Registered Disability Savings Plan (RDSPs)
The Financialist • Issue 103 • October 2009
BY WALKER MOONEY BA CIM
One of the most useful information sources for RDSPs is available at www.rdsp.com. This is part of the website of the Planned Lifetime Advocacy Network, or PLAN, as it is known. This organization was instrumental in the establishment of RDSPs and its main activity is to assist in effective planning for disabled individuals and their families. I believe PLAN does very good work.
Plan Design: The major role of a RDSP is to help families accumulate funds to help provide some financial security for a disabled person. The Federal Government will provide cash contributions to a RDSP, matching a portion of the contributions made by the disabled individual, his or her family or others – within prescribed limits. As well, any income generated from the investment of these combined contributions is not subject to tax while the funds remain in the RDSP. Upon withdrawal of income to meet future living expenses, only a portion of the proceeds will be taxable to the plan beneficiary.
The design of the RDSP is strongly skewed to provide more assistance to those families with lower income levels and more modest financial resources. As a consequence, the RDSP is complex and contains a number of restrictive provisions. However, it can assist significantly in accumulating funds for a disabled family member.
Contributions: Funds in a RDSP can come from three sources:
1. Contributions by a disabled person who becomes the plan beneficiary and family or friends up to a cumulative total of $200,000 by the plan beneficiary’s age 59.
2. The Federal Government will annually make a matching Canada Disability Savings Grant (CDSG) in varying proportions to the family’s net income as noted in the table above. When the plan beneficiary is over age 18, the matching grant will be based only on his or her income. Cumulative lifetime grants of up to $70,000 will be available to the plan beneficiary’s age 49.
3. The Federal Government will annually contribute a $1,000 Canada Disability Savings Bond (CDSB) to a cumulative maximum of $20,000. No offsetting contribution is required where family income is less than $20,817 for 2009. A partial payment will be payable where income is between $20,817 and $38,832. However, if family income exceeds $38,832, no CDSB payment will be payable. Again, CDSB payments are available until a plan beneficiary turns age 49.
The table attempts to show the maximum annual assistance available based upon a $1,500 actual contribution for the first three income levels and on a $1,000 contribution for the fourth income level. While larger annual contributions are allowed, no additional financial assistance is generated. Income threshold levels will increase annually to reflect inflation.
As you can discern from the table, if a family can contribute $1,500/year and is in the low income category, they can leverage the payment to $6,000/year, which can accumulate over the future years. Currently, Canadian RDSPs are available through three of Canada’s chartered banks.
Plan Payments:
Payments can be withdrawn from a RDSP by the plan beneficiary at any age. Any payment will be comprised of a proportionate amount of contribution, bond, grant, and investment growth. An amount equal to the last three components will be taxable to the recipient plan beneficiary. However, unless other income is significant, the actual taxes payable will be quite low. There is a penalty provision if a withdrawal occurs within ten years of the last grant or bond payment, as any grant or bond generated within the previous ten years will have to be repaid.
Provincial Assistance:
The province of BC provides disability benefits to qualified individuals. Qualifications for, and continuation of, this disability income carry both an asset test and an income test. For many disabled residents, this is an extremely important source of income. The BC Government was the first province to exempt RDSPs, and payments therefrom, from the asset and income threshold test. This is a significant measure and will go a long way to improving the financial lives of many disabled BC residents.
One option for those families with sufficient funds may be to establish and contribute to a RDSP and not pursue the government assistance available. This should allow for immediate payments to a plan beneficiary to supplement the provincial disability income which may be currently being received – without the concern that such payments will be reduced or eliminated.
Other Financial Factors:
In reviewing the overall financial position of a disabled family member, there are several other planning provisions which should be reviewed and integrated into an overall plan. A few of those entail a trust of up to $100,000 and a discretionary trust without limit, which can be arranged without impact on the asset test for provincial benefits. Also, the Income Tax Act allows a transfer of RRSPs or RRIFs to a disabled child or grandchild on a tax-preferred basis. Finally, there is the Disability Tax Credit, which is a precondition to the establishment of RDSPs.
All of these items need to be reviewed and integrated to best address the financial position of the family. Effective planning can go a long way in improving both the current and future financial security for those residents challenged by living with a disability.