RDSP and Financial Advisory

What is the RDSP?

The Registered Disability Savings Plan (the “RDSP” or the “Plan”) is a long-term savings plan designed to benefit individuals who have a disability. It was introduced by the federal Government of Canada in 2008 and is the only savings vehicle of its kind anywhere in the world.

You can think of the RDSP as being similar to a Registered Education Savings Plan (RESP), except the savings are meant to provide financial support to the Beneficiary of the RDSP later in life, rather than for post-secondary education. In both instances, a registered account is opened at a financial institution. Both government and personal contributions can be made to the RDSP, and those monies can be invested with any income from the investment being earned on a tax-deferred basis. In other words, it can accrue income and no tax will be paid on that income until the income is actually taken out of the RDSP.

Unlike an RESP, which is held by and remains the property of the person making the contributions to the RESP, not the intended Beneficiary, an RDSP may be held by a parent or legal guardian of the person with a disability who is the Beneficiary of the RDSP; however, the legal ownership of the RDSP lies with the Beneficiary.

While we strongly recommend that anyone who is eligible for government contributions to an RDSP open one, an RDSP is especially important for an individual who may not be tied to the labour force and therefore, may not have access to income from retirement savings plans, private pension plans, or the Canada Pension Plan as they grow older.

Since 2008, thousands of Canadian families have opened up an RDSP for the benefit of a loved one who has a disability, and it is now an essential component of estate and financial planning for individuals who have a disability and their families.

 Who can benefit from an RDSP?

In order to be eligible as a Beneficiary of the RDSP, you (being the person with a disability) must meet the following four criteria:

• • You must be a resident of Canada;
  • You must open an RDSP on or before December 31 of the year in which you turn age 59;
  • You must have a valid social insurance number. If you are working or receiving any form of government benefits, you will likely already have a social insurance number in place. If you do not, please visit the Service Canada website for information about how to apply for your social insurance number; and
  • You must have an approved Disability Tax Credit Certificate in place.

Note that there is no minimum age requirement for a person to be an eligible Beneficiary of the RDSP.

Who can set up the plan?

The plan “holder” is responsible for opening up the RDSP, managing the Plan, and making decisions about contributions, investments, and payments from the RDSP. Persons eligible to be the plan holder differ depending on whether the Beneficiary is under 18 years of age or is an adult.

For Beneficiaries under the age of 18, a parent or legal guardian of the child can be the holder of their RDSP. Upon the Beneficiary turning the age of 18, the parent can continue to be the holder of the Plan, transfer the role to the Beneficiary, or become joint plan holders with the Beneficiary (if the financial institution allows for joint holders).

If you are an adult Beneficiary, you may also be the holder of your RDSP. Note, however, that if you are not able to be the plan holder due to capacity concerns, then only your parent, spouse, common- law partner, or someone otherwise legally authorized to act on your behalf can be plan holder of your Beneficiary. In Ontario, legal authority generally means that you have appointed someone to be your Continuing Power of Attorney for Property, or someone has been appointed as your guardian of property, typically by the courts.

Contributions to the RDSP

1. 1. PERSONAL CONTRIBUTIONS

You can only be the Beneficiary of one RDSP, and there can only be one Beneficiary per RDSP. As the Beneficiary of an RDSP, personal contributions of up to $200,000 can be made to your RDSP up to December 31 of the calendar year in which you turn age 59. Personal contributions can come from a variety of sources. They can come from your own income or be made by family members, friends, or even corporations (on your behalf). These contributions require the written authorization of the plan holder.

Note that there is no annual contribution limit (keeping in mind the $200,000 lifetime limit) and contributions are not tax-deductible.

2. FEDERAL CONTRIBUTIONS

What makes the RDSP such an effective savings tool is the annual contributions made to your Plan by the Federal Government. Depending on your age and level of income, the Government may contribute up to $90,000 over the course of the Plan’s lifetime.

Before getting into the numbers, it is important to understand that the amount of Government contributions will be based on what is referred to as the Beneficiary’s Family Income (BFI). For Beneficiaries under the age of 19, the BFI is comprised of your parents’ net income. In your nineteenth year, however, the BFI includes only your net income, unless you are married, in which case your spouse’s income would be taken into account as well. It is also important to keep in mind that the BFI from two prior years is used to determine the amount of the federal contribution. For example, 2019 contributions are based on the BFI of 2017.

The Federal Government contributions are comprised of two components:

• • The Canada Disability Savings Bond (the “Bond”); and
  • The Canada Disability Savings Grant (the “Grant”).

They are both cash contributions for which you may be eligible on an annual basis. The primary difference between the two is that the amount of the Grant is based on a personal contribution, whereas you may be eligible for the Bond by virtue of simply opening an RDSP.

• BOND

The Bond is a cash contribution made by the Government of up to $1,000 on an annual basis. You must be 49 years of age or younger to receive the Bond (the Government will contribute until December 31 of the year in which you turn 49), and the Government will contribute up to $20,000 over the course of your lifetime. Application for the Bond is made at the time you open up your RDSP.

The amount of the Bond for which you are eligible is based on income thresholds that are adjusted upwards each year based on the rate of inflation. The following chart reflects the 2019 thresholds:

BENEFICIARY’S FAMILY INCOME

3. GRANT

Unlike the Bond, the annual Grant of up to $3,500 is based on personal contributions to your RDSP. You must be 49 years of age or younger to receive the Grant (the Government will contribute until December 31 of the year in which you turn 49), and the Government will contribute up to $70,000 over the course of your lifetime. Application for the Grant is made at the time you open up your RDSP.

Like the Bond, the amount of Grant for which you are eligible is based on income thresholds that are adjusted upwards each year based on the rate of inflation. The following chart reflects the 2019 thresholds:

Withdrawals from the RDSP

The intent of the RDSP is to encourage long-term savings so that you have built up a decent-sized nest egg to support yourself later in life. Therefore, the withdrawal rules associated with the plan are structured in such a way as to promote savings and to deter early withdrawals.

When thinking about the RDSP as part of your financial and estate plan, it is very important to take note of the rules relating to withdrawals, the most important of which is likely
the following:

• The 10-Year Rule: You must wait 10 years from the date of the government’s last contribution in order to make a withdrawal from your RDSP without a penalty. In most cases, the government makes its last contribution before you turn 50. Therefore, in most cases, you must wait until you are 60 to withdraw funds from the RDSP without penalty.
• Early Withdrawal Penalty: Early withdrawals (i.e., withdrawals made before 10 years have elapsed since the government’s last contribution) can be made, however, the Beneficiary would be required to repay three times the amount of the withdrawal up to the total amount of Government contributions made to the RDSP in the previous 10 years. For example, let’s say that the government contributed to John’s RDSP until 2025 because it had paid the maximum Grant and Bond amounts. John would have to wait until 2035 to make a withdrawal from the RDSP in order to avoid an early withdrawal penalty. 

• Payments from the RDSP: There are three different payments that can, and in some cases, must be made from an RDSP –

1. 1. Recurring Payments (referred to as Lifetime Disability Assistance Payments or “LDAPS”): LDAPs are regularly scheduled periodic withdrawals that can begin at any time (keeping in mind the 10-year rule) but must begin by the end of the calendar year in which you turn 60 years old. These withdrawals are determined by a formula (referred to as the “LDAP Formula”) that takes into account how much money is in your RDSP (referred to as the fair market value or “FMV”) and your age at the time of the withdrawal.
   2. Lump Sum Payment (referred to as a Disability Assistance Payment or “DAP”): There may be times when you would like to make a withdrawal from your RDSP without triggering the recurring payments (LDAPs). Perhaps you would like to use the money for a down payment for a home or simply to take a vacation. You can do so by taking out a lump sum withdrawal. The maximum annual amount of the withdrawal is based on the makeup of the plan. Keep in mind that these payments are subject to the 10-year rule.

• Specified Payments: Specified payments of up to $10,000 per year are available to Beneficiaries with a life expectancy of five years or less. In order to qualify, the Beneficiary must submit a request to the financial institution along with a letter from a medical practitioner attesting to the prognosis. Note that the 10- year rule and the LDAP Formula do not apply to these withdrawals.

The RDSP and other government programs

There is assurance from the federal government and the provincial government of Ontario that payments from RDSPs do not affect eligibility for and benefits from other government programs.

At the federal level, this applies to benefits such as the Canada Child Tax Benefit, the Goods and Services Tax Credit, Old Age Security, and Employment Insurance.

How do I open an RDSP?

RDSPs can be opened at a number of financial institutions (FIs) around the province. Employment and Social Development Canada (“ESDC”) keeps a current list of FIs that offer RDSPs on their website.

When it comes to choosing your FI, you may want to consider the following:

1. Does the FI allow for multiple plan holders of an RDSP?
   For some Beneficiaries, having multiple people as holders of the plan would be beneficial in terms of succession planning. With multiple plan holders, if one were unable or willing to continue in that role, having multiple people in place would ensure limited disruption with the administration of the RDSP. In Ontario, at present, the groups of people who can be a plan holder are restricted to parents, spouses, guardians, and authorized representatives (such as attorneys for property). That being said, it is hoped that Ontario will soon provide changes to its policies and regulations to allow for a wider range of persons to be considered an “authorized representative.”
2. What investment options are available?

You want to ensure that the financial institution takes time to learn about you and your family. For example, what other sources of income are available, what is your age, your risk tolerance, and your anticipated needs?

All of these factors will influence the type of investment that is right for your RDSP. Investment options do differ among the FIs.

With regard to provincial benefits, payments from your RDSP (income) and the value of your RDSP (asset) will not affect benefits from Ontario Works or ODSP. Note that these rules vary among the provinces and territories, so if you move outside of Ontario, you will want to verify the rules about RDSP withdrawals with the provincial or territorial government to which you are relocating.

How is an RDSP closed?

The ultimate goal of the RDSP is to ensure that you are able to access all of the funds over the course of your lifetime. There may be situations, however, where the RDSP has to be closed due to the Beneficiary passing away or losing eligibility for the DTC.

What happens if the beneficiary passes away?

If the Beneficiary passes away, the RDSP must be closed by December 31 of the following calendar year. Any Grant or Bond received within 10 years of the Beneficiary’s death will be paid back to the Federal Government, and all remaining monies (including accrued growth) will be transferred to the Beneficiary’s estate and taxed accordingly.

If the Beneficiary has a Last Will and Testament (the “Will”) in place, the Will identifies who inherits the remaining proceeds. If there is no Will in place, provincial legislation takes over and states that next-of-kin will inherit the funds based on the rules of intestacy.

What happens if the beneficiary loses eligibility for the DTC?

Previously, if you lost eligibility for the DTC, the RDSP would have to be closed by the end of the second consecutive year following DTC ineligibility. The federal government, however, recently introduced changes in Budget 2019 to remove the existing time limitation on the period that an RDSP may remain open after its Beneficiary becomes ineligible for the DTC (starting in 2021). A transitional rule will ensure that an RDSP issuer will not be required to terminate an RDSP after March 18, 2019 and before 2021 solely because the RDSP beneficiary became ineligible for the DTC.[1]

[1] For more: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/registered-disability-savings-plan-rdsp.html

Tax considerations

1. TAX-DEFERRED GROWTH
   Contributions to an RDSP are not tax deductible, but any investment gains earned inside the RDSP are not taxable until such time the Beneficiary makes a withdrawal.
2. RRSP/RRIF/LRIF ROLLOVER

The Income Tax Act[1] governs the rules with respect to a rollover of an amount to an RDSP from a registered retirement savings plan (RRSP) or a registered retirement income fund (RRIF) as a result of the death of the annuitant of the registered plan (the “annuitant”). In general, in order for the rollover to be available, the Beneficiary of the RDSP must be a child or grandchild of the annuitant and have been financially dependent on the annuitant by reason of a physical or mental infirmity (the “eligible individual”). In addition, the amount of the rollover is subject to (i) the $200,000 maximum RDSP contribution limit, and (ii) must not be greater than the lump sum payment from the RRSP or RRIF as a consequence of the death of the annuitant.

ELIGIBLE INDIVIDUALS AND FINANCIAL DEPENDENCE TEST

Specifically, an eligible individual is a child or grandchild of an annuitant of an RRSP or RRIF who was financially dependent on the annuitant for support, at the time of the annuitant’s death, by reason of mental or physical infirmity. For the purpose of the financial dependence test, unless the contrary can be established, an eligible individual was not financially dependent on an individual for support (the “supporting individual”) if the income of the child or grandchild in the tax year preceding the tax year the supporting individual died exceeded the aggregate of the basic personal tax credit amount and the DTC amount (if eligible).

• RESP ROLLOVER
  Beneficiaries of both a registered education savings plan (“RESP”) and an RDSP are permitted to transfer, tax deferred (i.e., rollover), the investment income from the RESP under one of the following conditions:

1. 1. The Beneficiary is, or is reasonably expected to be, unable to pursue post- secondary education because he or she has a severe and prolonged mental impairment; or
   2. The RESP has been in existence for more than 35 years; or
   3. The RESP has been in existence for at least 10 years, and each Beneficiary under the RESP has attained 21 years of age and is not eligible to receive educational assistance payments.

The RESP rollover amount will be considered a private contribution, and as such, must not be greater than the Beneficiary RDSP contribution room. In addition, the RESP rollover amount will not attract Canada Disability Savings Grants.

[1] Income Tax Act s. 20.02 and paragraph 60(m)

Summary and additional resources

The RDSP is one of the most effective ways for individuals with a disability to save for their future. With an annual government contribution of up to $4,500, it is hard to think of any better return on your investment. Further, monies held in an RDSP and withdrawals made from the plan do not impact eligibility for social assistance programs, including ODSP. That being said, careful consideration needs to be given to the rules associated with payments from the RDSP in order to ensure the maximum use of the funds.

Canada Revenue Agency – RDSP

Employment and Social Development Canada – RDSP

www.rdsp.com