Most people know about Registered Retirement Savings Plans, and they know how Registered Education Savings Plans can help save for a child’s future education.
But what do you do if you have a child with a disability and want to save for their long-term financial security?
The answer is the Registered Disability Savings Plan. It was introduced in 2008, but many people aren’t familiar with it.
RDSPs are similar to RESPs but have some differences. Contributions to the RDSP are not tax-deductible, but investment income is earned tax free and will be taxed only when the funds are withdrawn by the disabled beneficiary.
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To set up the RDSP the beneficiary must be eligible for the disability tax credit, which is also called the “disability amount” on income tax forms.
To be eligible, a qualified practitioner must certify that a prolonged impairment is present.
RDSP beneficiaries must also be a resident of Canada and younger than 60.
Anyone can contribute to the RDSP and there are no annual contribution limits. However, total contributions are capped at a lifetime maximum of $200,000.
Contributions can be made to an RDSP until the end of the year that the beneficiary turns 59. A beneficiary can have only one RDSP at a time.
Payments out of the plan must begin by the end of the year the beneficiary turns 60, subject to maximum annual limits based on life expectancy, the age of the beneficiary and the value of the plan’s assets.
There are two types of payments from an RDSP:
- Lifetime disability assistance payment – It is subject to a maximum withdrawal amount that, once started, must be paid at least annually.
- Disability assistance payment – It can be paid between the ages of 27 and 59 based on certain qualifying criteria.
To enhance the program, the government has also introduced the Canada Disability Savings Grant (CDSG), which matches the amount contributed at a rate of up to 300 percent depending on the beneficiary’s family net income.
The maximum grant in any single year is $3,500 with a total of $70,000 over the beneficiary’s lifetime. Contributions can be made to the plan up until the age of 59, but CDSGs are paid only until the beneficiary turns 49.
Low income families can access a $1,000 per year Canada Disability Savings Bond (CDSB) up to a lifetime maximum of $20,000. If you are eligible for this bond, the amount paid is not dependent on the amount contributed.
Any income earned in the RDSP, CDSG and CDSB must be included in the beneficiary’s income for tax in the year it is received. Withdrawals can be used for any purpose for the benefit of the beneficiary.
All the government grants and bonds contributed to the plan in the 10 years previous to the event must be repaid if the RDSP is terminated, the beneficiary ceases to be eligible for the disability tax credit or the beneficiary dies.
If you believe that an RDSP might be right for you or a family member, contact your professional adviser for more information and assistance in setting up the plan.
Colin Miller is a chartered accountant and senior manager in KPMG’s tax practice in Lethbridge. His opinions do not necessarily reflect the views of The Western Producer. He can be reached at 403-380–5707 or by e-mail at colinmiller@kpmg.ca
