Canada

The RDSP: Everything you need to know for 2018

ARTICLE  | 

This article was published in Thomson Reuters' Personal Injury Practical Guidance.

The Registered Disability Savings Plan, or RDSP, as it is commonly known, is a government program that began in 2008 for the purpose of helping Canadians with disabilities effectively plan for their long-term financial future. If you are a Canadian who is disabled or who has become disabled following an accident, you may be eligible for the RDSP. What follows is an overview of the program as well as the key eligibility criteria.

Setting the stage

To be eligible as an RDSP beneficiary, individuals who are disabled are entitled to claim the disability tax credit on their personal income tax return. A doctor or medical practitioner needs to attest to the individual’s prolonged physical or mental impairment in order to be eligible for the disability amount. The government offers two methods of matching contributions for the RDSP: these include the Canada Disability Savings Grant (CDSG) and the Canada Disability Savings Bond (CDSB). The total benefit available every year is up to $4,500.

Taxes on investment income and capital gains are deferred while in the RDSP. Once the beneficiary has been paid, these become taxable. However, as of 2014, banks and other financial institutions must withhold source deductions from all RDSP payments and withdrawals.

The Canada Disability Savings Grant

Yearly contributions made to an RDSP are eligible to receive matching government grants, depending upon the net family income, as well as these restrictions:

Net family income

Contributions

 Matching grant

Maximum grant amount

$93,208 or less

On the first $500

$3 for every $1 contributed

$1,500

On the next $1,000

$2 for every $1 contributed

$2,000

Over $93,208 (or no income tax return)

On the first $1,000

$1 for every $1 contributed

$1,000

 

When a beneficiary is under 19, net family income refers to the income of the parents and the beneficiary. For beneficiaries over 19, net family income includes that of the beneficiary and his or her spouse, if applicable.

Only beneficiaries under the age of 50 as of December 31 are eligible for the CDSG. There is also a lifetime maximum grant amount of $70,000 as well as a contribution limit of $200,000. No yearly contribution limits exist.

The program allows individuals to carry forward unused bond and grant entitlements for 10 years. This means that individuals who have been disabled prior to 2008 will obtain credit for bonds and grants dating back to 2008.

The Canada Disability Savings Bond

In the case of the CDSB, beneficiaries can receive the following levels of assistance:

Net family income

Available bond

Below $30,450

$1,000

Between $30,450 to $46,605

$1,000, reduced on a prorated basis

Over $46,605 (or no income tax return)

No bond is available

 

The CDSB also applies a maximum lifetime benefit of $20,000 and only beneficiaries under the age of 50 at December 31 are eligible.

Contributions need to stay in the fund for a decade; otherwise, both the CDSG and CDSB must be repaid. Net family income brackets for both the CDSB and CDSG are indexed to inflation.

For individuals disabled by accidents

It's a good idea to establish an RDSP if the following conditions are in place:

  • The beneficiary is under 60 years of age;
  • The beneficiary has a social insurance number and is a Canadian resident;
  • The individual qualifies for the disability amount;
  • The beneficiary and his or her family are seeking long-term savings.
Let's look at the following two scenarios:

Scenario one, where net income for the family is more than $93,208 and Scenario two, where net income for the family is less than $30,450

Scenario One: Income greater than $93,208

  • In this case, the beneficiary will not qualify for any income from the CDSB. A yearly contribution of $1,000 will trigger the maximum matching amount of $1,000, with the return on the investment at 100 per cent and tax-deferred growth. The contributor can also take advantage of tax-sheltering opportunities, as the gains will be taxed by the beneficiary who may occupy a lower tax bracket.
  • Once an individual has been certified as disabled, the most prudent next step would be to establish an RDSP and deposit the $1,000 annual contribution. Amounts beyond that can be contributed to an RDSP to leverage the tax deferral. Another option would be to use the beneficiary’s tax-free savings account (TFSA) first, as these instruments allow funds to grow tax-free.

Scenario Two: Income less than $30,450

  • Very often, families in this income bracket lack additional funds for investing and they may not be focused as much on long-term savings as meeting immediate needs. That said, a yearly deposit of $1,500 will generate significant long-term savings as it will be matched by the combined grant and bond of $4,500, which will net the family a 300 per cent return. Opportunities may also exist in the cases of adult beneficiaries for extended family members or friends to contribute additionally for the long-term benefit of the person who is disabled as well as his or her family.
  • Investing in an RDSP provides a definite financial advantage. $1,500 contributed annually for a decade will grow to approximately $58,000 in an RDSP if invested at 3 per cent. Depending on the individual’s marginal tax rate, a similar investment in a vehicle other than an RDSP will only net $17,500, or less. Where no money exists for the annual cash contributions, the beneficiary can still be eligible for the $1,000 bond.
  • When planning for a person disabled as a result of an accident, families in this income level may wish to set aside $1,500 annually from any insurance award or settlement, until the beneficiary reaches the age of 49, to cover annual deposits to an RDSP. Doing so ensures that the money is available to leverage the matching government CDSG amounts.

Other important things to note about the RDSP

  • Most banks and other major financial institutions can establish an RDSP for you and your family;
  • While anyone can donate to an RDSP on behalf of a disabled person who is the plan’s beneficiary, written permission is required and these payments will not be tax deductible;
  • Beneficiaries are only allowed to have one RDSP.

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