What is a Registered Disability Savings Plan (RDSP)? In 2007, the Government of Canada introduced the creation of a Registered Disability Savings Plan (RDSP). During the 2008 Budget Announcement, the Government of Canada stated the RDSP would be available to the public in 2008. The RDSP is a savings plan designed specifically for people with disabilities in Canada. This new tax-deferred savings vehicle is intended to assist parents and others in planning for the long-term financial security of their relatives and others with disabilities that are eligible for the Disability Tax Credit. Contributions to a RDSP are not tax deductible and can be made until the end of the year in which the beneficiary turns 59. Contributions that are withdrawn are not to be included as income for the beneficiary when paid out of an RDSP. However, the Canada Disability Savings Grant, Canada Disability Savings Bond and investment income earned in the plan will be included in the beneficiary’s income for tax purposes when paid out of the RDSP. The primary benefits of the RDSP include: Tax-Sheltered Savings for Future Disability Income A RDSP will allow plan holders to invest up to $200,000 in a tax-deferred account on behalf of their relatives with disabilities. The Government of Canada will pay matching Canada Disability Savings Grants (CDSG) of 100% up to 300% depending on the beneficiary’s family income, as well as the Canada Disability Savings Bond (CDSB) of up to $1,000 per year to low-income or modest-income Canadians with disabilities. Provincial Disability Benefits Unaffected RDSPs in British Columbia are exempt as an asset and income when determining a person’s eligibility for provincial disability benefits. Also having an RDSP will have no impact on federal benefits such as the Canada Child Tax Benefit, the Goods and Services Tax credit, Old Age Security or Employment Insurance. Who can become a Beneficiary of a RDSP? A person may be designated as a beneficiary if they meet the following requirements: Who can set up an RDSP? The plan holder is the person who establishes the RDSP and makes contributions into the RDSP on behalf of the beneficiary. For beneficiaries over the age of majority, the holder is generally the beneficiary. For beneficiaries under the age of majority, the holder can be a legal parent, legal representative or public department. When a plan is opened by a beneficiary’s legal parent(s), the legal parent(s) may continue as the holder(s) of the plan after the beneficiary reaches the age of majority. The beneficiary may be added to the RDSP as a joint holder of the plan once they have reached the age of majority and are contractually competent. If a plan is opened by somebody other than the beneficiary or the beneficiary’s legal parent(s), that person or body must be removed as a holder of the plan when the beneficiary reaches the age of majority. Similarly, an individual who is eligible to be a beneficiary of a RDSP may have reached the age of majority but not be competent to enter into a contract. If so, another person may open a RDSP for the beneficiary and become a holder. These qualified persons are: A legal parent may only open a plan for a beneficiary who has reached the age of majority and is not contractually competent, when the plan is a result of a transfer from another RDSP. Also, a legal parent of a beneficiary, who has reached the age of majority, and is not contractually competent, can open a plan for the beneficiary provided the legal parent is legally authorized to act on behalf of the beneficiary. A holder who is not the beneficiary of the plan does not have to a resident of Canada but must have a valid SIN or Business Number (for public institutions, departments and agencies) in order to establish the plan. If the guardian, tutor, or public department is no longer qualified to be a holder, (for example they are no longer their legal guardian or have died) they must be removed from the plan as a holder. In such a case, the following may be added to the plan as successor or assignees of a holder: Who can contribute to a RDSP? Anyone can contribute to a RDSP with the written permission of the plan holder. The plan holder does not have to be a resident of Canada. However the beneficiary must be a resident of Canada when the plan is opened and when each contribution is made to the plan. Contributors will not be entitled to a refund of their contributions. Qualified Investments for RDSPs The types of investments are restricted under the Income Tax Act (Canada) and include: There are restrictions on the types of non-arm’s length investments that may be held in a selfdirected RDSP. Contribution and Limits There is no annual contribution limit but the lifetime contribution limit is $200,000 and the contributions are not tax deductable. Contributions are permitted until the end of the calendar year in which the beneficiary turns 59. Note: Amounts directly transferred from one RDSP to another RDSP for the same beneficiary are not included in calculating the $200,000 overall contribution limit. Government Grants The government of Canada will provide assistance in the form of two types of grants – a matching grant and/or a bond which can be paid until the year the beneficiary turns 49. The amount of grant and/or bond paid is calculated based on the beneficiary’s family income. This income is dependent on the beneficiary’s age. From the beneficiary’s year of birth to December 31 of the year when he/she turns 18, the beneficiary’s family income is based on the income information that is used to determine the Canada Child Tax Benefit for that beneficiary. Beginning the year the beneficiary turns 19 until the plan is closed, the beneficiary’s family income is based on his/her income plus their spouse’s income. To encourage savings, grants and bonds must remain in the RDSP for at least 10 years. Therefore, the grant and/or bond are repayable to the Government of Canada if any withdrawals are made in the ten years prior to receiving the last grant or bond. Repayments of federal grants or bonds do not include interest earned on them. Here is an example: A RDSP is set up for Joe when he is 25 years old; contributions are made and grants and bonds are received for 10 years. In order to keep the grant and/or bond received Joe cannot withdraw from the plan until he is 45 years old as the last grant and bond would have been received when he was 35 years old. This rule is to ensure that RDSPs are used for long-term savings for disabled persons. It will also prevent people from withdrawing money and then obtaining matching grants and/or bonds on future years’ contributions and essentially using the same federal contribution more than once. Canada Disability Savings Grant (CDSG) The Government of Canada will pay a matching Canada Disability Savings Grant (CDSG) of 300, 200 or 100 percent, depending on the beneficiary’s family income. *Income amounts are shown for 2010. The beneficiary family income limits are indexed each year based on the rate of inflation. The following requirements must be made to apply for the grant: A RDSP can receive a maximum of $3,500 in matching Grants in one year. The CDSG can be received up to a maximum of $70,000 or up until the end of the calendar year in which the person turns 49. Canada Disability Savings Bond (CDSB) The Canada Disability Savings Bond (CDSB) is paid to low-income or modest-income families where the net family income is $39,065 or less. The CDSB is a maximum of $1,000 per year, based on family income, paid into a RDSP without any contribution being made. *Income amounts are shown for 2010. The beneficiary family income limits are indexed each year based on the rate of inflation. The CDSB can be paid up to a maximum of $20,000 or up until the end of the calendar year in which the person turns 49. The following requirements must be made to apply for the bond: Withdrawals/Payments Unlike the Registered Education Savings Plan where you can specify where you want the payments to come from, any and all payments received from a RDSP are automatically considered to be taken from 3 different parts: Disability Assistance Payments Withdrawals can be taken at any age; however, withdrawals must begin by age 60. There are two types of withdrawals from RDSPs: Disability Assistance Payments and Lifetime Disability Assistance Payments. Grants and bonds must remain in a RDSP for at least 10 years, therefore, whenever money is withdrawn, grants and bonds that were paid into the RDSP during the 10 years before the withdrawal must be repaid to the Government. Disability Assistance Payment (DAP) A Disability Assistance Payment is any payment made from a RDSP to the beneficiary. In most cases, the holder of the RDSP is the only entity who may request a Disability Assistance Payment. However, in a case where the total of all government grants and bonds are greater than the amount of private contributions in the RDSP at the beginning of the calendar year, the beneficiary must be allowed to request a DAP without the consent of the holder when the beneficiary has reached age 27 but not yet turned 59. In this circumstance, the total of all DAPs requested by both the beneficiary and the holder in the calendar year must be limited by the legislated maximum payment formula. There is no minimum or maximum DAP with exception to payments made as described above. Lifetime Disability Assistance Payments (LDAP) These payments, once started, must be paid at least annually until either the plan is terminated or until the beneficiary has died. These payments must begin by the end of the year in which the beneficiary turns 60 and will be subject to an annual maximum withdrawal limit based on the beneficiary’s life expectancy and the fair market value of the plan. There will be no maximum limits on the amount of disability assistance payment that can be made to the beneficiary in a specified year. A specified year is the year in which a qualified medical practitioner certifies in writing that the beneficiary will not live longer than five years. A specified year will also include each of the five calendar years following the year of certification. A year will not qualify as a specified year unless the medical certificate has been provided to the issuer in or before the year in question. RDSP grants and bonds, along with investment income in the plan are taxable to the beneficiary. The taxable portion of the RDSP is reported in Box 28 of a T4A slip. The beneficiary needs to report this amount as income on their tax return for the year in which they received the income. Transfers can occur of RDSPs from one participating Financial Organization to another. Since a beneficiary cannot have more than one RDSP, a transfer request must be completed to move a plan from one financial organization to another. It must be for the full amount of the plan, partial transfers are not acceptable. The holder of the plan must initiate the transfer and the required form must be completed by both the receiving and relinquishing financial organization. The RDSP holder can request the RDSP be closed. However, voluntary closure is not allowed in all situations. Grants and bonds must be paid back to the Government and all other money in the RDSP will be paid to the beneficiary. The holder must terminate the RDSP no later than December 31 of the year following the year in which the beneficiary no longer has a severe and prolonged impairment as described in the Income Tax Act. Any funds remaining in the RDSP after repayment of any grants and/or bonds will be paid out to the beneficiary. The taxable portion of the Disability Assistance Payment (DAP) will be included in the beneficiary’s income for the year in which the payment is made to the beneficiary. If the beneficiary of a RDSP dies, the RDSP must be closed no later than December 31st following the first full calendar year of the beneficiary’s death. Any funds remaining in the plan, after repayment of any grants and/or bonds, will be paid to the estate. The taxable portion of the Disability Assistance Payment (DAP) must be included in the income of the beneficiary’s estate in the year the payment is made. The Government of Canada’s Budget 2010 has proposed changes to the RDSP. These changes are still in the draft stage and have not been passed by Government but should be noted. Budget 2010 proposes to extend the existing RRSP rollover rules to allow a rollover of a deceased individual’s RRSP proceeds to the RDSP of a financially dependent infirm child or grandchild. Budget 201 proposes to amend the Canada Disability Savings Act to allow a 10-year carry forward of CDSG or CDSB entitlements. CDSB entitlements will be determined and paid into the plan for the preceding 10 years (not before 2008 when RDSPs were introduced). Balances of unused CDSG entitlements will also be determined and maintained for the same period. CDSGs will be paid on unused entitlements, up to an annual maximum of $10,500. Canadians now have a new investment and savings vehicle that will greatly assist families in providing long-term savings for relatives with disabilities. The tax-sheltered savings growth as well as the generous government grants and bonds will help to enhance the quality of life for Canadians with disabilities. The RDSP also provides the beneficiary with the flexibility to decide what they would like to use their RDSP for.Registered Disability Savings Plan (RDSP) GUIDE
RDSP information is compliments of Central 1 Credit Union and the Savings and Credit Unions of British Columbia.
Information on the RDSP is based on legislation in effect March 2010.
This is an information guide only. For clarification you should refer to the legislation provided by Canada Revenue Agency (CRA) at 1-800-959-8281. The website is http://www.cra-arc.gc.ca
Contributions
Beneficiary’s Family Income Grant Maximum $81,191* or less On the first $500 $3 for every $1 contributed $1,500 On the next $1,000 $2 for every $1 contributed $1,000 More than $81,191* On the first $1,000 $1 for every $1 contributed $1,000 Beneficiary’s Family Income Bond $23,855* or less (or if the holder is an institution) $1,000 Between $23,855* and $40,970* Part of the $1,000 (based on formula in Canada Disability Savings Act) More than $40,970* No bond is paid RDSP Reporting
Transfers
Termination of the RDSP
If a beneficiary is no longer disabled
If a beneficiary dies
Budget 2010 RDSP Changes
Where Do You Go From Here?
Guide to the RDSP
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