RDSP: Take a New Look at RDSP to Help the Disabled

Is there a new disability in the family for someone under the age of 49? Astute tax and financial advisors will want to introduce the RDSP (Registered Disability Savings Plan) as a savings option to shore up support for the future. But, who is eligible and what can be contributed? A primer on this very lucrative plan should be discussed with your clients.

The RDSP may be established for an individual who has a severe and prolonged physical or mental impairment and qualifies for the Disability Tax Credit during the year of the plan’s establishment. Contributions may not be made to the plan in years for which the individual is not DTC-eligible. In that case the plan must be terminated by the end of the year following the year in which the beneficiary ceases to be DTC-eligible. However, if the beneficiary is likely to become DTC-eligible again in the near future, an election may be made to postpone closing the plan for up to five years.

Contributions to an RDSP may not exceed $200,000 in a beneficiary’s lifetime. Mutual funds are qualified investments for RDSP purposes and as a trust arrangement are similar to RESPs, in that contributions to the plans are not deductible and investment income accrues on a tax-deferred basis. However, each payment made from an RDSP is considered to consist of grants, bonds and investment income, and each such part is included in the beneficiary’s income when received.

The federal government will provide direct financial assistance to RDSPs in two ways, based on the size of family net income:

1. Canada Disability Saving Grant. The CDSG will match RDSP contributions as follows:

*2016 levels; to be indexed in subsequent years.

Family income is calculated in the same manner as it is for Canada Education Savings Grant purposes, except that in years after the beneficiary turns 18, family income is the income of the beneficiary and their spouse or common-law partner.

There is a lifetime maximum of $70,000 that will be funded under the CDSG and an RDSP will not qualify to receive a CDSG from the year in which the beneficiary turns 49.

2. Canada Disability Savings Bond. Unlike the CDSG, there is no requirement that a contribution be made to an RDSP before a savings bond contribution is available. The maximum annual CDSB contribution is $1,000 and is earned where family income does not exceed $26,364 (2016). The CDSB amount is phased out completely when family income is $45,282 (2016).

There is a lifetime maximum of $20,000 for CDSBs. Like the CDSG, CDSBs will not be paid after the beneficiary of the RDSP turns 49.

Note: Repayments of all CDSGs and CDSBs will be required if there is a loss of eligibility for the DTC or in certain cases when there is a withdrawal or death of the beneficiary. Professional assistance should be sought.

Catch-up of RDSP Grants and Bonds. When an RDSP is opened, CDSG and CDSB entitlements will be calculated for the 10 years prior to the opening date (but after 2008) based on the beneficiary’s family income in those years. CDSB entitlements from the catch-up period will be paid into the plan in the year the plan is opened. The annual maximums for grants and bonds in the catch-up years on unused entitlements are:

• $10,500 for grants; and
• $11,000 for bonds.

The contributions into the RDSP are invested and will later be used to make payments to the beneficiary. Earnings within the plan are tax deferred until that time. The arrangement can be entered into with a qualifying person under certain circumstances.

For help in planning a worry-free retirement for disabled loved ones, speak to a qualified specialist, such as a DFA-Tax Services Specialist™or MFA-Retirement and Estate Services Specialist™.

Evelyn Jacks is President of Knowledge Bureau and one of Canada’s most prolific financial authors of 52 books, including her most recent, Family Tax Essentials: How to Build a Wealth Purpose with a Tax Strategy.

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