The Registered Disability Savings Plan (RDSP) is a savings program designed by the Canadian government to assist people with disabilities. The RDSP was implemented in 2008 and was the first program of its kind worldwide. It has been hailed as a great milestone in the effort to provide people with disabilities with financial security.
Eligibility for the RDSP
The RDSP can be set up by a parent or legal guardian (i.e. plan holder) of a disabled child (i.e. beneficiary), or it can be set up directly by an adult with a qualifying disability.
In general, a beneficiary qualifies for the RDSP if they are:
- Eligible for the Disability Tax Credit
- A Canadian resident
- Under 60 years of age
- Have a Social Insurance Number (SIN)
Anyone can make a contribution to an RDSP as long as they have the permission of the plan holder. This way, a parent, grandparents, friends, other family members, and the beneficiary, can contribute to the plan.
Contributions made to an RDSP are not tax-deductible. However, they will generate matching government grants depending on your family’s net income.
A beneficiary can have only one RDSP open at any time.
There’s no annual limit on contributions, however, there’s a lifetime overall limit of $200,000 on contributions to a plan.
Depending on your family’s annual income, you may be eligible for additional government assistance in the form of the Canada Disability Savings Bond (CDSB), even if you make no contribution.
Government Assistance to an RDSP
The Canadian government makes significant contributions to the RDSP in a way that ensures families with different levels of income are able to benefit. Your family’s net income (i.e. of the parent of a beneficiary or the beneficiary if over 18) as reported on the tax return for 2 years prior is used. For example, to calculate the government grant or bond applicable for 2019, your income tax return for 2017 is used.
Government contributions available in the form of bonds or grants include:
1. Canada Disability Savings Grant (CDSG)
The CDSG matches whatever contributions you make up to 300% depending on your family income and contributions made.
- In 2019, for income levels below $93,208, the government will match every $1 contribution with up to $3 for a maximum of $3,500 per year.
- For family income greater than $93,208, the government will match every $1 contribution with $1, for a maximum $1,000 grant per year.
The maximum CDSG payable per annum is $3,500 and there’s a lifetime limit of $70,000.
2. Canada Disability Savings Bond (CDSB)
While the CDSG requires a contribution to be made in order to receive the government’s matching grant, you do not need to make a contribution to receive the CDSB.
Lower-income families may be eligible to receive the CDSB if their net income is $30,450 or less. The benefit amount is $1,000 per year. For those with a family net income between $30,450 and $46,605, a proportional amount less than $1,000 is received. The lifetime maximum CDSB payable is $20,000.
Both CDSG and CDSB payments end when a beneficiary becomes 49 years old.
Singh and Maureen have a child (Sai) who suffers from a disability and is aged 9 years old. Their family net income is $40,000. If they make a contribution of $1,500 to the RDSP for 2019, the CDSG matching grant is equal to:
First $500 = 500 x 3 ⇒ $1,500
Remainder $1,000 = 1,000 x 2 ⇒ $2,000
Total CDSG = $1,500 + $2,000 ⇒ $3,500
Total contribution to the RDSP for 2019 = $1,500 (contribution by Sai’s parents) + $3,500 (CDSG) ⇒ $5,000.
Adeleke has an RDSP he opened for himself due to a disability. He is 23 years old and has a personal net income of $23,000. He made no contribution to his RDSP in 2019.
Since his net income is under $30,450, he will get a CDSB deposit of $1,000 in his RDSP in 2019 (assuming his $20,000 CDSB lifetime limit has not been reached).
RDSP Withdrawal and Taxes
Withdrawals can be made from an RDSP in the form of Lifetime Disability Assistance Payments (LDAP) or Disability Assistance Payments (DAP). Withdrawals can generally start at any time, however, take note of the 10-year repayment rule below.
LDAP’s are paid out as a regular income and must be paid out at least annually when a beneficiary becomes 60 years or older. DAP’s are lump-sum payments made to the beneficiary.
Payments made out to beneficiaries include both contributions, grant money, and investment income earned on the account. Although contributions are not taxable, investment income earned plus CDSG and CDSB must be included in the beneficiary’s income tax return.
10-year repayment rule:
Government grant or bond deposited within 10 years of withdrawal may need to be repaid – $3 of grant and/or bond must be repaid for every $1 withdrawn. This means that if you want to keep all of the government’s grants and bonds, you must delay withdrawing from the plan for at least 10 years after the deposits were made to the RDSP.
RDSP Investment Options
Like other registered plans (RESP, RRSP, and TFSA), RDSP funds can be invested in a variety of investment products including Guaranteed Investment Certificates (GICs), mutual funds, stocks, savings, ETFs, etc.
Other RDSP Details
- An eligible individual can open an RDSP by themselves if they have reached the age of the majority where they reside – age 18 or 19, depending on the province.
- RDSP payments/withdrawals do not affect other federal income-tested benefits such as OAS, GIS, GST/HST credits, Canada Child Benefits, social assistance benefits, etc.
- RDSP payments will not affect your other provincial disability benefits in provinces including Manitoba, Alberta, British Columbia, Saskatchewan, Nova Scotia, Newfoundland and Labrador, Yukon, and the Northwest Territories.
- Before you can apply to open an RDSP, you must have been deemed eligible for the federal Disability Tax Credit. To apply for this tax credit, use Form T2201 – Disability Tax Credit Certificate.
- The overall lifetime limit available in government grants and bonds is $90,000 ($70,000 in CDSG and $20,000 in CDSB).
- The parents or grandparents of a financially dependent infirm child can plan to rollover their RRSP or RRIF tax-free into the RDSP of the child/grandchild when they die. Proceeds from the rollover do not qualify for CDSG.
- No contributions are required to qualify for the Canada Disability Savings Bond (CDSB).
- Like the RRSP, income earned on an RDSP is tax sheltered until withdrawal.
- Unused CDSG and CDSB entitlements can be carried forward for 10 years (up to 2008). This makes it possible for eligible individuals to claim unused grants or bonds even if they set up the RDSP at a later date. The maximum grant payable in any particular year is $10,500.
- If a beneficiary is no longer eligible for the Disability Tax Credit (DTC), they need to terminate their RDSP by December 31 of the following year. If the beneficiary loses their DTC eligibility but is expected to become eligible again in the future, their RDSP is allowed to stay open for up to 5 years. During this period, no new contributions, grants, or bonds can be deposited in the account.
- Following the death of an RDSP beneficiary, the account must be closed. Contributions made to the plan are paid back to the estate of the deceased tax-free. Remaining government grants and bonds are paid back to the government, and any investment income earned on the account is entered as taxable income on the deceased’s final tax return.
- If you have specific questions about the RDSP program, call the government’s RDSP office at 1-800-959-8281 (TTY 1-800-665-0354).