Guide to Registered Disability Savings Plan (RDSP)

The Registered Disability Savings Plan (RDSP) is a savings program created by the Canadian government that is intended to help individuals save for the long term financial security of a person with a disability. It essentially acts as a pension plan for those with disabilities to ensure they have an income during retirement.

If you think that you or a loved one may be suited for this plan, read on for an overview of RDSP’s benefits and eligibility requirements.
 
Who is eligible to be the beneficiary of an RDSP?

In order to be an RDSP beneficiary, there are several eligibility requirements that must be satisfied:

• Must qualify for the Disability Tax Credit (DTC)*

• Must be a resident of Canada

• Must have a valid Social Insurance Number (SIN)

• RDSP must be opened before the year the beneficiary turns 60 years old

*To qualify for the DTC, a medical practitioner must claim on the individual’s T2201 (Disability Tax Credit Certificate) that “the individual has a severe or prolonged impairment in physical or mental functions”. The DTC is a non-refundable tax credit that helps to reduce the amount of income tax a person with a disability may have to pay. As of 2019, the DTC is $8,418 for those over the age of 18 and $13,325 for those under the age of 18.


Who can open an RDSP?

There are four different answers to this question depending on life circumstances of the beneficiary.

1)  Beneficiary is under 18 years old - In this scenario, a qualifying person over the age of 18 can open and become the holder of the RDSP account. A qualifying person includes: legal parents, guardians, and public departments, agencies and institutions that have legal authorization to do so.

2)  Beneficiary with pre-existing RDSP turns 18 years old and is deemed contractually competent - If the individual already has an RDSP that was opened by a parent or other qualifying member while they were underage, that qualifying person can remain a holder of the plan. If the beneficiary is deemed to be contractually competent, they may become a joint holder of the account.

3) Beneficiary with pre-existing RDSP turns 18 years old and their competency is in doubt -  When the contractual competency of the beneficiary is in doubt, a competent tribunal or provincial authority will determine the competency of the beneficiary. If they are deemed to be not contractually competent, a qualifying family member (i.e. parent, spouse, common law partner, etc.) can remain the holder of the RDSP account.  A legal representative can replace the qualifying family member in the case that they are no longer eligible.
For example, if the beneficiary of the RDSP is separated from their spouse, but not legally divorced, the spouse can be removed as the holder of the account and a legal representative may take over.

4) Individual turns 18 years old but is not contractually competent to enter into an RDSP -  Under these circumstsances, a qualifying person who is legally authorized to act on behalf of the beneficiary can open and become the holder of the beneficiary`s account.

Note: while the beneficiary of the RDSP must be a resident of Canada, the holder of the plan does not have to be a resident but must hold a valid SIN.
 

What can I contribute to my RDSP?

There is no annual limit of how much you can contribute to your RDSP in a given year. That being said, however, there is a maximum of $200,000 that can be contributed over your lifetime.

Contributions to an RDSP are not tax-deductible meaning that they are not included as part of the beneficiary’s income and will not be taxed when they are withdrawn from the RDSP. While the contributions you make to the RDSP will not be taxed, contributions made by the government, proceeds from other RDSP rollovers, and investment income earned in the plan, will be. Investment income gets to grow tax-sheltered in your RDSP and is only taxed upon withdrawal.

Contributions can be made to your RDSP until the end of the year that the beneficiary turns 59 years old. The beneficiary must begin withdrawing money by December 31st the year they turn 60 years old.
 

How much will the government contribute to my RDSP?

One of the greatest advantages of RDSPs is that the government also contributes funds to your account in the form of Canadian Disability Savings Grants (CDSG) and Canadian Disability Savings Bonds (CDSB). The amount of government assistance that the beneficiary is eligible to receive is determined by your family income if you are under the age of 18 and your personal income if you are over the age of 18. Please reference this Canada Revenue Agency website to see how much your RDSP is eligible to receive in the form of government grants and bonds.

• Canadian Disability Savings Grant (CDSG) – The CDSG provides you with matching contribution of up to 300% of your income, with a maximum of $3,500 annually. There is a lifetime limit of $70,000 that you can receive from the government in this form of assistance.

• Canadian Disability Savings Bond (CDSB) – Families that have lower incomes are also eligible for the CDSB. In order to qualify for a CDSB, there are no required contributions that you must make. Throughout your lifetime, the maximum amount of money you can receive from CDSBs is $20,000, with annual payments of no more than $1,000.

Note: It is important to note that you cannot receive CDSG and CDSB after the age of 49 years old. The earlier your RDSP is opened, the better.
 

How are funds withdrawn from an RDSP?

Withdrawals from RDSPs can take various forms but are most commonly either disability assistance payments (DAP) or lifetime disability assistance payments (LDAP).  

1) Disability assistance payments (DAP) – A DAP is a singular payment to the beneficiary or the beneficiary’s estate from their RDSP. DAPs can include funds from personal contributions, government grants and bonds, investment income earned in the account, or proceeds from rollovers.

2) Lifetime disability assistance payment (LDAP) – Similar to a DAP, LDAPs are payments that are made from the RDSP account to the beneficiary or their estate. Payments are not disbursed per request, however. Once started, LDAP payments are made regularly on an annual basis (at least) until the RDSP account is either empty or the beneficiary has passed away. These annual payments begin either when the beneficiary turns 60 years old or 5 years before they are expected to pass away. If the latter is the case, a licensed medical practitioner must express this in writing and submit to the CRA.

If the beneficiary dies while there are still funds in the RDSP, the account must be cleared out and closed. Any investment income that has accumulated in the RDSP will be transferred to the beneficiary’s estate and subject to tax. Initial contributions will be transferred to the estate but not subject to being taxed. Any CDSB or CDSG that has been paid into the account in the past 10 years will be repaid to the government.
 

The RDSP is a great savings plan that promotes long term financial security for individuals with disabilities and their families. This efficient savings vehicle holds your personal retirement contributions, allows your investment income to accumulate tax-free, and sets you up to receive government assistance, thus substantially growing your retirement income. If you want any more information regarding RDSP’s or retirement planning, we’re here to help.

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