17 Jan 2022
The RDSP – A Hidden Gem?
Benefits of A Registered Disability Savings Plan (RDSP)
An RDSP is a regulated account used for long-term savings for a family member with a disability, the main benefits of which include tax-free growth and “free money” from the federal government.
In order to open an RDSP account, the beneficiary must:
- Be entitled to the disability tax credit,
- Have a social insurance number (SIN), and
- Be resident in Canada
Unlike other registered investments such as the RESP and RRSP, there can only be one RDSP account at one financial institution for this beneficiary.
The holder(s) of the RDSP must have a SIN but unlike the beneficiary, does not require Canadian residency. Their role is to open and manage the plan, make contributions, and authorize contributions from others.
- For a minor beneficiary, the holder is the parent or legal representative.
- An adult beneficiary can be the holder if contractually competent, otherwise it would be the parent, spouse, or legal representative.
It is interesting to note that even though multiple RDSP holders are allowed, some financial institutions may not offer this option.
The main benefits of an RDSP are:
- Tax Savings – income earned in the RDSP is not taxed and can therefore accumulate faster. Contributions are not deductible for tax purposes, but they are also not taxable when later withdrawn by the beneficiary.
- Government Bonds – up to $1,000 per year can be received within an RDSP, without having to make a contribution, where income is below a specified amount (see illustration below).
- Government Grants – a maximum of $3,500 per year is available to match a $1,500 contribution where income is below a certain amount, and everyone else is entitled to a $1,000 grant to match a $1,000 contribution (details below). This works out to a 100% to 230% rate of return!
* Family income is net income for tax purposes, with some adjustments (e.g. RDSP income is excluded). It is based on the parents’ income while the beneficiary is a minor and includes a spouse’s or common-law partner’s income (if applicable) for adult beneficiaries.
- Provincial Benefits - British Columbians who meet the Person with Disabilities (PWD) designation and have income and assets below specified thresholds, are eligible for provincial benefits. The RDSP and income from it are exempt from the PWD asset and income thresholds, making it easier to qualify for benefits in BC (which include an allowance, shelter stipend, health benefits, and transportation subsidies).
- Federal Benefits – RDSP income will not affect the GST/HST credit, Canada Child Benefit, or Old Age Security clawback.
Contributions, Bonds and Grants
RDSP contributions are limited to $200,000 over a beneficiary’s lifetime, and can be made by anyone (with the holder’s permission) until the end of the year they turn 59. The bonds and matching grants also have some limits (see below) and can be received until the end of the year that the beneficiary turns 49.
Payments & Repayments
Disability Assistance Payments (DAPs) - A DAP is any payment made out of an RDSP. The lifetime DAP (LDAP) is an annual DAP that starts at age 60, with a maximum amount per year determined by a formula so that the RDSP can last until the beneficiary turns 83. The beneficiary will only be taxed on the portion of the DAP related to investment income, and government bonds and grants received.
Bond and Grant Repayments - If bonds and grants were received in the 10 years prior to a DAP, 3 times the DAP amount must be repaid. If the plan is closed or the RDSP beneficiary dies, then the entire 10-year balance must be repaid.
It is helpful to map out expected annual contributions in order to maximize the lifetime bonds, grants, and contributions, and to maximize the grants on catchup contributions. This also helps to minimize bond and grant repayments on DAPs. There are many factors to consider to get the most out of an RDSP, for example:
- A beneficiary is likely to have lower family income as an adult and therefore qualify for more grants and bonds at that time, but this must be weighed against the time value of money.
- Even though 10 years of unused grant entitlements are available, it may not pay to catch up on all contributions at once since grants cannot exceed $10,500 per year.
On the death of an RDSP holder, the plan will continue to be held by the joint holder, if any; otherwise, the beneficiary, parent, or spouse becomes the holder depending on the beneficiary’s competency. An RDSP for a minor beneficiary should ideally have joint holders for ease of administration when one holder passes. If there is only one holder, it may be possible to add a joint holder if the financial institution allows.
When a beneficiary dies, the RDSP becomes part of their estate. The beneficiary should have a Will to provide for their wishes and desired bequests, if they meet the age and mental capability requirements. Otherwise, provincial law will determine who inherits from their estate.
There is no question that every person with a disability should have a Registered Disability Savings Plan. You can find additional information here on the CRA website.
With careful planning, the generous contributions from government and untaxed income will provide long-term financial security, all while maintaining other federal and provincial benefits.
Other estate planning tools such as life insurance, Wills, Powers of Attorney, Representation Agreements, and Trusts should also be considered.
Manning Elliott Is Here to Help
We are here for you. If you still have questions about eligibility or how a Registered Disability Savings Plan works, please reach out to our tax experts or contact us through one of our Manning Elliott branches.
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NOTE: Tax laws are complex and are subject to frequent change. The contents of this article are not intended to represent legal or tax advice. Please consult your tax adviser before employing any strategies discussed here.