The Registered Disability Savings Plan allows parents (and others) to save for the long-term financial security of a person eligible for the Disability Tax Credit.
Who is eligible for the Registered Disability Savings Plan (RDSP) tax credit?
This is an individual who has severe and prolonged mental or physical impairment. Therefore, a person recovering from a car accident would not be eligible since it is not prolonged.
A medical practitioner, such as a doctor or nurse practitioner, must certify that the individual qualifies for the tax credit.
How does the Registered Disability Savings Plan (RDSP) work?
An RDSP is similar to other government-regulated savings plans like RRSPs – but has special rules about contributing and withdrawing funds.
An account can be opened at many financial institutions. The plan holder, often the parent, sets up the account on behalf of the beneficiary (the disabled individual).
One of the great aspects of the RDSP is that anyone can contribute, as long as they have written permission of the plan holder. This means that grandparents, aunts, uncles and friends can all pitch in financially.
Let’s look at an example. Marc and Melissa have a 20-year-old son, James, who has Down’s Syndrome. While James is generally healthy, he does not have the intellectual capacity to earn an income – therefore, he is eligible for the Disability Tax Credit. James still lives with his parents, but Marc and Melissa want to provide for him after their deaths. They decide to open an RDSP, contributing $5,000 annually. This will help to provide James with funds for living costs in the future.
How much does the government contribute to the Registered Disability Savings Plan (RDSP)?
The federal government contributes in two ways: The Canadian Disability Savings Grant and the Canadian Disability Savings Bond. The maximum grant is $3,500 per year, with a lifetime limit of $70,000. The bond is $1,000 per year, with a lifetime cap of $20,000.
These government contributions are one of the key benefits of setting up an RDSP rather than simply opening a savings account.
Registered Disability Savings Plan (RDSP) Rules
There are many RDSP rules. Before setting up an account, be sure to familiarize yourself with these regulations so that you can take full advantage of the benefits. Your financial adviser can also help you navigate the rules. Some people consult a lawyer, especially if they want to set up both a registered account and a financial assistance plan beyond the RDSP.
RDSP contributions are not tax deductible. Contributions can be made until the end of the year that the beneficiary turns 59. This is known as the RDSP age limit. After that, you must begin withdrawing funds from the account.
The good news: Withdrawals of the original contributions are not considered taxable income – the beneficiary does not need to include them on his or her tax return.
The bad news: Other RDSP components are taxable. These include investment income, the Canada Disability Savings Grant and the Canada Disability Savings Bond. Taxes must be paid when the beneficiary withdraws funds from the account.
In some cases, the beneficiary can open their own account. The individual must be over the age of 18 and be “contractually competent.” This means that they must have the intellectual capacity to make financial decisions.
Who qualifies for the Registered Disability Savings Plan (RDSP)?
As we have indicated, only those who have a prolonged intellectual or physical disability can be the beneficiary of an RDSP. They must be continuously eligible for the Disability Tax Credit. If their condition improves over time and they are no longer eligible, no contributions can be made. The plan may stay open until they die – it must be closed by Dec. 31 in the year following their death.
RDSP Contributions
While an RRSP has an annual contribution cap, there is no RDSP contribution limit. However, there is an overall lifetime maximum of $200,000 for a beneficiary. As we have indicated, anyone can contribute as long as they have written permission of the plan holder.
The federal government offers an RDSP calculator so that plan holders and beneficiaries can see how their account can grow over time with contributions, government grants and bonds, and investment income.
RDSP Withdrawals
The Canadian government has a number of rules about RDSP withdrawals.
One of the most important relates to income tax. While RDSP contributions are not taxed upon withdrawal, the other components are taxable. This includes grants, bonds and investment income. The financial institution where you have your RDSP account must deduct income tax from taxable RDSP payments. So, if you are making a withdrawal be sure to check how much you will receive after tax so that you enough funds for living expenses.
The government expects that its grant and bond contributions remain in the account for at least 10 years. If they are withdrawn before then, they must be repaid. There is a $3 repayment requirement for every $1 that is taken out, up to the total amount of grants and bonds that have been contributed in the last 10 years. In other words, do your best to keep the grant and bond funds in the RDSP for at least 10 years.
What happens to RDSP on death?
The RDSP must be closed by Dec. 31 in the year following the death of the beneficiary. Any taxes owing must be paid by the beneficiary’s estate.
In summary: Registered Disability Savings Plan
If someone in your family is eligible for the Disability Tax Credit, you should definitely consider opening an RDSP account. While there are a number of rules to be followed, the government grant and bond contributions make these accounts worthwhile over the long term.
