-depth. Hopefully, we can answer any potential questions you may have: What is an RDSP? Who’s eligible? How are they used? What makes them unique?
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A registered disability savings plan is a savings vehicle that is intended to help individuals save for the long term financial security of a person who is eligible for the disability tax credit (DTC).
An individual is only allowed to have one RDSP. Unlike an RRSP or RESP where you could hold more than one at different institutions.
Although only a single RDSP is allowed, the account can have more than one account holder. Although it may sound like the account holder is the disabled person, that is not the case. The account holder is the person who opens the RDSP and makes or authorizes contributions on behalf of the beneficiary.
The beneficiary of the RDSP is the person who receives the benefits from it, a.k.a. the disabled person. It is possible for the beneficiary to also be the account holder. This is the case if the beneficiary is at least the age of majority and is contractually competent to open and establish the plan.
If the beneficiary is not the age of majority, a qualifying person can open an RDSP for them. A qualifying person is a legal parent, guardian, tutor, or curator of the beneficiary, a public department, agency, or institution that is legally authorized to act for the beneficiary.
As the name implies, only those who have a disability are eligible for an RDSP. To be more specific, an individual can be a beneficiary of an RDSP if:
- they are eligible for the disability tax credit (DTC)
- have a valid social insurance number (SIN)
- they are a resident in Canada when the plan is entered into
- they are under the age of 60
Funding an RDSP can be done in several ways including; cash deposits, rollovers from other plans, and the addition of government grants, and bonds.
Contributions to an RDSP can be made until the year the beneficiary turns 59. These contributions can be done by anyone as long as they have written permission of the plan holder. Unlike an RRSP, these contributions are not tax-deductible.
There is no limit to the annual contributions that can be made in any given year. However, there is a lifetime limit of $200,000. Rollovers, which we will talk about shortly, are taken into account when calculating the $ 200,000-lifetime contribution.
Much like an RESP, when contributions are made to an RDSP, there are grants and bonds available. However, contributions over a certain amount will not be eligible for matching grants in a given year.
RDSP Grants and Bonds
The Canada Disability Savings Grant is an income-tested government matching grant. The government will match anywhere from 300% to 100% depending on adjusted family income.
An RDSP beneficiary can receive a max of $3,500 annually, and $70,000 over their lifetime in grant money. These grants are available until December 31 of the year the beneficiary turns 49.
If your family income is less than $93,208 you will receive the following grants:
- On the first $500 contribution – $3 grant for every $1 contributed, up to $1,500 a year.
- On the next $1,000 of contribution – $2 grant for every $1 contributed, up to $2,000 a year.
If your family income is above $93,208:
- On the first $1,000 contribution – $1 grant for every $1 contributed, up to $1,000 a year.
The Canada disability savings bond is also an income-tested benefit. If family income is less than $30,450, you would receive a $1,000 bond annually. If income is between $30,450 and $46,605, you would receive part of the bond based on a formula. Above the $46,605 level, you would not receive any bond.
To receive the bond no contribution needs to be made. Beneficiaries are eligible to receive the bond until the year they turn 49.
If there is any unused grant or bond entitlement, it can be carried forward for up to 10 years prior to the beneficiary’s 49th birthday. Typically a beneficiary would have unused grant or bond entitlement for each year they were claiming the disability tax credit before opening and contributing to a RDSP.
If carry forward room is available, the annual max that will be paid out is $10,500 in grants and $11,000 for the bond.
Under certain circumstances RDSP grants and bonds may need to be repaid. To see potential circumstances where RDSP grants and bonds have to be repaid, click here, and scroll to the bottom.
A rollover is the transferring of funds from a retirement savings plan on a tax-deferred basis to a RDSP. Rollovers reduce the amount of eligible contribution room and are not eligible for grant money. That being said, the most that could be rolled over is $200,000, assuming that no other contributions had been made.
The RDSP rules allow for a rollover of a deceased individual’s RRSP to an RDSP of the deceased individual’s financially dependent child or grandchild. These rollover rules also apply to RRIFs, certain lump-sum amounts from RPPs or SPPs, as well as PRPP proceeds.
As mentioned above, a beneficiary is only entitled to one RDSP. However, once they have opened one, they can still transfer it to a different institution. The conditions for transferring one RDSP to another RDSP are as follows:
- The transfer must be made directly from a beneficiary’s current RDSP to a new RDSP for the same beneficiary
- A transfer can only be made if all holders of the current RDSP agree to it.
- All funds must be transferred from the current RDSP to the new RDSP.
- The current RDSP must be terminated immediately following the transfer.
- Where the beneficiary has attained age 59 before the year in which the transfer takes place, the issuer of the new plan agrees to pay any DAP’s required to be made under the plan.
There are three types of payments made from an RDSP:
- Disability Assistance Payments (DAPs) (this includes LDAPs)
- Direct transfers to another RDSP (we already looked at this)
- Repayments under the Canada Disability Savings Act (CDSA) (we will not focus on this for the sake of length).
Disability Assistance Payments (DAPs)
Only the beneficiary or the beneficiary’s estate upon their death is eligible to receive DAP. It is a singular payment that can be requested at any time and may consist of contributions, grants, bonds, proceeds from rollovers, and income earned.
After a DAP payment, the fair market value of the account must still be equal to or greater than the total amount of grants and bonds received in the last 10 years.
This type of payment, for comparison sake, would function similarly to an RESP withdrawal.
Lifetime Disability Assistance Payments (LDAPs)
This type of payment, once started, must be paid at least annually until the plan is terminated or the beneficiary dies. These payments must start by the end of the year in which the beneficiary turns 60.
An LDAP for comparison sake would be similar to the mandatory conversion and withdrawals of an RRSP/RIF at age 71.
When payments are received, they are taxed in the hands of the beneficiary as income. This is regardless if the payments are from the proceeds of a rollover, grant money, bond money or income earned in the account. RDSP payment recipients should receive a T4A tax slip.
If you have an RDSP and wondering about starting to receive payments, talk to your financial advisor. The formulas and taxation rules can get a little complex so it is best to consult a professional.
Cessation of the Plan or the Beneficiary
In some circumstances, a disabled person recovers. When this happens they are most likely no longer eligible for the Disability Tax Credit (DTC).
When this is the case, the RDSP must be terminated and all amounts paid out of the plan to the beneficiary by December 31 of the following calendar year. All grants and bonds must be repaid to the government.
However, to avoid having to close the RDSP and repay the grants/bonds, an election can be made. To have an election made, the RDSP plan holder will be required to:
- Have a licensed medical doctor or nurse practitioner certify in writing that the beneficiary will likely become eligible for the DTC at some point in the future.
- Make an election to keep the plan open by providing the medical certificate to the issuer.
This election is generally valid until the fourth calendar year following the first full calendar year in which the beneficiary is no longer eligible for the DTC.
What happens upon beneficiary death?
When the beneficiary of an RDSP passes away, all amounts remaining in the plan must be paid out to the beneficiary’s estate. This must be done by December 31 of the year following the calendar year in which the beneficiary dies.
Any grants and bonds that have not been in the account for 10 years or more will have to be repaid.
RDSPs are a great saving and investment vehicle for those that qualify. If you are eligible for the DTC, we urge you to sit down with your advisor and open one up.
Although RDSPs have not been around long (2008) there are some reforms coming. In 2019 the federal government announced changes to the rules around what happens if a beneficiary no longer qualifies for the DTC.
The new reforms should allow the RDSP to remain open upon cessation of a disability. In addition, grants and bonds would no longer have to be repaid. These changes are set to happen following 2020.
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