Registered Disability Savings Plan

A Registered Disability Savings Plan (RDSP) is a savings plan intended to help parents and others save for the long term financial security of a person who is eligible for the disability tax credit (DTC). RDSPs were introduced in the 2007 federal budget for the 2008 tax year (with an extension to March 2, 2009 to receive federal support grants and bonds). Budget 2012 contained further enhancements for RDSPs.

Like a Registered Education Savings Plan (RESP), a RDSP uses after-tax dollars to build up savings in a tax-deferred plan. There is no upfront tax deduction. Contributions that are withdrawn are not included as income to the beneficiary when paid out of an RDSP. However, government grants (the Canada Disability Savings Grant and the Canada Disability Savings Bond) and investment income earned in the plan are taxable to the beneficiary when paid out of the RDSP.

Employment and Social Development Canada (ESDC) maintains a list of financial organizations that offer the RDSP. Plan Institute, a non-profit organization, maintains a longer list.

Once you open an RDSP, you may apply for the Canada Disability Savings Grant and Canada Disability Savings Bond. In 2017, based on their income levels, "68 percent of beneficiaries were entitled to receive up to $1000 of bond along with a potential grant amount of up to $3500, depending on the amount of their contributions".

A RDSP has no impact on federal benefits, such as the Canada Child Tax Benefit, the Goods and Services Tax Credit, Old Age Security, and Employment Insurance. However RDSP withdrawals may impact some provincial benefits in New Brunswick, Prince Edward Island and Quebec. See this link for details.

Basic rules and definitions

The plan beneficiary is "the person who is approved for the Disability Tax Credit that will receive the money in the future".

The plan holder is "the person who opens and manages the plan".

The beneficiary and holder can be the same or different people:

• for a minor beneficiary, the plan holder must be a parent, legal representative or public department
• for an adult beneficiary, the plan holder will be the beneficiary except if there are "concerns about their ability to enter into a contract", in which case the plan holder will be a legal representative or a family member

A beneficiary can only have one RDSP at any given time, although this RDSP can have several plan holders throughout its existence, and it can have more than one plan holder at any given time.

Each RDSP has one beneficiary.

Contributions

Who can contribute

Contributions can be made by the beneficiary, family and others who are authorized by the planholder. The contributions are not tax-deductible, but are tax-exempt as long as they remain in the plan.

Contribution limits and deadline

There is no annual limit on amounts that can be contributed to an RDSP of a particular beneficiary in a given year. However, the overall lifetime limit for a particular beneficiary is $200,000.

Contributions are permitted until the end of the year in which the beneficiary turns 59.

The deadline for making contributions to an RDSP, and applying for the Canada Disability Savings Grant and Canada Disability Savings Bond, is December 31 of each year.

Carry forward

Since January 2011, you are allowed to carry forward unused grant and bond entitlements to future years. The carry forward period can only start after 2007 and lasts for 10 years. The terms and conditions of the grant and bond entitlement programs also include provisions for their repayment under certain conditions

Rollovers

As of July 2011, the proceeds from a deceased parent’s or grandparent’s Registered Retirement Savings Plan, Registered Retirement Income Fund and Registered Pension Plan can be rolled over into the RDSP of a financially dependent child or grandchild with a disability. This will "avoid significant tax otherwise payable on death". However, rollovers are included in the lifetime contribution limit of $200k and are not eligible for grants.

Another type of possible rollover is from a Registered Education Savings Plan (RESP). Several conditions must be met.

Canada Disability Savings Grant

Contributions can be supplemented by the Canada Disability Savings Grant. ESDC specifies: "Depending on the beneficiary’s family income and contribution level, the Government may grant up to $3 for every $1 in contributions received by an RDSP in a year, to a maximum of $3,500. The lifetime grant limit is $70,000. The beneficiary family income thresholds are indexed each year to inflation.

A Canada Disability Savings Grant can be paid into an RDSP on a contribution made to the beneficiary’s RDSP by December 31 of the year the beneficiary turns 49 years old."

To receive the maximum grant

"If you want to receive the full amount of grant every year, you will need to contribute either $1,000 a year or $1,500 a year, depending on which grant you are eligible for."

If your family income is less than or equal to the family income threshold ($100,392 for 2022) : maximum $3,500 grant per year

• For the first $500 you contribute each year to the RDSP, the Government will deposit $3 for every $1 you contribute, up to $1,500 a year
• For the next $1,000 you contribute each year to the RDSP, the Government will deposit $2 for every $1 you contribute, up to an additional $2,000 a year

If your family income is greater than the family income threshold ($100,392 for 2022): maximum $1,000 grant per year

• For the first $1,000 you contribute each year to the RDSP, the Government will deposit $1 for every $1 you contribute, up to $1,000 a year.

Calculating the beneficiary's family income

The beneficiary's family income is calculated as follows:

• From birth to December 31 of the year the beneficiary becomes 18 years of age, the beneficiary’s adjusted family net income is based on the income information used to determine the Canada child benefit (CCB) for that beneficiary
• Beginning the year the beneficiary becomes 19 years of age until the RDSP is closed, the beneficiary’s adjusted family net income is based on his or her income plus his or her spouse’s, or common-law partner’s income.
• If the beneficiary is under the care of a department, agency, or institution for at least one month in the year, the adjusted family net income is based on the allowance payable to the department, agency, or institution under the Children’s Special Allowances Act.

Note for teenagers

Income numbers used for grant calculations are from 2 years earlier. When someone turns 19, it will be the child's income from when he/she was 17. This means it is important to file a tax return for the beneficiary from age 17 onward.

Government of Canada: "Beneficiaries over 18 years of age must have filed income tax returns for the past two years and must do so for all future taxation years".

Canada Disability Savings Bond

Lower-income families may qualify for payments from the Canada Disability Savings Bond program (also administered by ESDC) without having to make a contribution to an RDSP.

According to ESDC, the "Canada Disability Savings Bond is paid by the Government of Canada directly into a registered disability savings plan. Depending on the beneficiary’s family income, the Government of Canada may contribute up to $1,000 each year. The lifetime bond limit is $20,000.

A Canada Disability Savings Bond can be paid into an RDSP until the year in which the beneficiary turns 49 years old. The full bond is paid up to a family income of $32,797 and phased out at $50,197 (for 2022).

As with the Canada Disability Savings Grant, this amount is indexed indexed to inflation each year.

Withdrawals

Turning 60

Regular withdrawals from a plan must begin by December 31 of the year the beneficiary turns 60. These are known as a lifetime disability assistance payments (LDAPs). There is a LDAP formula that limits the maximum withdrawal each year based on the account balance and the age of the beneficiary. People with short life expectancies (5 years or less) are not subjected to this annual withdrawal limit.

It is also possible to request a non-recuring disability assistance payment (DAP). A separate request must be made for every DAP.

Early withdrawals

RDSP withdrawals (DAPs or LDAPs) can happen before the age of 60, but some grants and bonds may need to be reimbursed to the government. There are exceptions if:

• grants or bonds were recieved more than 10 years ago
• the beneficiary has a reduced life expectancy of 5 years or less

Additional rules

A specified disability savings plan (SDSP) is a "measure to provide beneficiaries who have shortened life expectancy with greater flexibility to access their savings from an RDSP". See RC4460 for details.

Finally, there are specific rules if the RDSP is considered a "primarily government-assisted plan", which happens "when the total of all government grant and bond payments made into any of the beneficiary's RDSPs in the previous years is more than the total of all private contributions made to any of the beneficiary's RDSPs in the previous years".

Taxes

Each withdrawal will contain a mixture of contributions, grants, bonds (if eligible) and growth on investments. There could also be a component coming from rollovers of other plans (RRSPs or RESPs for example).

While contributions are withdrawn tax-free, the other amounts are taxable in the hands of the beneficiary and are known as "taxable DAPs".

If taxable DAPs reach a certain threshold ($23,268 in 2022), the RDSP issuer will have to withhold income tax at source and send it to the Canada Revenue Agency:

• 10% (5% for Quebec) on amounts up to and including $5,000
• 20% (10% for Quebec) on amounts over $5,000, and up to $15,000
• 30% (15% for Quebec) on amounts over $15,000

As usual for taxes withheld, this is not a special tax or additional tax or RDSP withdrawals. The amount withheld is only a crude estimate of what the final income tax bill may be, to be calculated later when filing the tax return.

Investing in a RDSP

The RDSP is designed to cover the long term financial needs of the beneficiary; the rules described above discourage early withdrawals. Therefore, a RDSP should typically be invested for the long term, like a retirement account would. The article Portfolio design and construction is relevant here.

Choosing a financial institution

The Plan Institute has suggestions on how to select a RSDP provider. One consideration is what types of investments each RSDP provider offers, another one is what fees of all types are. Typical offerings from banks or credit units include Guaranteed Investment Certificates (GICs) or mutual funds. For experienced investors, Discount brokerages will offer more choice among the qualified investments listed in the next section. Unfortunately, not all brokers offer self-directed RDSP; see the FWF topics below.

Qualified investments

The types of investments that can be held in a RRSP are also allowed in RDSPs. This includes:

• cash
• mutual funds
• securities listed on a designated stock exchange (i.e., stocks, exchange traded funds, ...)
• Guaranteed Investment Certificates
• bonds
• certain shares of small business corporations

CDIC coverage

See also: Deposit insurance

Since 2021, separate Canada Deposit Insurance Corporation (CDIC) coverage is available on RDSP assets that are held in deposit accounts, such as bank accounts or a high-interest savings account. Specifically, separate coverage applies for up to $100,000 in eligible deposits held under RDSPs effective April 30, 2021.

Questions

Some frequently asked questions are:

1. Who can set up an RDSP?
2. Payments into the RDSP
3. Payments out of the RDSP
4. Taxable amount of disability assistance payments
5. Termination of the RDSP

Calculator

The calculator will help Canadian families project the estimated future value of an RDSP, and will help determine how it can enhance the quality of life for a family member with a disability. By answering a few simple questions, the calculator will determine the amount of Grant and Bond a person is eligible for, and the approximate value of future payments.

See: RDSP Calculator

Government reviews

Budget 2008 announced that the program would be reviewed three years after plans became operational. In October 2011, the federal government announced a review of Ensuring the Effectiveness of Registered Disability Savings Plans with the objective:

This consultation paper outlines the major elements of the RDSP program and seeks the views of Canadians on important elements of the program, including issues related to establishing plans, accessing plan savings, plan termination, and the administration of the RDSP program. The Government encourages interested Canadians to submit comments on these and other relevant issues.

The consultation period ended December 16, 2011.

Budget 2012 announced that based on the feedback received during the review, Economic Action Plan 2012 proposes a number of measures to improve the RDSP. These measures will:

• Provide greater access to RDSP savings for small withdrawals by replacing the requirement to repay any CDSGs and CDSBs paid into an RDSP within the 10 years preceding a withdrawal from the plan with a requirement to repay CDSGs and CDSBs at a fixed ratio to the amount withdrawn.
• Provide greater flexibility to make withdrawals from certain RDSPs by increasing the annual maximum withdrawal limit that applies to these RDSPs, and ensure that RDSP assets are used to support a beneficiary during their lifetime by requiring a minimum amount to be withdrawn from all RDSPs beginning the year a beneficiary attains 60 years of age.
• Provide greater flexibility for parents who save in Registered Education Savings Plans (RESPs) for children with disabilities by allowing investment income earned in an RESP to be transferred on a tax-free basis to an RESP beneficiary’s RDSP.
• Provide greater continuity for long-term saving by RDSP beneficiaries who cease to qualify for the Disability Tax Credit in certain circumstances by extending the period that their plans may remain open.
• Improve the administration of the RDSP for financial institutions and beneficiaries by amending certain RDSP administrative rules.

Other disability savings options

A Henson Trust is a "common tool used in special needs planning". The idea of such "absolute discretionary trusts" is that the beneficiary does not have "access to the money" although the trust is able to make discretionary distributions. Therefore, the beneficiary should still qualify for social assistance benefits. Henson trusts "should be prepared by lawyers who specialize in or experienced in the complexities of trust law and disability planning".

Further reading

• Financial Wisdom Forum topic: "Discount Brokerage RDSP"
• Financial Wisdom Forum topic: "Where do you keep your RDSP?"
• Financial Wisdom Forum topic: "TD e-series portfolio for RDSP accounts"
• Financial Wisdom Forum topic: "100% Equity a good idea in RDSP?"

External links

• "Registered Disability Savings Plan". Employment and Social Development Canada.
• "RDSP: Open, transfer or rollover". Employment and Social Development Canada.
• "Tax Topics and Resources for Persons With Disabilities". TaxTips.ca.
• "Registered Disability Savings Plan". RDSP Resource Centre.
• "Registered Disability Savings Plan". Canadian Personal Finance Blog.
• "RDSP tutorial". RDSP Plan Institute.
• "Financial Planning for a Special Needs Person". Canadian Money Saver, October 2010.