Registered Disability Savings Plans
Registered disability savings plans (RDSP) are a great tool to assist Canadians with disabilities and their families. These plans offer many benefits such as grants and bonds to contribute to your financial goals, tax-deferred growth, and provide financial security without jeopardizing access to provincial social assistance benefits. Starting early can ensure that you maximize the benefits available to you.
RDSPs can be opened for any Canadian resident individual who is under 60 years of age and eligible for the disability tax credit. Each individual can only be the beneficiary of one plan at any given time. The plan is opened with a participating financial institution by the plan holder. The holder can be the eligible individual if they have reached the age of majority, or another qualifying person if they are under the age of majority or not contractually competent to enter into the plan. A qualifying person includes a parent, guardian or another individual that is legally authorized to act on their behalf.
There is a lifetime contribution limit of $200,000 with no annual limit. Contributions are not tax-deductible and can be made by anyone with authorization from the holder. Contributions are permitted until December 31 of the year in which the beneficiary turns 59.
The greatest benefit of the plan arises from Canada disability savings grant and Canada disability savings bond. These amounts are paid into the plan by the government on top of the contributions into the plan. The Canada disability savings grant is a matching grant based on the contributions to the plan and family net income. The maximum grant that can be received is $3,500 per year and $70,000 over the beneficiary’s lifetime. Grants can be received until December 31 of the year in which the beneficiary turns 49.
As of 2021, matching grants will be paid as follows:
If family net income is $98,040 or less—$3 for every $1 contributed on the first $500 in contributions and $2 for every $1 contributed on the next $1,000 in contributions. Therefore, the maximum grant of $3,500 will be received on $1,500 in contributions.
If family net income is greater than $98,040—$1 for every $1 contributed on the first $1,000 in contributions.
Family net income is indexed to inflation. Family net income generally includes income of the beneficiary and their parents or guardians until the year in which they turn 18. After this time, family net income includes the beneficiary’s income and the income of their spouse or common-law partner. The Canada disability savings bond is paid to low-income individuals and does not require contributions to be made to the plan. A maximum of $1,000 per year and a lifetime limit of $20,000 applies. The bond can also be received until December 31 of the year in which the beneficiary turns 49. As of 2021, the maximum bond of $1,000 will be paid if family net income is $32,028 or less and the bond will not be paid if family net income exceeds $49,020. Between these amounts, a portion of the $1,000 will be paid based on a formula.
Withdrawals from the plan can be made at any time to be used for the benefit of the beneficiary and must begin before the end of the year in which the beneficiary turns 60. The portion of the withdrawals arising from grants, bonds and income earned within the plan will be taxable to the beneficiary. The withdrawal of original contributions is not taxable since the contributions were not tax-deductible. A portion of the grants and bonds may be clawed back if they have been in the plan for less than 10 years at the time of withdrawal.
Unused entitlements to grants and bonds can be carried forward for a period of up to 10 years if the beneficiary was eligible during those years. However, based on the calculation of the grants and bonds, it is best to open the plan as early as possible to ensure the lifetime maximums are received. Starting early also allows for a longer period of tax-deferred growth within the plan.
Many provincial social assistance programs are income and asset tested. RDSPs are typically exempt from the asset requirements of these programs. Therefore, these plans are an effective way to provide financial security for yourself or your loved one.
RDSPs have many benefits but they are also complex and require proper planning. There are also many other options that may be available to assist you or your loved one.
For more information, please contact info@gytdcpa.com or 1 844-GYTD-CPA
GYTDCPA.com-Registered Disability Savings Plans
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