Registered Disability Savings Plans

In the 2007 Federal Budget, the government added a considerable tool to aid in securing the long-term financial future of persons with disabilities. The Registered Disability Savings Plan (RDSP) allows Canadians who are eligible for the disability tax credit, or those legally authorized to act on their behalf, to contribute up to a maximum of $200,000 to the plan. The RDSP has three main benefits that make it an attractive option: 1) tax deferral of investment income until withdrawal from the plan; 2) Canada Disability Savings Grants (CDSG); and 3) Canada Disability Savings Bonds (CDSB).

What is an RDSP?

The Income Tax Act describes an RDSP as an arrangement registered with the Canada Revenue Agency (CRA) between a licensed trust company (the issuer) and one or more of the beneficiary or a qualifying person(s) in relation to the beneficiary (the holder) under which contributions, grants and bonds are invested for the purpose of disbursing the amounts to the beneficiary.

Holder

The holder of the RDSP is the person who makes the decisions regarding the investments and establishes the RDSP on behalf of the beneficiary. If the beneficiary is a minor, the holder can be the legal parent, guardian or entity who has legal authorization to act on the beneficiary’s behalf. Upon reaching the age of majority, a mentally competent beneficiary must become the plan holder. However, if the beneficiary is not mentally competent, then the holder may be the same as that of a minor with the exception that the parent must be legally authorized by the province to act on the beneficiary’s behalf.

Contributions made to an RDSP

An RDSP is similar to a registered education savings plan in that non-deductible contributions are made to the plan by the holder along with contributions of government assistance by way of the CDSG and the CDSB.  Only one RDSP can be established at any given time for each beneficiary.

Holder contributions

Contributions made by the holder, or someone with written consent of the holder, have no annual limit. There is a lifetime contribution limit of $200,000. Holder contributions may be made at any time up to the end of the year in which the beneficiary turns 59. 

Government assistance

There are two forms of government assistance for RDSPs. The first is the CDSG. This grant is based upon the amount of contributions made by the holder. The CDSG assistance in a year can be 100%, 200% or 300% of the holder contributions, depending on contribution amounts and “family income levels,” up to an annual limit of $3,500.

The second form of government assistance is the CDSB, which is independent of any holder contributions but is based on “family income.” The annual maximum CDSB assistance contributed to the plan is $1,000. Both the CDSG and the CDSB can be granted to the RDSP up to the end of the year in which the beneficiary turns 49.

The maximum lifetime CDSG available to any particular RDSP is $70,000, and the maximum available CDSB is $20,000. Along with the maximum holder contributions of $200,000, the total maximum contributions to an RDSP are thus $290,000.

To maximize the government assistance received, the holder contributions should be spread out over the eligible years to take advantage of the annual maximum grant amount.

Payments made from an RDSP

Three types of payments may be made from the plan. They are:

1. disability assistance payments (DAPs), including Lifetime Disability Assistance Payments (LDAPs);
2. a transfer from one RDSP to another; and
3. repayment of government assistance.

Disability assistance payments

Any payment made to the beneficiary or the beneficiary's estate is considered to be a DAP. The payments are partially tax free and partially taxable, based on the proportion of holder contributions to the plan and the fair market value of the plan. The ability to make a DAP is subject to limitations for the assistance holdback amount, as discussed below. 

Lifetime disability assistance payments

The RDSP must provide for LDAPs to be made from the plan. The LDAPs must begin by the end of the taxation year in which the beneficiary turns 60. The maximum LDAP that can be withdrawn from the plan in any year is determined by a formula based on the fair market value of the assets and the age of the beneficiary. The goal is to allow equal payments from the plan over the beneficiary’s remaining life.

Special rules apply to accelerate the withdrawals for beneficiaries with shortened life expectancies of less than 5 years.

Repayments of government assistance

Under certain circumstances, the issuer must repay CDSGs and CDSBs that were received by the plan over the preceding 10 years. The specific events that can trigger such repayments are:

1. termination of the RDSP;
2. the beneficiary loses the eligibility for the DTC;
3. a DAP is made from the plan; and
4. death of the beneficiary.

To ensure the repayment amount is covered by assets in the plan, the RDSP issuer must ensure an “assistance holdback amount” is available. This amount is not available for a DAP and is equal to the government assistance over the last 10 years up to a maximum of the fair market value of the plan. This is intended to encourage long-term savings.

Termination of the RDSP

An RDSP may be terminated for various reasons: 1) the holder can terminate the plan voluntarily with a DAP; 2) the death of the beneficiary will trigger the collapse of the RDSP; and 3) non-compliance with the conditions of eligibility will result in termination of the plan.

Once the RDSP is terminated non-voluntarily, the assets of the plan must be paid out to the beneficiary, less any assistance holdback amounts that need to be repaid to the government, by the end of the following tax year.

Taxability

There are some exceptions to the tax free status of the earnings in the RDSP. If the trust has a loan balance outstanding at the end of the year, then all the income of the trust is taxable for that year. As well, any business income or income from non-qualifying investments will be taxable in the year in which it is earned, but will not affect the non-taxable status of qualifying investment income. 

Other disability benefits and programs

There are many other benefits and programs accessible at both federal and provincial levels that use either income- or asset-based thresholds to determine eligibility. 

For federal benefits from the tax system, income from an RDSP need not be included as “adjusted income” for calculating eligibility. As well, the provincial governments allow full exemptions from including RDSP assets and income in income tested programs, except in Quebec, New Brunswick and P.E.I., which allow partial exemptions. In Ontario, this means that having an RDSP will not affect payments received under the Ontario Disability Support Program.

Summary

The RDSP provides significant advantages to encourage investment and long-term savings to aid in financial security for persons eligible for the Disability Tax Credit. Contact your Collins Barrow advisor to determine whether these advantages are available and appropriate for you.

Dan Thompson, CA, is a tax practitioner with the Ottawa office of Collins Barrow.