Living with a disability typically comes with additional expenses. For many Canadians, these added costs can be financially difficult to handle and can hinder proper care.
The Registered Disability Savings Plan (RDSP) is a government program designed to help Canadians and their family members with disabilities have the necessary funds to cover services, medical equipment, and other costs.
As with any other savings plan, it’s important to understand the options available with an RDSP in Canada and how they fit with your overall financial picture.
Key Points On The RDSP In Canada
- The Registered Disability Savings Plan (RDSP) helps Canadians with disabilities and their caregivers generate long-term savings to cover costs associated with their disabilities.
- There are two plans you can apply for under the Registered Disability Savings Plan; the Canada Disability Savings Grant (CDSG) and the Canada Disability Savings Bond (CDSB).
- The Canadian government matches CDSG contributions up to a lifetime maximum of $70,000.
- The government also provides as much as $20,000 through the CDSB.
- Interest and investment income earned in an RDSP is tax-deferred, allowing funds to grow quickly.
What Is The Registered Disability Savings Plan (RDSP)?
The Registered Disability Savings Plan is a long-term savings solution available to those who are eligible to receive the Disability Tax Credit (DTC). The program was designed to help individuals with a disability or parents and caretakers save for the long-term care of disabled individuals.
Available across Canada and through a range of financial institutions, RDSPs are available to individuals with both physical and mental disabilities.
How Does The RDSP In Canada Work?
When you open an RDSP account, there are two types of plans you can apply for:
- The Canada Disability Savings Grant (CDSG) and;
- The Canada Disability Savings Bond (CDSB).
Canada Disability Savings Grant (CDSG)
The CDSG is a matching grant. This means the federal government contributes to your RDSP when you (or an authorized contributor) add money to the account. How the government matches the contribution depends on your contribution amount and your net household income.
The government can contribute up to $3,500 in grants per year, with a maximum lifetime grant of $70,000. The grant can be paid on RDSP contributions made on or before December 31 of the year the beneficiary turns 49 years old.
Canada Disability Savings Bond (CDSB)
The CDSB is available for lower-income households. You do not need to make any contributions to this plan to recessive the bond. If you’re eligible, you’ll automatically receive the bond into your plan.
You get a benefit of $1,000 annually, up to a lifetime limit of $20,000. Do note that the CDSB is available up to the year you turn 49.
How Much Can You Contribute To Your RDSP In Canada?
With most registered savings plans, there is a yearly limit to contributions. However, RDSPs are a noteworthy exception. There is no annual limit, though there is a lifetime contribution limit of $200,000.
This applies to contributions, and not to interest earned on the savings in the account. As a result, there is significant value in opening one sooner rather than later.
You can make contributions into an RDSP in Canada until December 31 of the year that you turn 59 years old. However, you’ll stop receiving a matching grant from the government after December 31 of the year you turn 49.
Who Can Be A Beneficiary of An RDSP In Canada?
Registered Disability Savings Plans require the individual to:
- Qualify for the disability tax credit. This requires an application and the certification of a medical practitioner that the disability is prolonged, severe, and impairs function.
- Have a Social Insurance Number (SIN) and be a resident of Canada.
- Be under the age of 60 years old.
It’s important to note that there can only be one beneficiary per RDSP, though the beneficiary can be changed by the account holder. Any changes require the subsequent beneficiary to meet the same requirements as the first.
What Happens If The Beneficiary Passes Away?
If the beneficiary of the plan dies, any grants or bonds contributed by the government that have been in the account for under 10 years must be paid back to the government. If there are any funds remaining, these will be paid to the estate and distributed accordingly as per the beneficiary’s will, if there is one.
In this case, the funds from grants and bonds are taxable.
Who Can Be The Account Holder Of The Registered Disability Savings Plan (RDSP)?
You can open an RDSP if you’re one of the following:
- A person with a disability who is the age of majority in your province/territory and are able to manage your finances
- The legal parent of a child with a disability
- A guardian or other caretaker who is legally allowed to act on behalf of a person with a disability
Though the structure of an RDSP in Canada is designed to help parents and caregivers save, the beneficiary and the primary (or the account holder) can be the same person.
In instances where there is legal guardianship and trusteeship over the beneficiary, the guardian controls the contributions. Disabled individuals who manage their financial affairs can manage, contribute, and withdraw from the RDSP.
Are RDSP Contributions Taxable?
Contributions to the RDSP are not tax-deductible, meaning they cannot be used to lower your income tax. Withdrawals from your RDSP are not taxed or included as income when paid out to the beneficiary.
However, other income associated with qualifying for the DTC is taxable, including the Canada disability savings grant or the savings bond. Funds earned through investments in the plan, in addition to rollover proceeds, do count as taxable income.
Disability Support Available Across Canada
- The Child Disability Benefit (CDB)
- The Veterans Affairs Canada (VAC) Disability Program
- The British Columbia Disability Assistance Program
- The Ontario Disability Support Program (ODSP)
- The Nova Scotia Disability Support Program (DSP)
- New Brunswick Disability Support Program
- The Manitoba Children’s disABILITY Services (CDS) Program
- Alberta Family Support For Children With Disabilities (FSCD)
- Alberta Aids To Daily Living (AADL)
- Saskatchewan Assured Income For Disability (SAID)
When Can You Withdraw From A Registered Disability Savings Plan?
You must start making regular withdrawals from your RDSP no later than December 31 of the year you turn 60 years of age.
Under certain circumstances, you may be required to pay all or a part of the grant when you make a withdrawal. This applies if you:
- Received grants over the last 10 years. If you make a withdrawal and have received grants or bonds over the last decade, you’ll have to repay part or all of the amount you received. The exact repayment amount depends on how much you withdrew from the account. The amount you must pay back is $3 of grant and/or bond for every $1 you withdrew, up to the total amount of grant or bond paid over the last 10 years.
- Are not approved to receive the DTC and are under the age of 60. Your age will determine how much you need to pay back when you make a withdrawal.
Types Of Withdrawals You Can Make From An RDSP
Funds can be withdrawn from an RDSP at any time by the person managing the RDSP, but there are specific rules that must be followed. Generally speaking, there are two basic ways to withdraw from an RDSP:
- Lump-sum withdrawals
- Regular payments
Benefits Of A Registered Disability Savings Plan (RDSP)
There are several benefits to having an RDSP, including:
- Tax deferral on investment income: By deferring taxes on investment earnings while the money is in an RDSP, you can foster quicker growth. When you withdraw the money, the investment income becomes taxable, but until then it contributes to the value of the RDSP without a tax burden.
- Flexible funds: The account holder can withdraw funds for the beneficiary at any point. However, you may have to repay part of the RDSP if you received matching grants within the last 10 years since the withdrawal.
- Contributions from the government: The Government of Canada matches contributions within set limits.
Final Notes
As a component of an overall financial plan for disabled individuals, Registered Disability Savings Plans are a powerful tool. Consider your options and select an approach that best suits the needs of both the contributor and the beneficiary.
An RDSP in Canada is best when used in conjunction with a solid budget and a long-term financial strategy. Provided the account holder plans ahead and considers the eligibility impact on other benefits, it can set up individuals with qualifying disabilities for financial success long into the future.
