Registered Disability Savings Plans
The Registered Disability Savings Plan (“RDSP”) is a savings plan provided by the federal government to help parents and others save for the long-term financial needs of a disabled individual. The RDSP is a rather complicated program and the intent of this article is to briefly describe the requirements to qualify for an RDSP and the benefits of the program.
An individual is eligible as a beneficiary of an RDSP if he or she is a Canadian resident under the age of 60 and is qualified for the Disability Tax Credit (“DTC”).
The DTC is non-refundable tax credit that people with severe and prolonged impairment may be eligible for. A medical practitioner must certify that the individual has such impairment. In general, a person must meet one of the following criteria:
- be blind,
- be markedly restricted in at least one of the basic activities of daily living,
- be significantly restricted in two or more or the basic activities of daily living (can include a vision impairment), or
- need life-sustaining therapy.
In addition, the person’s impairment must meet both of the following criteria:
- be prolonged, which means the impairment has lasted, or is expected to last for a continuous period of at least 12 months, and
- be present all or substantially all the time (i.e. at least 90% of the time).
A beneficiary can have only one RDSP at any given time.
Benefits of an RDSP:
The funds in an RDSP grow tax-free and up to $200,000 can be contributed to the account without affecting the beneficiary’s disability benefits. Anyone can contribute to an RDSP and such contributions can be withdrawn without being included in the income of the beneficiary. Unlike a RRSP, however, contributions are not tax-deductible.
The primary benefit of an RDSP is that they may allow the holder of the RDSP to qualify for two federal government programs: the Canada Disability Savings Bonds (“Bonds”) and Canada Disability Savings Grants (“Grants”), which are both paid directly into the RDSP. The amount of Bonds or Grants that a beneficiary of an RDSP may qualify for depends on the his or her family income.
The government will pay a Bond of up to $1,000 a year to a beneficiary of an RDSP with a family income of less than $30,450. This amount is reduced as the beneficiary’s family income exceeds that amount and no Bond is paid if the family income exceeds $46,605. No contributions to the RDSP must be made to get the Bond and the lifetime Bond limit is $20,000. A Bond can be paid into an RDSP until the year in which the beneficiary turns 49.
The Grant operates by matching contributions into the RDSP. If the beneficiary’s family income is less than $93,208:
- on the first $500 contributed into the RDSP, the beneficiary will receive $3 for every $1 contributed (i.e. a maximum of $1,500), and
- on the next $1,000 contributed to the RDSP, the beneficiary will receive $2 for every $1 contributed (i.e. $2,000 maximum).
The maximum Grant for any one year is $3,500.
If the beneficiary’s family income is greater than $93,208, on the first $1,000 contributed to the RDSP, the beneficiary will receive a Grant of $1, with a maximum Grant for any one year of $1,000.
The maximum lifetime amount that a beneficiary can receive in Grants is $70,000 and Grants can be received on contributions made until the beneficiary turns 49.
The purpose of the RDSP is to provide benefits to disabled individuals for long-term savings. If funds are withdrawn from the RDSP before the beneficiary turns 60, penalties could apply such that the last ten years of federal government contributions may need to be returned.
The Bonds, Grants and investment income earned in the RDSP are included in the income of the beneficiary when they are withdrawn and taxed accordingly; however, they are excluded for the purpose of calculating Old Age Security (OAS) and the Guaranteed Income Supplement (GIS).
The rules for RDSPs are quite complex. However, an RDSP can provide some significant benefits to a disabled individual who qualifies for the plan, with total government contributions of up to $90,000 in both Grants and Bonds that the individual would not otherwise qualify for without an RDSP.
We are happy to help if you have questions about RDSPs. Please contact Zach or another member of our Tax Law Team.