A Registered Disability Savings Plan is a tax-exempt account designed to assist those with disabilities in saving for their long-term financial security. RDSPs were created in 2008 by the Canadian federal government becoming the first accounts of this kind in the world.
According to a survey completed by Statistics Canada in 2020, less than one-third of eligible residents in Canada have taken advantage of an RDSP. Of those eligible who had not opened an RDSP, nearly half had never heard of them. Lower income and less educated respondents were less likely to be aware of RDSPs.
In some small way, I hope I am able to influence those statistics.
Who Qualifies for an RDSP?
An individual qualifies to be the beneficiary of an RDSP if they meet the following criteria:
- Is eligible for the disability tax credit (DTC)
- Has a valid social insurance number (SIN)
- Is a resident of Canada
- Is under the age of 60
Disability Tax Credit (DTC)
To qualify for the disability tax credit, a medical practitioner must certify that an individual has a severe and prolonged impairment in physical or mental functions using form T2201, Disability Tax Credit Certificate. There is a self-assessment questionnaire to help individuals determine if they qualify for the DTC. Either you or your medical practitioner can submit form T2201. It can be submitted electronically through CRA My Account or by mail. Your medical practitioner can also apply through a digital application. The CRA aims to process your application and mail a notice within 8 weeks of receiving your application, but it could take 3 to 6 months.
Who Can Open an RDSP?
There is both a holder and a beneficiary of an RDSP. The beneficiary is the individual who qualifies for the DTC and who the funds are intended for. The holder is the person responsible for the management of the RDSP and makes or authorizes contributions to the RDSP. If the beneficiary is under the age of majority a parent, legal guardian, or an agency legally authorized to act for the beneficiary can be the holder. Once the beneficiary reaches the age of majority they are able to become the holder of their RDSP. If the beneficiary’s contractual competency to enter into a plan is in doubt or they are not contractually competent, there are different rules for who can be the holder of the RDSP.
Government Support
Unlike an RRSP, contributions to an RDSP are not tax-deductible. But similar to an RRSP, growth and income within the account is tax-free until withdrawn. In addition to the tax-exempt growth the federal government matches contributions with the Canada Disability Savings Grant (CDSG) and provides Canada Disability Savings Bonds (CDSBs) for families with low and modest incomes.
Contributions are limited to $200,000 per beneficiary, with no annual limit. Anyone can contribute to an RDSP with written consent from the planholder.
Contributions are eligible for the Canadian Disability Savings Grant until the beneficiary is 49 years of age. Contributions are matched 300% on the first $500 and 200% on the next $1,000 contributions if family net income is below $106,717 as of 2023 (amount is indexed to inflation). If family income is above that threshold, then the matching grant is $1,000 on the first $1,000 of contributions. The maximum yearly grant amount is $3,500, with a lifetime limit of $70,000. You are allowed to catch-up on grants from previous years up to a maximum of $10,500 per year. The beneficiary accumulates grants once they are approved for the Disability Tax Credit.
Canadian Disability Savings Bonds are paid by the Government of Canada directly into an RDSP. Families with income below a minimum threshold receive $1,000 in CDSB per year. Above the minimum threshold and below the maximum threshold the CDSB received declines using a formula until it cease above the maximum threshold. The lifetime maximum for CDSB is $20,000.
There is a 10-year repayment rule where all CDSGs and CDSBs received must be repaid if the RDSP is terminated, the plan ceases to be an RDSP, or the beneficiary dies.
Withdrawing from an RDSP
The RDSP is a long-term savings vehicle. It is designed to support people with disabilities as they age and isn’t suited for short-term goals. As a result, you may have to repay the CDSGs and CDSBs you received if you make a withdrawal. You don’t have to repay the grants and bonds if you are 60 years of age, haven’t received grants or bonds in more than 10 years, or have a reduced life expectancy of 5 years or less (RDSP becomes an Specified Disability Savings Plan). You will need to repay $3 of grant and bond for every $1 withdrawn, up to the total amount of grants/bonds paid in the previous 10 years.
There are 2 different ways to access money from an RDSP. Through Lifetime Disability Assistance Payments (LDAPs) and Disability Assistance Payments (DAPs).
Lifetime Disability Assistance Payments (LDAPs) are recurring payments paid to the beneficiary. They must begin by the end of the calendar year the beneficiary turns 60. They can be started prior to age 60, but withdrawals would be subject to the repayment of grants and bonds received in the previous 10 years. There payments will continue to be received until the beneficiary dies or the money in the plan is fully depleted.
Disability Assistance Payments (DAPs) are single payments paid to the beneficiary or their estate. They are also subject to the repayment of grants and bonds received in the previous 10 years.
There are limits to the amounts you can withdraw as a LDAP or DAP which are calculated by using a formula based on the age of the beneficiary and the amounts of grants and bonds in the plan.
Income Treatment of Withdrawals
All funds in the RDSP are not taxed until withdrawal and only a portion of the withdrawal amounts are taxable. Only the grants, bonds, income, and growth in the RDSP are taxed. Your contribution amounts are not taxed with the non-taxable amount determined by a formula.
Withdrawals and assets held within an RDSP will not affect your other government benefits like CPP, GIS, OAS, or ODSP. There are some provinces where withdrawals will impact the amount of provincial benefits you receive.
Transferring and Closing a Plan
A beneficiary is only allowed to have one RDSP. You are able to transfer existing RDSPs to a new institution, but only full transfers of assets are allowed. Partial transfers are not accepted. The RDSP at the previous institution will need to be closed immediately after the transfer is completed.
An RDSP is closed when all money is removed from the plan, it becomes non-compliant, the beneficiary dies, or the plan holder requests the plan is closed (in certain circumstances). As of 2021, if the beneficiary is no longer eligible for the Disability Tax Credit, the holder has the option of closing the plan or keeping it open. If the DTC is lost, money can be withdrawn from the plan but contributions can’t be made, grants and bonds can’t be paid, and amounts from a deceased parent or grandparent’s RRSP can only be rolled in within 4 years after the DTC is lost.
Rollovers into an RDSP
Under certain conditions rollovers from retirement savings and education savings are allowed. Funds from RRSPs, RRIFs, pension plans, and RESPs are allowed from parents and grandparents subject to the lifetime contribution limit of $200,000. The beneficiary of the RDSP must be entitled to receive the amounts from retirement savings either by being named the beneficiary at the plan level or because the proceeds were payable to the estate and the RDSP beneficiary was a beneficiary of the estate. There are further restrictions for the rollover of an RESP.
Bobby McBride holds the Certified Financial Planner (CFP) designation and is Financial Planner at Planning with Bobby Inc. He also holds the Chartered Financial Analyst (CFA) designation and is an Investment Advisor at Investing with Bobby of Designed Securities Ltd.
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