Registered disability savings plans: Why don't more have them?
RDSPs have financial benefits even for those who don't make contributions
In the six years since registered disability savings plans (RDSPs) first appeared, the number of accounts has been steadily growing, reflecting the potential these plans have to make a huge difference for a population that faces big financial obstacles — especially in adulthood.
As of the end of December 2014, Canadians had opened a total of 99,601 RDSP accounts, a 60 per cent increase from 2012, according to Employment and Social Development Canada.
Still, the number of accounts represents only about 15 per cent of the roughly 643,000 Canadians between the ages of of zero and 59 who are eligible to open an RDSP, showing that the plans are still underused by their main target group – disabled individuals and their families.
These tax-assisted savings plans were the first anywhere in the world designed specifically to provide financial security for people with disabilities.
RDSP quick facts
- Number of RDSPs registered: 99,091 (Dec. 2014)
- Contributions from beneficiaries, their families and others: $590.9 million (mid-2014)
- Contributions from government: $1.2 billion
Source: ESDC/Planned Lifetime Advocacy Network
"There's still a definite lack of awareness," says Joel Crocker, director of planning at the Planned Lifetime Advocacy Network (PLAN), a Vancouver-based non-profit group that lobbied for the creation of RDSPs.
"There are also many misconceptions, such as that you need to put money into the plans to get any help from the government."
"There must be a catch," is a familiar comment advocates often hear. So, it comes as a surprise when disabled people learn they can often get thousands of dollars without having to make any contribution to their own plans.
What is an RDSP?
An RDSP is similar to a registered education savings plan (RESP) in that contributions to the plan are not tax deductible, but the income inside the plan is allowed to grow on a tax-sheltered basis until funds are withdrawn.
Contributions are further bolstered by federal grants and savings bonds (more on this government assistance below) that provide up to $4,500 a year of direct assistance, depending on income — up to a lifetime limit of $90,000.
Who is eligible?
To open an RDSP, recipients must satisfy three main conditions, namely, they must be:
- Under the age of 60 when contributions are made.
- A Canadian resident with a social insurance number.
- Eligible for the disability tax credit. This ensures that plans can only be set up for those with a serious and ongoing physical or mental impairment.
Parents can set up plans for disabled children. Disabled adults can set up plans for themselves. But only one RDSP can be set up per person.
How do they work?
Once someone sets up an RDSP for a particular beneficiary, anyone can contribute money to it as long as the plan holder gives written consent.
"This restriction is important," writes Jamie Golombek in the Canadian Tax Journal, "because it permits the RDSP holder to plan contributions strategically, in order to maximize matching government grants and bonds."
Recent RDSP reforms
The 2012 federal budget introduced a measure to let some family members become temporary RDSP holders for an adult who might not be able to enter into a contract themselves. Under the old rules, a plan holder had to be the beneficiary or the beneficiary's legal representative.
The budget changed the rules to allow the tax-free transfer of RESP investment income to an RDSP (as of 2013) if the plans share a common beneficiary. Another budget measure introduced proportional repayment of Canada disability savings grants (CDSGs) and Canada disability savings bonds (CDSBs) paid into an RDSP in the preceding 10 years when money is withdrawn from an RDSP.
Under the new rules, $3 of the grants or bonds paid in the previous 10 years must be repaid for every $1 withdrawn. The old rules required all grants and bonds paid in the prior decade to be repaid.
Ottawa also allows a 10-year carry forward of unused grant and bond entitlements. This will allow people to claim unused grant and bond money going back to 2008, even if the RDSP was set up in later years.
Another change allows parents or grandparents of a disabled child or grandchild to arrange for a tax-free rollover of RRSP, RRIF or company pension plan money to an RDSP when the parent or grandparent dies.
Depending on family income and how much is contributed, Ottawa will provide a grant of up to $3,500 a year. For lower-income Canadians with RDSPs, the federal government adds a bond of up to $1,000 a year, even if no contribution is made that year. These grants and bonds are available until the year the beneficiary turns 49. All grant and bond money must remain in the plan for at least 10 years.
There's no annual limit on how much can be put into a plan, but there is a lifetime contribution limit of $200,000, not counting the grants and bonds. The deadline for contributions each year is Dec. 31.
Parents or grandparents of a disabled child or grandchild can also arrange for a tax-free rollover of RRSP, RRIF or company pension plan money to an RDSP when the parent or grandparent dies.
What are the criteria for grants and bonds?
The grants are called Canada Disability Savings Grants. An RDSP can receive a maximum of $3,500 in matching CDSGs in any one year and a total maximum of $70,000 over the lifetime of the RDSP's beneficiary.
The grant is on a sliding scale. For families with a net income over $89,401 (thresholds are inflation-adjusted each year), the grant is equal to the first $1,000 contributed to a maximum of $1,000 a year. But for those with family incomes below $89,401, the grant is sweetened. On the first $500 contributed, Ottawa will contribute $1,500. On the next $1,000, the feds will kick in $2,000. So the maximum grant in any one year can reach $3,500 on a contribution of just $1,500. The lifetime limits for grants is $70,000.
For lower-income Canadians, Ottawa also provides Canada disability savings bonds. For those with family incomes up to $26,021 in 2013, the RDSP will get a $1,000 bond each year, even if nothing is contributed to the recipient's RDSP that year. For incomes between $25,356 and $44,701, the grant will be reduced proportionately until it disappears entirely at incomes above $44,701. The lifetime limit for bond payments is $20,000.
For those just opening a plan, Ottawa allows a 10-year carry forward of unused grant and bond entitlements. Since RDSPs have been around since 2008, people can claim unused grant and bond money going back to that year.
A word about family income. For those RDSP beneficiaries under age 18, it's the net income of the child's parents or guardians that is the key figure. For those 18 or over, it's their own family income that is key, even if they still live with their parents.
The bottom line?
All disabled adults, even if they have no income, should apply for the disability tax credit, file tax returns, set up an RDSP and apply for grants and bonds.
The money can really add up. Here's one example provided by PLAN: A low-income family contributes $1,500 a year for 20 years to an RDSP for a total contribution of $30,000. Assuming that the maximum $90,000 of federal grants and bonds are received in those 20 years and the plan is in place for another 10 years (to avoid any repayment issue), an RDSP could grow to be worth between $400,000 and $500,000, assuming a modest return of 4.5 to 5 per cent per year over the 30 years.
Advocates say the plans offer a huge incentive for families to contribute.
How are funds withdrawn from an RDSP?
Several types of withdrawals can be made from an RDSP. Lifetime disability assistance payments (LDAPs) are paid at least once a year until the RDSP is terminated or the beneficiary has died. This payment arrangement, if selected, must begin no later than the end of the year when the plan's beneficiary turns 60. A complicated formula limits the maximum annual LDAP payout. Ottawa now allows an increase in the annual maximum RDSP withdrawal limit, up to 10 per cent of plan savings.
Disability assistance payments can be made from an RDSP at any time, but grants and bonds may need to be repaid if they have not been in the plan for at least 10 years. The 2012 federal budget brought in a proportional repayment rule. Under the new rules, $3 of the grants or bonds paid in the previous 10 years must be repaid for every $1 withdrawn. The old rules required all grants and bonds paid in the prior decade to be repaid.
How do withdrawals affect other benefit payments?
Payments from an RDSP are partially taxable and partially non-taxable.
The portion of the withdrawal derived from grants, bonds and growth is taxable. The part derived from contributions is not taxable.
The really good news is that payments do not reduce the beneficiary's entitlement to any federal income-tested benefit, like the child tax benefit or the federal sales tax credit and the guaranteed income supplement. Furthermore, most provinces and territories have announced a full exemption of RDSP income and assets from provincial income-tested support programs.
How do I set up an RDSP?
Bank of Montreal was the first big bank to establish an RDSP in December 2008. Now, all of the big banks have their own RDSP programs in place. A few credit unions also offer the plans. Each financial institution offers its own investment choices. RDSPs can only be set up at institutions that offer the plans. Be warned that at some smaller branches, staff may have no idea what an RDSP is. You may need to contact a bigger branch.
More information on RDSPs is available from financial institutions, the federal government and various advocacy groups.