What is an RDSP?
A Registered Disability Savings Plan (RDSP) serves as a deferred savings instrument designed to assist individuals with disabilities and their families in planning for long-term financial security. Canada has the distinction of being the first country globally to introduce such a plan, with approximately 150,000 accounts opened to date. Notably, contributions can be made by anyone. The account holder with flexibility to utilize the funds as they see fit. Additionally, there are grants and bonds associated with the RDSP, which will be elaborated upon later in this article.
Who Qualifies for an RDSP?
To qualify for an RDSP, the following criteria must be met:
You must be a resident of Canada and have a valid Social Insurance Number (SIN).
You must be under the age of 60. However, please note that you're only eligible for grants and bonds until December 31st of the year you turn 49.
You must have a long-term disability that qualifies you for the Disability Tax Credit (DTC).
The DTC is a tax reduction measure designed to recognize the financial burden of disability. This credit is claimed when taxes are filed.
Eligibility is determined by the Canada Revenue Agency (CRA) based on Form T-2201, which must be filled out in consultation with a healthcare practitioner and subsequently submitted to the CRA.
RDSP Contribution Limit
While there is no annual contribution limit for an RDSP, there exists a lifetime maximum contribution of $200,000. Importantly, government-matched funds are not included in this total.
Contributions can be made by anyone, given they have written permission from the account holder. However, contributions are not permitted after the end of the year in which the beneficiary turns 59.
Understanding RDSP Grants
The Canada Disability Savings Grant (CDSG) is a program where the Canadian government matches contributions made to your RDSP by you or any permitted contributor. The grant amounts vary based on the beneficiary's income:
For beneficiaries with an income of $106,717 or less, the government will contribute $3 for every $1 contributed up to the first $500. For the next $1,000 contributed, the government will match $2 for every $1. The maximum grant amount for any single year is $3,500, with a lifetime maximum of $70,000.
For beneficiaries with an income above $106,717, the government will contribute $1 for every $1 contributed up to the first $1,000. The maximum grant amount for any single year is $1,000, with the same lifetime limit of $70,000.
The beneficiary's income from two years prior determines whether they receive the full $3,500 grant one year and $1,000 the next.
The Canada Disability Savings Bond
The Canada Disability Savings Bond (CDSB) is available exclusively for lower-income RDSP beneficiaries and is not contingent on any other RDSP contributions.
For beneficiaries with a net income of less than $34,863 per year, the federal government contributes $1,000 annually. For beneficiaries younger than 18, the family's income is taken into account.
For those with a net income between $34,863 and $53,359, the government contributes a proportion of $1,000.
Beneficiaries or families with a net income above $53,359 do not receive the CDSB.
The Canada Disability Savings Bond has a lifetime limit of $20,000.
Withdrawing from an RDSP
The RDSP operates akin to a pension plan, and withdrawals are processed accordingly.
For early withdrawals (before the beneficiary turns 60), penalties may apply, depending on the date of the last government contribution deposit. To determine the taxable portion before making a withdrawal, account holders can contact the ESDC at 1-866-204-0357 or 1-866-754-2674.
Under the '10-Year Proportional Repayment Rule,' any government grants or bonds deposited within the last 10 years must be partially repaid if withdrawals are made. Specifically, for each $1 withdrawn from an RDSP, $3 of any grants or bonds paid into the plan in the previous 10 years will be forfeited.
There are different types of withdrawals:
1. Disability Assistance Payments (DAPs): These are one-time withdrawals that can be requested at any time.
2. Lifetime Disability Assistance Payments (LDAPs): These represent a series of recurring withdrawals from an RDSP made to the beneficiary once they reach the age of 60. These payments, akin to a pension, continue at least once per year until the RDSP funds are depleted or the beneficiary passes away.
3. Shortened Life Expectancy: If a medical doctor or nurse practitioner confirms that the beneficiary's life expectancy is five years or less, normal withdrawal rules are relaxed. The account holder then has the opportunity to convert the RDSP into a Specified Disability Savings Plan (SDSP)."
The Tax Treatment of Contributions of Withdrawals
Contributions made to an RDSP are not tax-deductible, meaning you do not receive a tax break for the money you contribute. However, these contributions grow tax-free within the plan. This allows the savings in the plan to accumulate faster, as they are not being reduced by annual taxes.
It's important to note that while contributions are not taxed when they are withdrawn, any earnings (interest, dividends, capital gains), along with government grants and bonds, are considered taxable income for the beneficiary at the time of withdrawal. This is comparable to Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs), where you get a tax break on the money going in, but pay taxes on the money coming out.
Keep in mind that withdrawals under the Disability Assistance Payments (DAPs) and the Lifetime Disability Assistance Payments (LDAPs) will trigger taxation on the portion of the withdrawal representing plan growth and government contributions. As such, the taxable amount depends on the proportion of contributions, government grants and bonds, and plan growth at the time of the withdrawal.
Finally, in many cases, individuals with disabilities who are eligible for an RDSP likely have lower incomes and, thus, are in a lower tax bracket. This could potentially result in the taxes payable on RDSP withdrawals being quite low.
RDSP Plan Holder
The plan holder of an RDSP is the person who opens the RDSP and makes or authorizes contributions to it. They also manage the investments and make decisions about when and how much money should be paid out of the plan.
Here are the general rules regarding who can be an RDSP plan holder:
1. If the beneficiary (the person for whom the RDSP is opened) is of the age of majority and is legally able to enter into a contract, they can be the plan holder.
2. If the beneficiary is a minor, a parent or legal guardian can open the RDSP and act as the plan holder until the beneficiary reaches the age of majority.
3. If the beneficiary has reached the age of majority but is not legally able to manage their finances, a legal parent, guardian, public department, agency, or institution can be the plan holder.
4. If the beneficiary is an adult and does not have the capacity to enter into a contract, a qualifying family member (parent, spouse, or common-law partner) can be the plan holder.
Provincial Differences
Most provinces and territories in Canada exempt RDSP assets and withdrawals when calculating eligibility for provincial assistance programs. However, there may be slight differences in how each province or territory administers these exemptions, particularly in relation to income-tested benefits and programs.
The Age of Majority also differs between provinces and would affect when a beneficiary would be able to become the holder of the plan. Also standards for capacity and competence are not the same in all provinces and legal and/or medical advice should be sought in these matters.
RDSP Adult Beneficiaries & Contractual Competency
Information on RDSP accounts when the adult beneficiary is not contractually competent or incapacitated. Who is the Holder and Beneficiary?
If your client has a disability, they may be eligible for the Registered Disability Savings Plan (RDSP). The RDSP is owned by the individual for whose benefit it was opened, and this person is considered the beneficiary.
However, the beneficiary may not always be the best person to manage the RDSP. In such cases, an RDSP can still be established with someone else appointed as the Holder of the RDSP.
The Holder is responsible for managing the plan, including making decisions about investments and payment options. An RDSP must have both a beneficiary and a Holder. Nevertheless, if the Holder and the beneficiary can be the same process if the beneficiary is contractuallu competent.
Who Can be Holder? | Beneficiary | Legal Parent | Qualifying Family Member | Legal Representative |
Beneficiary is under age of Majority |
| Yes |
| Yes |
Adult Beneficiary - Not Contractually Competent |
|
|
| Yes |
Adult Beneficiary - Contractually Competent | Yes |
|
|
|
Adult Beneficiary - Contractual Competence in doubt |
|
| Yes |
|
The beneficiary of an RDSP is the individual for whose benefit the plan is opened. They must:
Be eligible for the Disability Tax Credit (DTC), unless the RDSP is being transferred from an existing plan to a new one.
Possess a valid Social Insurance Number (SIN).
Reside in Canada at the time the plan is initiated.
Be under the age of 60, as plans can be opened until the end of the calendar year in which the individual turns 59. This age limit is not applicable if the RDSP is being opened as a result of a transfer from the beneficiary's previous RDSP.
A beneficiary is permitted to have only one RDSP at any given time.
The holder is the person who establishes the RDSP and is authorized to make contributions to it on behalf of the beneficiary.
The holder can be:
The legal parent of the beneficiary.
The guardian, tutor, or curator of the beneficiary, or another individual who is legally empowered to act on behalf of the beneficiary.
A public department, agency, or institution with legal authority to act on the beneficiary's behalf.
Provided all conditions are satisfied, there can be more than one holder for an RDSP at any time.
Qualifying Family Member is the legal parent of the beneficiary or a spouse or common-law partner of the beneficiary who is not living apart and separate from the beneficiary because of a breakdown of their marriage or common-law partnership.
RDSP Account Opening with Contractual Compentancy
The general process to open an RDSP for a beneficiary who is not contractually competent is the same as opening any other RDSP (see the RDSP account opening instructions here).
Please note the following in regard to the application forms for a contractually incompetent adult:
CPM_RDSP_Application - This should be completed in the same manner as any other RDSP account, with the exception of Section 5 - Holder Information. Ensure that the appropriate boxes at the bottom of this section are selected to accurately reflect the situation.
ESDC-EMP5608 (Applying for Grants and Bonds) - This form should be completed in the same manner as for any other RDSP account, with the exception that Section 4 should not be signed by the beneficiary if they lack contractual competence, as indicated by the requirements.
ESDC-EMP5611 and ESDC-EMP5612 (Existing RDSP to be Transferred In) - Only the holder is required to sign Form 5612.
Additional considerations for RDSPs where the beneficiary is not contractually competent include:
For a child, the Holder must be a parent or guardian. Parents can retain holdership of the plan even after the child reaches adulthood. They may also choose to transfer holdership or become joint Holders.
For an adult lacking contractual competency, the federal government permits parents, spouses, and common-law partners to become plan Holders until December 31, 2023. If appointed before 2024, such a family member can maintain holdership for life. This provision does not apply to an already established RDSP or if the individual already has a legal representative.
An adult lacking contractual competency may also have an adult guardian appointed (or a representative through a representation agreement, in British Columbia only) to open and manage the RDSP. The term for an adult guardian varies by province and includes titles such as power of attorney, tutor, trustee, curator, and committee.
An adult with contractual competency can designate a Power of Attorney or representative (in British Columbia) to manage their financial affairs.
Some scenarios may necessitate independent legal advice.