How RDSPs really work…Explaining Registered Disability Savings Plans.
As the Father of a daughter with Cerebral Palsy and a Financial Advisor I have done extensive research regarding the issues surrounding financial and estate planning from a special needs perspective including but not limited to RDSPs.
During my research I found that many Bank Representatives and Financial Advisors don’t understand all the complex RDSP benefits and rules which can result in making them more difficult to open and understand.
As a result of my knowledge of RDSPs, I was approached by a Financial Advisors’ magazine to write an article explaining how RDSPs work. The article below was originally published in the February 2019 issue of FORUM, the flagship publication for Advocis, The Financial Advisors Association of Canada.
I understand how overwhelming having a family member with special needs can be with all the appointments and paperwork that go with it. I try and help by making the financial and estate planning easier.
I offer a no cost, no obligation phone call or meeting with you (complete form below) to discuss your specific situation where we can talk about RDSPs, Life Insurance, ODSP, Henson Trusts, and/or any other financial or estate planning questions you may have.
Explaining RDSPs – Registered Disability Savings Plans
Originally published in Forum magazine, February 2019. Article modified to reflect updated rules regarding loss of DTC eligibility.
The registered disability savings plan (RDSP) is an amazing tool when planning for the financial welfare of an individual with a disability. But unfortunately, it's a tool that's misunderstood and underutilized.
Who Qualifies for an RDSP?
To qualify for an RDSP you must meet all of the following criteria:
- Be eligible for the Disability Tax Credit (DTC)
- Be under the age of 60 — an RDSP can only be opened for an individual and contributions can be made to it until the end of the year in which he or she becomes 59 years of age
- Be a resident of Canada and have a valid Social Insurance Number (SIN)
Government Grants & Bonds
With an RDSP come government grants and bonds — but an individual is only eligible for these until December 31 in the year they turn 49. There are two types of government funds for RDSP accounts.
Canada Disability Savings Grant (CDSG)
The Canada Disability Savings Grant (CDSG) is a matching government grant based on the net family income and the amount contributed into an RDSP. Net family income comes from Line 236 of the income tax return of the parent(s) living with the individual until the end of the year they turn 18 — and then the net family income of the individual and spouse if any when over the age of 18.
When determining the net family income to calculate the grant entitlement, the tax return from two years prior to the year of contribution is used (for example, in 2019 when determining grants and bonds, the government looks at the 2017 tax returns).
- Above $95,259 net family income: $1 for every $1 contributed, up to $1,000 per qualifying year
- Below $95,259 net family income:
- $3 for every $1 on the first $500 contributed
- $2 for every $1 on the next $1,000 contributed
- Maximum: $3,500 in grants per qualifying year
Canada Disability Savings Bond (CDSB)
The Canada Disability Savings Bond (CDSB) is money paid by the government into an RDSP to low-income individuals who have qualified and opened an RDSP account. No contribution is required.
- Net family income under $31,120: $1,000 bond
- Net family income between $31,120 and $47,630: Partial bond calculated by formula in the Canada Disability Savings Act
- Above $47,630: No bond
CDSG and CDSB will be clawed back if funds are withdrawn from the RDSP within 10 years of receiving them. This is known as the Assistance Holdback Amount (AHA).
When Can You Withdraw?
A common question: when will someone be able to withdraw from an RDSP and still maximize CDSG and CDSB? Because of the various rules of the RDSP, this is based upon the individual's situation and typically ranges from age 29 (which is rare) to age 49+ (which occurs more often).
Contributions
Contributions made into an RDSP are not tax deductible, but the growth in the account is not subject to income tax until withdrawn. When a withdrawal is made, there is a calculation that determines the percentage of withdrawal that will be taxed (proceeds of rolled over registered accounts, the cumulative gain, grants and bonds) as opposed to the contributions that will not be taxed.
When an individual first opens an RDSP, they can carry forward unused grants and bonds up to 10 years. However:
- $10,500 is the maximum annual grant money they can receive
- $11,000 is the maximum annual amount of bonds
- If RDSP contributions are more than grant money, that contribution is not carried forward to attract grants in future years — grants apply only to contributions made in the current year
- The maximum lifetime contribution limit is $200,000 (this does NOT include government grants and bonds received)
Also, unlike many other accounts, a beneficiary may have only one RDSP account at a time. While an individual can have one, and only one, RDSP, they can transfer from one RDSP to another if they follow the required conditions.
Who Can Open an RDSP?
If the individual who is to be the beneficiary of the RDSP is under the age of majority, then either a legal parent, a guardian, or individual who is legally authorized to act for the beneficiary, or a public department, agency, or institution that is legally authorized to act for the beneficiary, can open the RDSP.
If a beneficiary has reached the age of majority and is contractually competent, they can open the RDSP for themselves. If the legal parent(s) of a beneficiary that has reached the age of majority and is contractually competent is/are the holder of an RDSP already existing, then the parent(s) can remain the holder, the beneficiary could be added as a joint holder, or the beneficiary could become the sole holder of the account.
When the beneficiary has reached the age of majority and there is either a question if the individual is contractually competent or it is determined the individual is not contractually competent, then a qualifying family member (QFM) can open the RDSP. A QFM includes a spouse, common-law partner, or parent. This provision is available until December 31, 2026 but has been extended several times already. A QFM does not include a sibling — for a sibling to be the account holder they would have to be the beneficiary's legal guardian.
Anyone can contribute into an RDSP, but they will require written consent of the plan holder. Unfortunately, if the beneficiary dies, the RDSP must be closed and the funds disbursed to the beneficiary's estate by December 31 of the year following the year they died. Any grants or bonds received in the previous 10 years would be subject to repayment, and the remaining funds will be paid to the estate.
Where to Open an RDSP
RDSPs can be opened at most financial institutions — banks, credit unions, and independent financial advisors. While most banks and several credit unions offer RDSPs, some staff who sell RDSPs aren't educated in the complex rules.
I strongly suggest that an individual find someone who is knowledgeable about RDSPs and concepts of higher financial and estate planning from a special needs perspective. This would include a discussion of the concept of a Henson trust (which is a type of trust designed to benefit disabled persons by protecting assets — usually an inheritance — of the disabled person, as well as the entitlement of government benefits and entitlements) and other methods of ensuring continued entitlement of government benefits and services. I would also suggest that a financial advisor planning on selling a client an RDSP do the necessary research so they know how to properly advise the client, or that they partner with another advisor that has the necessary knowledge and expertise to properly guide the process.
Overlooked Rules
Updated Rule: Loss of DTC Eligibility
In this case, no future contributions can be made into the RDSP unless the Beneficiary re-qualifies for the DTC. There are also further grants or bonds that are received unless re-qualified.
If you voluntarily close the RDSP, any grant or bond money received in the 10 years preceding the date that the Individual was no longer eligible for the DTC. The only way to retain all the government grant and bond money would be to hold the RDSP and let it grow until the Beneficiary turns 60.
Shortened Life Expectancy
In addition, if a beneficiary has a reduced life expectancy of less than five years they can apply with the assistance of a written certification by a licensed medical doctor or nurse practitioner to have their RDSP turned into a specified disability savings plan. This prevents the triggering of repayment of grants and bonds received in the prior 10 years and allows withdrawals of up to $10,000 of the taxable amount (or the greater of the lifetime dis-ability assistance payment formula) to be paid out each year. This freezes the RDSP and prevents any further contributions, grants, or bonds.
Several parents feel there is no point in opening an RDSP as their child has a diminished life expectancy and they would never be able to retain the grants and bonds. This may convince them that they should reconsider, as there is a chance that both they and their child may benefit from an RDSP.
Rollovers
You can rollover retirement savings into an RDSP if you have an unused amount of the overall RDSP lifetime limit. This amount would not be taxable to the estate of the deceased retirement savings holder and the income tax would be deferred for the beneficiary until they start withdrawing from the RDSP (this would significantly reduce the amount of income tax paid by the estate). The beneficiary would have to be a financially dependent child or grandchild of the deceased for the rollover to be allowed. The proceeds from a rollover do not count as a contribution that can attract grant money but they do count against the beneficiary's lifetime contribution limit.
While some advisors may mention that a client can roll over an RESP to an RDSP, I find that many do not explain how this works. It is the accumulated income payment (AIP) from an RESP that gets rolled over. This could be advantageous if there are significant gains in the RESP and you know for certain that the beneficiary will never attend a post-secondary institution that RESP funds could be utilized for. The RESP grant money would be sent back to the government, and the principal returned to the subscriber. The monies from an RESP rollover do not attract grant money but count against the beneficiary's lifetime contribution limit to the RDSP.
Provincial Asset Breakdown
There are important provincial differences for how RDSPs are treated regarding disability benefits eligibility.
| Province / Territory | RDSP Treatment |
|---|---|
| Alberta, Saskatchewan, Manitoba, Ontario, Nova Scotia, Newfoundland & Labrador, Yukon, Nunavut, Northwest Territories | ✔ Exempt asset & exempt income for disability benefits eligibility |
| New Brunswick, Quebec, PEI | ◑ Exempt asset, but only partially exempt from income calculations |
A RDSP does NOT impact Old Age Security, Canada Pension Plan, Guaranteed Income Supplement, GST, or other federal social assistance benefits.
There are some situations whereby you may elect to use an RDSP not for grants and bonds but exclusively for the ability to supplement provincial disability benefits that would have otherwise been lost due to asset threshold issues. — G.Z.
Withdrawing from an RDSP
Money is taken out from an RDSP either as a disability assistance payment (DAP), which is a singular payment from an RDSP to a beneficiary and can be done on their own, or as an LDAP, which, once started, cannot stop until the RDSP has ended. The beneficiary can take both a DAP payment and an LDAP payment from an RDSP.
There is a minimum amount of money that one MUST take from an RDSP by the end of the year the beneficiary turns 60, and this is when the LDAP must be started. The amount of the required LDAP payment for the year is determined by the following formula:
- A
- = the fair market value (FMV) of the property held in the plan at the beginning of the year, excluding the value of locked-in annuity contracts held by the plan trust
- B
- = the greater of 80 and the age of the beneficiary at the beginning of the calendar year
- C
- = the actual age of the beneficiary at the beginning of the calendar year
- D
- = the total of all periodic payments paid, or deemed to have been paid, under certain locked-in annuity contracts, to the plan trust in the calendar year, if applicable
Some people with RDSP accounts are not aware that if the amount contributed into an RDSP is less than the total grants and bonds received, then the RDSP would be considered a primarily government assisted plan (PGAP). This will limit the total amount of money that can be withdrawn annually from the plan to either the LDAP formula or 10 per cent, whichever is greater. This knowledge could significantly change a financial plan given the potential restriction of withdrawals.
RDSP rules and specifications can be overwhelming, so when opening up an RDSP ensure that you are aware of the rules and processes.
Originally published in Forum magazine, February 2019. Article modified to reflect updated rules regarding loss of DTC eligibility. Reproduced with permission. This article is for informational purposes only and does not constitute financial or legal advice. Rules and thresholds change annually; consult a qualified RDSP advisor for current figures.
For a copy of the article, assistance with opening an RDSP, Life Insurance, ODSP, Henson Trust or DTC please fill out the form below.