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Registered Disability Savings Plans

About Registered Disability Savings Plans (RDSP)

December 10, 2014

Launched in 2008, RDSP are a ‘retirement pan’ for individuals that qualify for the Disability Tax Credit.  RDSP are designed to promote long-term savings that allow plan assets to grow sufficiently large to provide a future source of income for children with severe disabilities when their parents are no longer able to provide support. Eligible beneficiaries can receive up to $90,000 in government support in the form of Grants and Bonds.

The details:

  • Beneficiaries must be residents of Canada, have a Social Insurance Number and have obtained the Disability Tax Credit.
  • Who can set up an RDSP? An adult beneficiary or if the beneficiary is not contractually competent or is a minor, a parent or legal guardian, spouse, public department, agency or institution that is legally authorized to act on behalf of the beneficiary can set up an RDSP.
  • Contributions are not tax-deductible. Contributions are permitted until December 31st of the year the beneficiary of the plan turns 59. Maximum lifetime contributions are $200,000.
  • Eligibility of Canada Disability Savings Grant (‘Grant’) is determined by family net income. This is based on a family’s net income when the beneficiary is a minor and the beneficiary’s net income (and spouse if applicable) when he/she is an adult. An eligible beneficiary with income below $87,907* will receive $3 Grant for each $1 contribution on the first $500 contribution (i.e. $1,500 Grant); plus $2 Grant for each $1 contribution on the next $1,000 (i.e. $2,000 Grant) to a total of $3,500 Grant per year. If family net income is greater than $87,907*, eligible beneficiaries will receive $1 Grant for each $1 contribution to a maximum of $1,000 per year.
  • An eligible beneficiary over 18 with a family net income below $25,584* will receive a maximum annual $1,000 Canada Disability Savings Bond (‘Bond’). Beneficiaries with income between $25,584* and $43,953* will receive a decreased Bond based on income. Once the plan is open, Bonds are paid annually.
  • The last day a beneficiary is eligible to receive a Bond and Grant is December 31 the year he/she turns 49 years of age.
  • Maximum lifetime Grants are $70,000 and Bonds are $20,000.
  • There is a 10-year carry forward of Grant and Bond entitlements (dating back to 2008) to an annual maximum of $10,500 in Grants and $11,000 in Bonds (10 years x $1,000 + current year $1,000). 
  • A beneficiary can only have one RDSPRDSP can be transferred among financial institutions offering RDSP.

*Income amounts shown are for 2014; amounts are indexed annually. Qualifying income is based on 2 years previous family net income (line 236 of income tax return). e.g. 2014 Grant and Bond eligibility are based on 2011 and 2012 net income.

To maximize grants:

Peter is 26, single and works part time.  With a net annual income for $22,000 he is eligible for full Grants and Bonds.  In addition he currently has seven years of unused Grants and Bonds dating back to 2008.  His parents are eager to help out and contribute to maximize Grants and Bonds. When catching up, the maximum payable each year is $10,500 Grants and $11,000 in Bonds.

Peter’s age  Canada Disability Savings Bond  Contribution Canada Disability Savings Grant
26 $7,000 (7 years x $1,000) $3,500  $10,500
27 $1,000 $5,000 $10,500
 
28 $1,000 $5,000 $10,500
29-45 $1,000 per year until $20,000 maximum reached $1,500 $3,500 per year until $70,000 maximum is reached

 

No contribution is required to obtain Bonds.

For unused Grants, the government applies the entitlements in descending order, starting with the highest available matching of 300% ($1 contribution attracts $3 Grant on the first $500), followed by any grant entitlements at 200% ($1 Contribution attracts $2 Grant on the next $1,000), then if applicable 100%.  In addition the Grants are first applied to the oldest year of eligibility (2008) and then move forward.

Withdrawals:

  • There are two types of payments or withdrawals from RDSP: Lifetime Disability Assistance Payments (LDAP) and Disability Assistance Payments (DAP). Both LDAP and DAP are made up of a portion of contributions, income, Grants and Bonds. Income, Grants and Bonds are taxable in the hands of beneficiary.
  • “10-year AHA Rule” applies on all payments from an RDSP. All Grants and Bonds received in the 10 years preceding the RDSP payment must be returned to the government except in cases where beneficiaries have a life expectancy of less than 5 years. This amount is known as an “assistance holdback amount” (AHA). Starting 2014; for every $1 that is withdrawn from the RDSP, $3 worth of Bonds and Grants have to be repaid, up to the value of the AHA.
  • LDAP are recurring annual payments that once started, continue until the death of the beneficiary. LDAP can begin at any age but must start by the end of the year in which the beneficiary turns 60 years of age. Waiting until age 60 to begin payments from an RDSP will ensure all Grants and Bonds received up to age 49 would be protected against the 10-year AHA rule.
  • DAP are lump sum payments made to the beneficiary or beneficiary’s estate. The total amount of money that can be withdrawn from an RDSP each year is limited to a maximum annual amount, set by the federal government, to ensure the RDSP will provide annual payments for the remainder of the beneficiary’s life. Starting in 2014, the maximum annual limit for total withdrawals is the greater of the LDAP formula and 10% of the fair market value of the RDSP at the beginning of the year.
  • Withdrawals will not impact other government benefits such as Old Age Security, Canada Pension Plan, Goods and Services Tax and provincial disability support programs such as AISH in all provinces except Quebec, New Brunswick, and Prince Edward Island.

What happens upon death of beneficiary or upon loss of the Disability Tax Credit (DTC)?

  • Grants and Bonds received in the 10 years preceding the beneficiary’s death must be returned to the government. The remaining holdings of the plan will become an asset of the beneficiary or pass to the beneficiary’s estate.
  • When a beneficiary loses the DTC there is a 5 year window which provides time for the RDSP beneficiary to re-qualify for the DTC.  If after 5 years the RDSP beneficiary does not regain the DTC, Grants and Bonds received in the 10 years preceding the loss of the DTC must be returned to the government.

Financial Institutions have struggled to develop the product due to the complexity and cost of administering the program. Through our system partner, Credential Asset Management Inc., we offer RDSP via BMO Guardian Funds. Please contact Jim Hummel, CFP®, Mutual Funds Investment Specialist, Credential Asset Management Inc., VP, Financial Planning, Christian Credit Union, Edmonton or Carol Haayema, CFP®, Mutual Funds Investment Specialist, Credential Asset Management Inc., Branch Manager, Christian Credit Union, Lethbridge to discuss further.

 

The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. The article is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell any mutual funds or securities.

*Mutual Funds are offered through Credential Asset Management Inc. Unless otherwise stated, mutual fund securities and cash balances are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions. 

 
 
 ®Credential is a registered mark owned by Credential Financial Inc. and is used under licence.
 


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