A Registered Disability Savings Plan aims to help families save for loved ones diagnosed with severe or prolonged disability. is a registered investment account that aims to help families save for loved ones diagnosed with severe or prolonged disability. Introduced in December 2008, RDSPs have been well received and applauded by the international community as Canada was the first country to introduce such type of account.
Opening an Registered Disability Savings Plan
A plan holder would visit their local financial institution and would proceed to open an Registered Disability Savings Plan for the benefit of a beneficiary. A plan holder is considered an individual who would make contributions into the account. The plan holder could be a parent, legal guardian, or even the beneficiary if they’re over 18 and sound of mind. In order to be named as a beneficiary on a RDSP, the criteria below has to be met. A beneficiary cannot be named on more than one RDSP.
- You must be a Canadian resident with a valid SIN
- You’re suffering from a prolonged physical or mental disability
- You’re eligible for the Disability Tax Credit.
- Be under the age of 60 and must apply by the end of December 31st you turn 59.
Disability Tax Credit
Under the current tax rules, if a beneficiary becomes ineligible for the Disability Tax Credit, no further contributions can continue into the RDSP and any government grants have to be returned. The 2019 budget aimed to provide some relief to RDSP beneficiaries by allowing RDSPs to remain open but no further contributions would be permitted. Any government grants would not be retracted. The new rules are likely to take effect beginning of 2021.
Contributing into an Registered Disability Savings Plan
RDSPs have a lifetime contribution of $200,000 and no annual limit. Contributions into an RDSP are not limited only to the plan holder. With written permission from the beneficiary, anyone can contribute into an Registered Disability Saving Plan. Contributions may happen up until the end of the year the beneficiary turns 59. Funds invested in the account accumulate tax-free.
Canada Disability Savings Bond
- Your contributions into the RDSP may attract the Canada Disability Savings Bond.
- The bond aims to help families with net income less than $46,605 save for the person diagnosed with a disability.
- If beneficiary is under 18, assessment will be made on his parents/legal guardian family net income
- If the beneficiary is over 18, assessment will be made on their family net income
- The government would pay up to $1,000 yearly with a $20,000 lifetime limit.
- The bond is paid into the plan even if no contributions are made. The only catch is that, income tax must be filed at minimum the past two years and all future years going forward.
- If the beneficiary is under 18, legal guardians would have to file it under their income
- If beneficiary is over 18, they would proceed to file it under their own income
Canada Disability Savings Grant
Similar to an Registered Education Savings Plan, RDSPs contributions into the plan attract government grant and the amount varies based on family income. The government would contribute up to $3,500 yearly maximum and $70,000 lifetime limit. Grants on contributions can be received up until December 31st of the year the beneficiary turns 49.
- If your family Net Income is Less than $93,208
- On the first $500 contribution, you would receive $3 in grant for every $1 in contribution = $1,500
- On the next $1,000 contribution, you would receive $2 in grant for every $1 in contribution = $2,000
- If your family Net Income is More than $93,208
- On the first $1,000 contribution, you would receive $1 in grant for every $1 in contribution = $1,000
RDSP Withdrawals
Registered Disability Savings Plan withdrawals must begin before the end of the year the beneficiary turns 60 years old. However, withdrawals can happen at any age but there may be penalties. There are two types of withdrawals:
- Lifetime Disability Assistance Payments (LDAP)
- Disability Assistance Payments (DAP)
When proceeding to request withdrawals from an RDSP, plan holders and beneficiaries should be aware of the holdback period which is discussed below.
Lifetime Disability Assistance Payments
LDAPs are lifetime payments that must start by the end of the year the beneficiary turns 60. Payments may earlier with if the RDSP is a Specified Disability Savings Plan (SDSP). An SDSP is a variation of the RDSP and relates to when the beneficiary has a shortened life expectancy of 5 years or less. SDSP beneficiaries are allowed to withdraw up to $10,000 annually without a penalty.
The amount withdrawn from the Registered Disability Savings Plan as LDAPs is limited by a formula. If the federal government contributed more to your RDSP than you did, then the amount you can withdraw is limited. The formula does apply if the beneficiary has a shortened life expectancy.
A/(B + 3 – C) + D
A = the Fair Market Value of the RDSP on January 1st, other than the value of locked-in annuities held in the plan.
B = the greater of 80 and the age of the beneficiary at January 1st
C = the actual age of the beneficiary at January 1st
D = the total value of all periodic payments reeived by the RDSP in that year, under a locked-in annuity
Speak to your plan provider to determine how much you’re entitled to withdraw.
Disability Assistance Payments
Disability Assistance Payments are payments made to a beneficiary from the Registered Disability Savings Plan that may consist of contributions, grant, bond and income earned in the account. These payments could be requested at any time. However, keep in mind that any DAP withdrawals are subject to holdback in where you’ll return any government grants within the last 10 years.
Assistance Holdback Amount
If you proceed to withdraw from the Registered Disability Savings Plan, be aware of the “holdpack period” of 10 years. The holdback period refers to any grants or bonds that the government has contributed into the RDSP in the last 10 years. Any withdrawals made from the RDSP will attract the holdback and grants/bonds will be returned.
The repayment rule is that for each $1 withdrawn, only $3 of grants or bonds paid into the plan in the last 10 years need to be repaid.
If 10 years have passed and no grants have been deposited by the government, withdrawals can happen without repaying any funds.
Tax Implications
Every dollar withdrawn from an Registered Disability Savings Plan is broken down to three categories:
- Private contributions
- Government contributions
- Income/Growth
Private contributions in the Registered Disability Savings Plan can be withdrawn tax free but grants and bonds are included in your income. In addition, any growth in grants and bonds is included as income.