Canada has a good savings and benefit program in the form of government grants and bonds, but many people who qualify for the disability program are not aware that Canada has a Registered Disability Savings Plan (RDSP).
While we are all probably familiar with Registered Retirement Savings Plan (RRSP) and Registered Education Savings Plan (RESP), very few have heard of the RDSP.
The RDSP is a vehicle for tax-deferred growth and a “matched” savings plan for people with a severe and prolonged disability. For Canadians who qualify, the RDSP is a great way to achieve long-term financial security.
To qualify for the RDSP, the beneficiary of the program (the person with the disability) must meet four criteria. He or she must:
- be under the age of 60
- be a Canadian resident
- have a valid Social Insurance Number
- be eligible for the Disability Tax Credit (DTC)
The best way to find out if you or someone you know might be eligible for the Disability Tax Credit (DTC) is to see your doctor who can fill out a CRA form (T2201) to make that determination. If a person meets the other three criteria listed above but hasn't done the DTC paperwork, he or she can still open the RDSP while the DTC paperwork is in progress but if CRA denies the DTC application, the RDSP will have to be closed and any bond or grant received will have to be returned to the government.
The Bonds and Grants
Just like an RESP, there are bonds and grants available in an RDSP. As of 2013, here is what's available:
The Canada Disability Savings Bond
If the family income of the beneficiary is $25,356 or less, the government deposits $1,000 bond each year to the RDSP. The government will deposit the bond into the RDSP without the beneficiary having to contribute anything.
If the family income is between $25,356 and $43, 561, a prorated bond is available. CRA has a formula based on the age of the beneficiary to calculate the amount.
For families with income of more than $43, 561, no bond is available.
The Canada Disability Savings Grant
If the beneficiary's family income is $87,123 or less, the government will match 300 percent of the first $500 contributed to the RDSP up to $1,500 per year.
For the next $1,000 contributed to the plan, the government will match 200 percent up to $2,000 per year.
For example: If $1,500 is contributed to the RDSP and the beneficiary's family income is under the threshold of $87,123, the government will give a grant of $3,500.
$ 500 contribution x 300% = $1,500 grant $1,000 contribution x 200% = $2,000 grant Total $3,500 grant
If the beneficiary's family income is over $87,123, the government will match 100 percent of the first $1,000 contributed up to $1,000 per year.
Family income is based on the household income if the beneficiary is under 18 years of age. If the beneficiary is 18 or over, the family income is based on his or her income, and that of their spouse, if any.
Limitations of the RDSP
There are a few limitations and restrictions to know about with the RDSP. First, there are the contribution limits:
Maximum Disability Bond is $1,000 per year
Maximum lifetime Disability Bond that can be received is $20,000
Maximum Disability Grant is $3,500 per year
Maximum lifetime Disability Grant that can be received is $70,000
Maximum lifetime contribution limit is $200,000
There is no limit to the amount that can be contributed to the plan in a year.
If a person has qualified for the RDSP since its inception in 2008 but hasn't started one yet, it may be possible to 'catch up' on missed bonds and grants. If you're starting an RDSP and want to find out about how much you're eligible to catch up, call the government's RDSP hotline at 1-866-204-0357.
Unused Grant and Bond entitlements: “The carry-forward measure”
Unused Grant and Bond entitlements from the past 10 years (starting in 2008) can be claimed for existing RDSPs, or RDSPs opened in January 2011 or later.
To apply for unused Grant and Bond entitlements, the beneficiary must currently be eligible to receive the Grant and the Bond. Applications can be made until the end of the calendar year in which the beneficiary turns 49.
The amount of Grant and Bond eligibility depends on the beneficiary's family income in those years. The Grant amount received also depends on how much is contributed to one's RDSP. The matching rate will be the same as the one that would have applied if the contribution had been made in the year in which the Grant entitlement was earned. Matching rates will be paid on RDSP contributions using up any Grant entitlements at the highest available rate first, followed by any Grant entitlements at lower rates.
Grants and bonds will be paid on the unused entitlements up to an annual
• $10,500 for grants; and
• $11,000 for bonds
The maximum amount of Grant paid over the beneficiary's lifetime is $70,000.
The maximum amount of Bond paid over the beneficiary's lifetime is $20,000.
Here’s an example of how the carry forward measure works. Let’s assume the family income for the beneficiary is below $25,356. If you start an RDSP on 2014 (which is after January 2011), you can carry forward unused grants and bonds starting in 2008. You can deposit $3,500 and get all the maximum grants and bonds, here’s the breakdown:
2008 to 2014 is 7 years
$500 per year x 7 years = $3,500 contribution
You can get $1,500 (300%) of grants for every $500 you contribute
$1,500 grants x 7 years = $10,500 (annual maximum)
Plus $11,000 bonds (annual maximum)
Contributions $3,500 Grant $10,500 ($1,500 x 7 years) annual maximum Bonds $11,000 annual maximum Total $21,500
So by putting in $3,500 on the first year, the beneficiary can potentially get a total of $21,500 of grants and bonds.
On the 2nd year of the plan, you can put around $5,000 to get another $21,500 of grant and bonds. It will not be $3,500 because the way the grant works for the carry forward is they will use all the 300% match first. Since you’ve already used them up on the first year on the 2nd year it works this way.
First $500 gets $1,500, the balance of $4,500 ($5,000 - $500) gets a match of 200% or $9,000. The outcome is
Contribution $5,000 Grant $10,500 ($1,500 + $9,000) annual maximum Bonds $11,000 annual maximum Total $21,500
This is just an example of someone whose family income is below $25,356. The person’s individual grant and bond entitlement will be different depending on their family income as they are calculated based on their income in each year going back to 2008. So if at any time from 2008 to present, the beneficiary’s income goes over the minimum, then the bond entitlement is adjusted accordingly. The grant doesn’t get adjusted until the family income goes over $87,123.
Registered Disability Savings Bond and Grants can only be received up to the end of the year the beneficiary of the plan turns age 49. Any contributions after that will not receive any grant or bonds.
The last day to contribute to the RDSP is the end of the year the beneficiary turns 59.
Like the Registered Retirement Income Fund (RRIF) which must be withdrawn no later than age 71, the RDSP must also be withdrawn at a certain age. The beneficiary of the RDSP must begin collecting from the plan at age 60.
The biggest restriction on the RDSP is the penalty for withdrawing the money early. A beneficiary can request a payment from the RDSP at any time in the form of a Disability Assistance Payment (DAP) but if the beneficiary withdraws money from the plan prior to age 60, there is a claw back of three times the amount of the withdrawal or to the maximum Assistance Holdback Amount (AHA). The AHA is the total amount of Disability Bonds or Grants received in the 10 years preceding the date of the DAP withdrawal.
When it's time to take out the money
Contributions are not tax deductible like an RRSP. It’s more like a TFSA where money invested into the RDSP is after tax dollars.
At age 60, when it's time to start receiving income from the RDSP, the money will be taxed in the hands of the beneficiary, who presumably will be in a low tax bracket. The payments will be received in the form of Lifetime Disability Assistance Payments (LDAP) and will consist of three parts: contribution, bonds & grants, and growth.
When the beneficiary withdraws from the RDSP, contributions or money invested are not taxable or added to the income of the beneficiary.
Only the Canada Disability Savings Grant, Canada Disability Savings Bond and the investment earnings portion of the LDAP in the plan are included in the beneficiary's income for tax purposes when they are withdrawn out of the RDSP.
Each withdrawal is a blend of taxable and non-taxable amounts.
In summary, you can contribute to an RDSP until Dec 31st of the year the beneficiary turns 59.
The beneficiary can only open an RDSP if they qualify for the Disability Tax Credit (DTC).
You will only get the grant and bonds until Dec 31st of the year the beneficiary turns 49.
Contributions made are not taxable
Grant, bonds and investment growth is taxable to the beneficiary.