What you need to know about Registered Disability Savings Plans (RDSP)

Jul 23, 2019
father and son on the lake shore

By: Diana Steiner, B.Sc., CFP, CLU, Wealth Planning Group

Do you or someone you care about qualify for the disability tax credit (DTC)? This federal tax credit is available for eligible individuals who have a severe and prolonged impairment of physical and/or mental functions.

If an individual qualifies for the DTC and is a Canadian resident under the age of 60, consider the use of a Registered Disability Savings Plan (RDSP). It is a valuable way for parents and others to set aside funds for the individual’s financial future. Once set up, the RDSP becomes an asset of the beneficiary.

Benefits

An RDSP can provide many benefits:

  • Investment earnings in the RDSP are not taxable.
     
  • Contributions are not tax deductible but can be withdrawn tax-free.
     
  • Government programs can add funds to plans. The most common are federal programs, which are based on net family income (generally the parents’ income) while the beneficiary is under 18 and the beneficiary’s income after that (plus spouse’s income if applicable):
     

    • The Canada Disability Savings Grant (CDSG) provides up to $70,000, based on net family income and contributions made.
       
    • The Canada Disability Savings Bond (CDSB) provides up to $20,000 for those at lower income levels (less than about $48,000), with no contribution requirements.
       
  • In most provinces and territories, RDSP assets and income are either fully or at least partially excluded when calculating the beneficiary's eligibility for government assistance programs.

Restrictions

Of course, there are restrictions:

  • There can be only one RDSP per beneficiary and only one beneficiary.
     
  • There are specific rules regarding who can be the plan holder, depending on the beneficiary’s age and mental competence, but anyone can contribute, with authorization.
     
  • The lifetime maximum contribution limit is $200,000 for the beneficiary (with no annual limit). This includes the possible tax-deferred transfer of retirement plans on death to the RDSP of a financially dependent child or grandchild.
     
  • Contributions can only be made until the end of the year the beneficiary turns 59. Beginning in the following year, minimum annual payments must be made to the beneficiary.
     
  • Grants and bonds are only payable until the end of the year the beneficiary turns 49.
     
  • If funds are redeemed within 10 years of grants or bonds being received, repayment of these amounts may be required.
     
  • Special rules apply if the beneficiary ceases to be eligible for the DTC.

As there are many intricacies involved with setting up an RDSP, contact your financial advisor to discuss your situation.

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