What You Should Know About the Ability of RDSPs to Protect the Most Vulnerable Among Us

Ask any Canadian what those tax preferred government accounts are called which have tax and other CRA benefits (the term is “registered” as opposed to “non-registered,” by the way). No really. Try it out really quick, then come back.

If they’re comfortable with the alphabet soup, most will say; “An RSP! or is it RRSP? A registered something?” The other that might come up with younger people especially is a TFSA, though many still don’t realize it can be an investment account since the full, (arguably) deceptive name is a Tax Free Savings Account. Perhaps the odd parent or so will say RESP, and clarify they’re not talking about an RRSP. But another one that’s almost never mentioned, yet is by far the most helpful for those who qualify, is an RDSP.

What is an RDSP?

What is an RDSP? The letters stand for “Registered Disability Savings Plan.” As the name suggests, its purpose is to function as a tax-sheltered savings or investment vehicle for individuals with a permanent disability. How it works, in short, is this: the federal government gives generous matching funds, even up to 300% (!) for many families, and lower-income households can receive additional bonds in the thousands per year. Unfortunately, right now only about 1 out of 3 of eligible Canadians are taking advantage of this very attractive program.

So, as a financial consultant who is not only knowledgeable about them, but also licensed and experienced opening them up here in British Columbia, the following is a summary of what you should know about RDSPs to protect the most vulnerable among us.

Why Should Someone Open Up an RDSP?

Like other “registered” accounts, RDSPs give special tax privileges and can qualify for special bonds and incentives. In the case of an RDSP, it serves to provide the best chance of financial security to those who are disabled once their parents, guardians, or caretakers cannot provide for them any longer.

It was announced in 2007 and available since 2008. It is a progressive, massively advantageous, and first of its kind type account in the world because it is built specifically for those with disabilities. Accordingly, it offers the following features:

1. Up to $20,000 in bonds to low-income families (no contributions necessary to qualify), called the “Canada Disability Savings Bond”
2. Up to 300% (!) matching deposits up to $70,000 (300% for families with an income of $97,069 or less), called the “Canada Disability Savings Grant”
3. Tax-free investment growth (like an RRSP)
4. No reduction of other income-tested federal benefits
5. Tax-free withdrawal of your own funds (growth, grants, and bonds are taxed)

Who Qualifies for an RDSP?

RDSPs can be setup for those who

1. are eligible to receive the “Disability Tax Credit” (DTC)
2. are younger than age 60
3. are Canadian residents
4. have a valid Social Insurance Number

So, for most who are interested, the question is how to qualify for the DTC, which is determined by the CRA. Since the purpose of the account is to provide long-term financial security and peace of mind for those with unique financial needs, one needs to show evidence of some type of “present” (= more than 90% of the time) and “prolonged” impairment (= more than 12 months).

Per the current guidelines, the person claiming eligibility must meet one of the following when it comes to such impairment:

• legally blind
• markedly restricted in at least one of the basic activities of daily living
• significantly restricted in two or more or the basic activities of daily living
• in need of life-sustaining therapy

In order to claim these there is a tax form called t2201 that requires a medical practitioner’s certification. For some this is a one time process, for others there may be reassessment required.

How Does Investing in an RDSP Work?

Like other registered accounts, anyone who is a “plan holder” can open up an RDSP with a professional at a financial institution that offers investment services, like a wealth management firm or major bank or credit union.

What does a “plan holder” do? They are someone who opens and manages the plan. This primarily means selecting the investments, determining contribution amounts, and handling withdrawals.

Most “plan holders” are parents or legal guardians. Many are the beneficiaries themselves (if over 18 and “contractually competent”), though it can be a qualifying family member, or an agency or institution. “Contributors” (= those putting cash into the plan) can be anyone with the beneficiary’s written permission, and they are typically the same as the plan holders.

Any kind of investment can be held in RDSP accounts, though due to the long-term oriented growth and sheer lack of self-directed investment brokerages supporting them, contributions overwhelmingly happen in mutual funds or higher interest GICs.

Contributions can be made in a “lump sum” or “periodically.” In order to properly decide which one makes sense in your unique circumstances you should establish a long-term written financial plan that strikes a balance between your cash flow needs and other investment goals with your desire to maximize bonds, grants, and tax-deferred growth for the beneficiary (whether yourself or others).

This also means keeping in mind that contributions can be made up until the end of the year in which the beneficiary turns 59, though government bonds and grants (see below) are payable until the end of the year in which the beneficiary turns 49.

How Do I Get this Free Government Money?

There are two types of “free” monies you can receive from an RDSP, bonds and grants.

Bonds

Let’s start with the bonds. When a family’s annual income is $31,711 or less, through the Canada Disability Savings Bond (CDSB), the CRA contributes $1,000 to the RDSP, even if the plan holder makes zero contributions (!). If the family income is between $31,711 and $48,535, less than $1,000 is given on a pro-rated based. Then for families with more than $48,535 there are no bond payments.

Now, for long-term strategic planning, keep the following also in mind:

• there’s a $20,000 lifetime limit per beneficiary for these bond payments
• bonds are payable until the end of the year the beneficiary turns 49
• any unused grant entitlements carry forward for up to 10 years

Do realize that “family income” is calculated using the beneficiary’s age. So, if the beneficiary is a minor or turns 18 in a given calendar year the beneficiary’s parental income is generally used. And if the beneficiary is an adult or turns 19, the beneficiary’s income plus any applicable spousal or common-law income is used.

Grants

Let’s talk about the grants, which depend on contributions. When a family’s household income is $97,060 or less, through the Canada Disability Savings Grant (CDSG), the CRA matches contributions at rate of 300% (that’s a lot, FYI) on the first $500 contributed, then 200% on the next $1000 contributed. And for families with an income more than $97,069 the CRA matches contributions at a rate of 100% (that’s still very significant, FYI) on the first $1,000 contributed.

Similarly, for long-term strategic planning, keep the following in mind:

• there’s a $70,000 lifetime limit per beneficiary for these grant payments
• there’s a maximum grant amount of $3,500 per year
• grants are payable until the end of the year the beneficiary turns 49 (like bonds)
• any unused grant entitlements carry forward for up to 10 years (like bonds)

Remember, you can receive both the bond and the grant in a given year, and the government works with your investment advisor or financial institution to deposit the funds automatically.

So, for a family with an annual income of $97,069 or less, the minimum monthly contributions you could make in order to maximize the grant amounts would be $125 per month ($1,500/12). And for a family with an annual over more than $97,069 that amount would be $83.33 per month ($1,000/12).

How Does it Work to Withdrawal RDSP Funds?

The main difficulty that comes with an RDSP is how to properly withdrawal the funds, so it is highly recommended that you consult with a professional advisor to make best use of it’s unique advantages to achieve your personal, financial goals and avoid unplanned, yet preventable tax bills.

Why is it so complex? The rationale is this. An RDSP is designed to be a substantive support system, similar to a traditional pension plan, for those with disabilities so that they can be well-positioned for financial independence later in life. So, (for better or worse, depending on your perspectives on the roles of government), rules and checks are put in place to ensure that the funds have proper time to accumulate with tax-deferred, compounded growth with grant or bond contributions. So, all in all, waiting until age 60 to take out money empowers the beneficiary to maximize the value of bonds, grants, and the tax-deferred compounded growth, but it is still possible to make withdrawals before age 60.

This is how it works. Formally, withdrawals are made through what are called Disability Assistance Payments (DAPs). These can be one time or scheduled payments. Here’s what it looks like before or after the beneficiary turns 60 years old.

Before Age 60

The precise amount you can withdrawal will depend on whether or not the private contributions exceeded government ones (see the details here). However, there is the “10-year rule,” which is a mandatory repayment of the lesser of three times the amount withdrawn or all the grants and bonds received by the RDSP in the prior 10 years.

What does this mean? For example, if you withdraw $1,000 before age 60, you must repay $3,000 until the full government contributions (bonds and/or grants) are repaid. Now, that might sound like you can’t realistically ever take money out. But remember, this does not include all the tax-deferred compounded interest, which after several years can be quite significant. But, there are some flexible exceptions, like being allowed to withdraw up to $10,000 if the beneficiary’s life expectancy is less than five years.

After Age 60

Remember, after the beneficiary turns 50 there are no more grants or bonds given. Then, by age 60 DAPs must begin, and they will be completely free of any repayments (given the 10-year rule mentioned above). The process can be one-time or scheduled payments (in which case the CRA will calculate for you the precise annual amount based on a formula with your age and the RDSP value).

What is especially beneficial for those with disabilities at this traditional retirement age is that these payments in no way affect federal benefits or most provincial/territorial social assistance payments, like Old Age Security, the Canada Child Tax Benefit, the Goods and Services Tax credit, or Employment Insurance.

Regardless of the age of the beneficiary, they are then taxed on the CDSG, CDSB and tax-deferred growth portion of the withdrawal at their marginal rate (but not the private contribution amounts, which are after-tax dollars like TFSA contributions, but not tax deductible like RRSP contributions).

Where does an RDSP Best Fit in My Financial Plan?

Again, it bears repeating that you consult with a financial professional for setting up and planning for withdrawals because:

1. the investment opportunities have limited qualifying tools
2. eligibility for the disability tax credit may require additional documentation
3. the withdrawal rules and caves are quite complex compared to other registered accounts, especially for tax planning and estate purposes

Now, in a proper, written financial plan, the individual or families goals form the foundation for all the strategies and products when it comes to the various aspects of a plan, namely,

• managing cash flow and investments
• preparing for the unexpected
• funding major expenditures
• optimizing wealth for retirement and charitable giving
• maximizing career and business success

So, given that the long term purpose of an RDSP is to ensure the life-long financial stability of the beneficiary, the following questions and concerns should typically be addressed to get things started:

• if there are financial constraints, how are regular contributions prioritized and determined a way that balances the benefits of an RDSP with the beneficiary and/or contributor’s RRSPs, TFSAs, RESPs, or Group Plans?
• what risk management strategies, permanent life and living benefits (Critical Illness and Disability) insurance should be tailored to meet the unique challenges and opportunities of the beneficiary and their support network?
• given current and projected income levels, what amounts should be withdrawn and when in order to minimize tax exposure and maximize investment gains?
• for traditional retirement age, is there a tax efficient and flexible “retirement cheque” planned that will both avoid an older age “underliving” due to fear of overspending, while also being positioned to sustain the beneficiary well into old age?
• is there proper estate planning in place so that when the unexpected happens, the beneficiary and family will protected and able to achieve their life’s goals without undue financial hardship compounding their loss?

As you can see, financial planning for an RDSP inevitably involves not just evaluating the goals and well-being of the beneficiary, but that of their family or support network.

If you believe you qualify for an RDSP and are interested in setting one up in the context of establishing a long-term multi-generational financial plan, I can coach you through the process to make it simple and easy.

For a limited time David J. Sigrist is offering a complimentary, no risk 30 minute Strategy Session where he and his team can understand your goals, needs, identify your key risks, and then establish a plan and broker the best solutions for your unique situation.

Book your session with this link, or email him at [email protected] for more details.

PS: Perhaps you’re one of those people who skims articles to see what information they need at the moment. That makes sense. So, here’s an overview for you: an RDSP is an extremely attractive and lucrative investment option for those with disabilities in Canada. However, it is a long-term investment vehicle and how best to maximize government contributions and minimize tax exposure for withdrawals is complex, especially if you want to optimize the benefits in conjunction with other solutions (RRSPs, TFSAs, Group benefits, Life and Living Benefits Insurance, Retirement Planning, etc.).

I’m one of the few consultants in BC who are licensed and experienced setting up RDSPs within a true, financial plan. And for a short time I’m offering a complimentary 30 minute Strategy Session to help people understand how my team can set one up for them and coach them through the process to make it simple and easy. 

Book your session with this link, or email me at [email protected] for more details, big or small. Thanks.