Register Disability Savings Plan
For families with a child that has disability, one of the major concerns is often how best to ensure the financial security of this child going forward. In addition to this concern is frequently the desire and challenge of ensuring that government benefits that this child could be entitled to do not get clawed back. Fortunately, as a result of announcements first made in the 2007 Federal Budget, Registered Disability Savings Plans (RDSPs) are available to help with these dual objectives.
Registered Disability Savings Plans are based on the design of Registered Education Savings Plans and allow for up to $200,000 of nondeductible contributions to be made during a beneficiary’s lifetime. This $200,000 limit can be contributed all at once or over several years and any subsequent growth accumulates on a tax deferred basis. In addition, all beneficiaries are eligible for additional contributions from the Federal government in the form of Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs). Individuals that qualify for the Disability Tax Credit (DTC) are eligible to be the beneficiary of a RDSP as well as receive the aforementioned Federal contributions.
Canada Disability Savings Grant contributions amounts are income tested with the current cut off occurring at a family income of $81,941. When family incomes are less than this amount, the first $500 of annual contributions receives three dollars in CDSGs for every dollar contributed. The next $1,000 of contributions then receives two dollars in CDSGs for every dollar contributed. If the family income is above the $81,941, the CDSG amount is one dollar in grant for every dollar contributed on the first $1,000. There is also a lifetime maximum of $70,000 for all CDSG contributions.
Families with incomes of $23,855 or less are also entitled to receive annual Canada Disability Savings Bonds contributions of $1,000 per year for up to 20 years. These annual contribution amounts are gradually phased out for family incomes between $23,855 and $40,970. For both Canada Disability Savings Grants and Canada Disability Savings Bonds, family income are defined as the income of the legal parents or guardians of the beneficiary if under 18. Once a beneficiary has attained 18 years of age, family income is defined as the income of the beneficiary and their spouse or common-law partner. It is also important to note that beneficiaries are only eligible for
RDSP contributions can be made until the end of the year in which the beneficiary turns 59; however, beneficiaries are only eligible for CDSG and CDSB contributions until December 31st in the year in which they turn 49. Payments from RDSPs must then commence by the end of the year in which the beneficiary turns 60 and are taxable to the beneficiary. These payment amounts are tied to maximums determined by the life expectancy of the beneficiary as well as the value of the assets in the RDSP. The only portions of withdrawals from RDSPs that are subject to taxation are the Federal government contributions as well as the growth in the plan. An important feature of RDSP withdrawals is that any income a beneficiary receives is not included in Federal income tested benefits like Old Age Security and the Guaranteed Income Supplement. The British Columbia provincial government has also exempted RDSPs from income and asset tested calculations of provincial disability benefits.
RDSPs are an exciting tool that many are proclaiming to be the most significant advancement for the more than 700,000 Canadians with disabilities in the last 25 years. It is however important to note that like most tools, if used incorrectly, the desired result will not occur. For example, when any withdrawals are made, all grants that were paid in the last 10 years will have to be repaid. A family’s RDSP allocations should be determined by their particular goals, investment knowledge and risk profile (amongst other factors). Professional advice should be consulted to ensure that opportunities that are specific to their particular circumstances are maximized.
Troy Peart B.B.A., CFP, CFA can be contacted at troypeart@shaw.ca. Your questions, comments or suggestions for future articles are encouraged.
