As with every plan designed by the Canadian government to ease living for residents and non-resident in Canada, the Registered Disability Savings Plan (RDSP) is designed to help people living with disabilities build long-term financial security.
It is no news that people living with disabilities are faced with different challenges, financial challenges being one of the biggest. To aid and relieve these challenges, the Canadian government introduced the Registered Disability Savings Plan (RDSP).
Understanding the Registered Disability Savings Plan (RDSP)
The Canadian government established the Registered Disability Savings Plan (RDSP) in 2018 to aid long-term savings for people living with disabilities in Canada.
It is common knowledge that these people have a much lower income prospect and significantly higher medical expenses than people living without a disability. Thus, the financial burden can make saving towards retirement quite difficult and impossible; this is the gap the RDSP is designed to fill.
Currently, only two out of the five Canadian chartered banks offer the RDSP. For people who qualify for this plan, it can be an effective and attractive savings plan.
This plan can provide people living with a disability a considerable amount of money due to the Canadian government’s substantial grants and bonds.
RDSP Eligibility Process
To be eligible for this plan and considered disabled to open an RDSP account, you must qualify first for the disability tax credit. A medical practitioner must certify a marked restriction in physical or mental ability to carry out regular daily activities to be eligible for this tax credit. This marked restriction is available on form T2201 – the Disability Tax Credit Certificate. The following are requirements you must meet to qualify as a beneficiary of an RSDP account:
- Be a resident of Canada.
- Have a valid Social Insurance Number – SIN
- Qualify for the Disability Tax Credit
- Below 60 years of age
One of the most crucial determinants used to evaluate beneficiaries for an RDSP account is a disability Tax Credit (DTC). You must prove you are living with a disability before you can qualify for this plan. While most people living with disabilities receive DTC without issues, others have difficulty processing theirs.
To know you you qualify for a DTC, you must fall under the following:
- Have a mental or physical disability that has lingered or is expected to last for a year or more
- You require therapy or treatment to function.
- You’re physically impaired.
- Have limitations carrying out regular activities like speaking, hearing, walking, eating, etc.
Becoming an RDSP Holder
To become an RDSP account holder for an individual or an organization, you must:
- Be the beneficiary of the RDSP.
- Have a valid Social Insurance Number
- A legal parent of the beneficiary
- A valid Business Number – BN
- An eligible family member – parent, spouse or common-law partner
- A guardian or anyone with legal authority to act on behalf of the beneficiary.
- A public agency, institution or department with legal authority to act on behalf of the beneficiary.
- An eligible entity with a legal authority given under the RDSP as a successor or assignee of the plan holder
Accessible Funds in an RDSP
The disability tax credit allows you access tax relief of about $1,500 yearly, both federal and provincial grants depending on your income level. This grant is transferrable from a dependent or spouse if the disabled person has insufficient income to access the credit by themselves.
The disabled person can be a dependent family member like a sibling, grandparent, uncle, aunt, niece, or nephew who relies on the individual filing for the tax credit for any of the necessities of life.
RDSP account combines joint contributions by the Plan holder, government grants, bonds, and investment income. Generally, you can use the money in your RDSP for anything. Remember when taking any amount of your RDSP account that the 10-year rule applies.
The 10-Year Rule on RDSP
There is a holdback period of ten years from the year of the last federal donation if you receive a national government grand or bond. The rule governing the payment is that for every $1 you withdraw from an RDSP account, you will lose $3 of any grants or bonds paid into the plain in the past ten years. The money lost will be repaid to the government.
For those who opened an RDSP over ten years ago, grants and bonds contributed to RDSP become vested. Vested in this contest means that the funds will now belong to the RDSP beneficiaries. Here, the repayment rules on grants and bonds no longer apply to the funds deposited in that year.
However, the repayment rules and requirements remain valid to grants and bonds contributed within the last ten years. It is safe to say that the withdrawal of any amount from an RDSP will trigger the repayment requirement.
RDSP Withdrawal Limit
You can only withdraw a limited amount of money in a year if the federal government donated more towards your RDSP than you or your family and friends. This is calculated by dividing the money in your RDSP by the number of years before you turn 83. Or 10% of the total amount in the plan yearly.
You can decide to make a one-off payment or commence regular payment at any age, even though you only begin to receive money from your RDSP starting at age 60. Note that withdrawals are dependent on the rules governing RDSP in the financial institution you registered your RDSP.
Perks of the RSDP
To continue enjoying the benefits from an RDSP, an individual must continue to have a qualifying disability and be eligible for the disability tax credit all through the lifetime of the RDSP.
If the account holder dies or recovers, it will end in the closure of the RDSP. The RDSP ends in the years that your eligibility ceases.
All grants and bonds not included in the plan for ten years or above will be refunded to the government. Since the CDSG and CDSB are only available for years up to age 49, you must be at least 30 years of age to qualify for the maximum government subsidies.
The major financial perks of the RDSP include:
- Tax-free investment income
- Up to $3,500 receivable yearly in Canada Disability Savings Grants – CDSG
- Canada Disability Savings Bond – CDSB
- About $200,000 of RRSP/RRIF or RPP can be transferred to a dependent’s RDSP on a tax-deferred basis after the demise of a parent or grandparent.
- Anyone with the written consent of the account holder can contribute to an RSDP
- Contributions are made based on family income.
- Up to $1,000 receivable yearly in Canada Disability Savings Bonds – CDSB
- Ability to transfer funds by either backdating to ten years prior or to the date of diagnosis
- About $200,000 annual contribution limit for a lifetime contribution for each beneficiary
Withdrawing from an RDSP
According to the set rules and guidelines, payments from the RDSP must start at age 60 and are payable for the Plan holder’s lifetime.
While the interest, grant, and bond portion of the payments that come out of the RDSP are taxable as regular income, the payments do not count towards income-tested benefits such as welfare payments, Old Age Security, Guaranteed Income Supplement, and GST rebates.
Also, the Canada Pension Plan (CPP) benefits are always unaffected by income levels.
Although funds in an RDSP account are tax-deferred, you might be required to pay tax when you withdraw money from the plan. This is because all investment income, grants and bonds become taxable income when removed. It is advisable to plan towards any withdrawals from your RDSP account to avoid federal grant and bond repayment.
Maximizing your Savings via an RDSP
You can maximize your savings in an RDSP account by saving early. Yes, the earlier you start saving, the better. To can automate the process by enrolling in a pre-authorized chequing program. This will effectively maximize your saving.
You can leverage on government grants and bonds by contributing yearly to be eligible to receive the maximum annual Canada Disability Savings Grant and Canada Disability Savings Bond.
The maximum amount of CDSG funds the RDSP offers is a total of $70,000 and $20,000 for CDSB funds. So, if an individual pays the maximum amount yearly for 20 years, they will attain the maximum grant and bond funds. There are currently no yearly limits on the amount of contribution a plan holder donates to an RDSP. Note that there is a lifetime limit of $200,000.
The RDSP is an excellent way for families of disabled persons to save for the future of their disabled loved ones or themselves. Employers and employees are not left out of this plan. Employers of disabled employees can educate qualifying employees on Long Term Disability (LTD).
Organizations can set up individual plans and make donations to RDSPs on behalf of qualifying employees. By contributing $1,500 in LTD benefits, an employer would be helping a disabled employee create a significant replacement income that can commence when their LTD benefits expire.