Understanding how a registered disability savings plan could help you and your family

An RDSP is an account designed by the Government of Canada, which enables individuals with disabilities to save for their financial future with the potential for help from family and friends.

The RDSP program was launched in 2008 to support individuals approved for the Disability Tax Credit (DTC) under the Canada Revenue Agency (CRA).

Who Can Apply for an RDSP?

In most cases, a person with a disability can open an account for themselves if they have reached the age of majority and are contractually competent to enter an RDSP agreement. However, if the beneficiary is under the age of majority or is contractually incompetent to enter a plan, the fund allows a qualifying person (a legal parent; a guardian; and any individual or institution who is legally authorized to act for the beneficiary) to open an account for the beneficiary. The account holders are responsible for general management of the account, which includes authorizing any contributions made to the RDSP.

The beneficiary is the individual that will receive the money from the account down the road. The beneficiary must be under the age of 60 when the account is first opened, and government grants and bonds will only be made into the account up until the beneficiary turns 50 years old.

Investing in an RDSP has no impact on your other disability benefits, in most provinces and territories, so you can continue to save while receiving benefits. An RDSP is a tax-deferred savings option, which means that individuals can save while also not paying tax on any earnings until the money is withdrawn.

A very important part of the RDSP are the available federal government contributions. Depending on your annual family income and contributions you make into your RDSP, you could be eligible for up to $90,000 in support from the Government of Canada through grants and bonds over the lifetime of your account.

The Canada Disability Savings Grant (CDSG) is funding available from the Government of Canada, which matches the personal contributions made to an RDSP. The matching rate is anywhere between 100% and 300%. This means that depending on your family income, for every $1 that you or family and friends contribute to your RDSP, it could be matched by the federal government grant with an additional $3 invested.

Government grants can total up to $3500 per year, or up to $70,000 over the account’s lifetime. Any contributions made prior to the 31^st of December of the year in which the beneficiary turns 49 years of age could be eligible to be matched by government contributions.

Government grants are calculated based on the beneficiary’s adjusted family income. From birth to the year the beneficiary turns 18 years of age, net income is based on the same information used to calculate eligibility for the Canada child benefit. From January 1 of the year the beneficiary turns 19, to the closure date of the RDSP, adjusted net income is based on the income of the beneficiary and their spouse or common-law partner.

Note: if the beneficiary is under the care of a department, agency, or institution at any point in the year for at least a month, the adjusted family net income is calculated based on the allowance payable to that department, agency, or institution under the Children’s Special Allowances Act.

Eligible grant amounts are adjusted annually to account for inflation. 2022 income thresholds and eligible amounts are as follows: 

Adjusted family net income is $98,040 or less:

• First $500 in contributions is eligible for $3 matching grant funding for every $1 contributed, up to $1,500 per year.
• On the following $1,000, contributions are eligible for $2 of matching grant funding for every $1 contributed, up to $2,000 per year.

Adjusted family net income is more than $98,040:

• First $1,000 in contributions is eligible for $1 of matching grant funding for every $1 contributed up to $1,000 per year.

The Canada Disability Savings Bond (CDSB) is a support amount paid directly into an RDSP. Unlike the grant, there is no requirement for beneficiaries or their families to make contributions to the fund to receive bonds.

The lifetime limit for bond funding is $20,000 and can be paid into the RDSP up until the year in which the beneficiary turns 49 years of age.

Eligible bond amounts adjust annually for inflation and 2022 eligible amounts are calculated based beneficiary’s adjusted family net income as follows:

The Canada Disability Savings Bond and Grant Programs are administered by Employment and Social Development Canada (ESDC) who determine eligibility amounts according to the beneficiary’s family income and the corresponding matching rates.

Like any financial investment vehicle, there are benefits to opening an RDSP, along with limitations or risks to consider as well.

Benefits of opening an RDSP include:

• Fund matching by the Government of Canada of up to 300% of your contributions - Depending on your family income, you could be eligible for an additional $70,000 in federal grants over the lifetime of your RDSP.
  
• Bonds availability for low-income families - Regardless of whether you make contributions into your RDSP, you could still be eligible for an additional $1,000 annually ($20,000 lifetime maximum) in federal government issued bonds depending on your annual family income.
• RDSPs are tax-deferred growth investments - Any contributions made by you, or the government grants are not taxable while part of the RDSP plan.
• Plenty of investment options - Most major Canadian financial institutions offer RDSP account options including Guaranteed Investment Certificates (GICs), stocks, mutual funds etc. This means you control where you want to invest.
• Access to previous year funding - Plan holders and beneficiaries can opt to carry forward up to 10 years of unused grant and bond entitlements to future years if eligibility was met by the beneficiary during those years. (Annual maximums for unused entitlements are $10,500 for grants and $11,000 for the bonds).
• No Impact on other Supports - Investing in your RDSP doesn't impact any other disability benefits, in most provinces and territories. This means that you can continue to invest and save through your RDSP while still receiving benefits available through various levels of government. (For more information, visit: https://www.canada.ca/en/services/benefits/disability.html)
• Anyone can help - Friends, family members, charities or other organizations can all contribute to a beneficiary’s RDSP. Anyone willing to contribute is free to do so with written approval from the plan holder.
• RDSP investments are your money - You can spend withdrawals from the account however you want.

Limitations and risks to consider with RDSPs are:

• All investment income and government contributions in the RDSP become taxable to the beneficiary in the year  of withdrawal.
• RDSP payments could impact disability pension payments.
• Government enforced penalty taxes could apply if the beneficiary holds a non-qualifying investment. Credit unions restrict RDSPs to only hold qualified investments.
• Assistance Holdback Amount (AHA) repayments may be triggered by withdrawals prior to the beneficiary turning 59 years of age. 

Eligible beneficiaries or account holders can apply for an RDSP at many financial institutions, including TD Direct Investing. Once your account is open, the RDSP can receive contributions from any individual or organization granted permission by the account holder. Like other long-term investment options, RDSPs can invest funds in many eligible options such as stocks, GIC, bonds and mutual funds.  

As long as they have permission from the account holder, anyone can contribute to an RDSP on behalf of the beneficiary.

Keep in mind that there are no annual limits to amounts invested annually, however the overall contributions into the account over the lifetime of the RDSP cannot exceed $200,000. Contributions in excess of $200,000 would cause the RDSP to become non-compliant. The client will be notified to withdraw the amount in excess of $200,000 within a specified timeframe to bring the RDSP back into good order.

The Government of Canada contributions do not count towards the $200,000 limit.

Withdrawal rules

One of the main functions of an RDSP is to ensure regular payments flow to the beneficiary when they need them after they turn 60 years old. These payments can include any types of contributions or growth that is available in the account at the time of withdrawal. This includes funds from personal contributions and government grants, interest earned, and roll over payment amounts.

There are two types of withdrawal payment types available through an RDSP account:

• Disability Assistance Payments (DAPs) – Payment from the RDSP made to the beneficiary at anytime
• Lifetime Disability Assistance Payments (LDAPs) – payments are recurring withdrawals that take place over a scheduled period. Note: Once the first LDAP is issued these payments must continue at minimum on an annual basis until the plan is terminated or the beneficiary is deceased.

LDAP payment amounts are regulated by a pre-determined formula and must begin by the end of the year that the beneficiary turns 60.

It is important to consider the tax implications when withdrawing from an RDSP. All contributions made are tax-free until they are withdrawn. Once withdrawn (before the age of 60), the government grants that have been in the account for over 10 years and income earned both become taxable portions that will be reported on the beneficiary’s T4A.

Also consider that government funds that have been in the RDSP for less than 10 years may be subject to repayment terms upon withdrawal.

Repayment of grants and bonds on payment requests

The RDSP is generally meant to support a beneficiary from the time they turn 60 and beyond.

The 10-Year Rule: This rule indicates the 10-year period that precedes any of the following events occurring:

• An RDSP is terminated.
• An RDSP is no longer an RDSP as it is no longer compliant with the Income Tax Act.
• A disability assistance payment (DAP) is made
• The beneficiary no longer is eligible to receive the Disability Tax Credit (DTC)
• The beneficiary dies.

If any of these events were to occur, it could trigger the repayment of government grants or bonds contributed to the RDSP in the 10 years preceding the event. 

To make sure there’s enough funds in the RDSP account to cover this repayment, RDSP issuers set aside the amount totaling the grants and bonds contributed to the account in the previous 10 years, which is called assistance holdback amount or (AHA)". Hence, withdrawing funds prior to 60 could trigger the repayment of some - or all - the Assistance Holdback Amount (AHA).

These considerations can be quite complicated and so it’s always recommended to seek professional advice from your RDSP issuer prior to any withdrawal.

Note that any withdrawals made after the beneficiary turns 60 are not subject to repayments of the grants and bonds portions of the RDSP. 

What is the Disability Tax Credit?

The disability tax credit or (DTC) is a non-refundable tax credit to support Canadians and their families by reducing their annual income tax payment amounts.

The DTC is a tax credit that can be claimed annually and is meant to offset the additional costs experienced by those individuals living with disabilities.

Can I transfer money from an RDSP to another RDSP account?

Yes, you can! There is flexibility in moving money from one RDSP account to another, however there are conditions that need to be met:

• Both RDSPs must be assigned to the same beneficiary, and funds need to be transferred directly from one account to the other.
• If there are multiple account holders, each must agree to the transfer.
• The transferring RDSP must be closed upon completion of transfer.

If the beneficiary is 59 years of age or older prior to the transfer, any DAPs will come from the new RDSP.

Can there be more than one account holder for a single RDSP?

Yes, this is possible. Again, there are conditions to consider, however if these are met, then there can be multiple account holders.

For example, if the legal parent(s) or guardian(s) are also holders of a pre-existing RDSP of an adult beneficiary at the time a plan is established, those individuals can remain joint holders of the new plan along with the adult beneficiary.

Otherwise, if the beneficiary is of the age of majority and is contractually competent, they can open an RDSP on their own.

If the beneficiary is under the age of majority a person/organization can open an RDSP on behalf of the beneficiary if they are one of the following:

• Legal parent of the beneficiary
• A guardian, tutor or any other individual legally authorized to act on behalf of the beneficiary
• A public agency or institution legally authorized to act on behalf of the beneficiary

Can the holder of RDSP be changed?

Only in situations where a plan is originally opened when a beneficiary is below the age of majority and then reaches the age of majority can the holder of the RDSP be changed.

In an instance where the original holders were the legal parents or guardians, they can remain as joint holders of the plan at this point. If the original plan holder was not a legal guardian, they need to be removed immediately when the beneficiary becomes the plan holder.

 Can an RDSP beneficiary who is over age 49 receive grant or bond money?

No. The eligibility period to receive government grants is the time between the account being opened to the year that the beneficiary turns 49. Government contributions will continue up to the 31^st of December of the year the beneficiary turns 49. Keep in mind these contributions could total up to $70,000 in grants and/or $20,000 in bonds over the lifetime of the account, so it’s important to apply to an RDSP early to take full advantage of the government contributions. Applications to these government contributions must be made at the time of opening an RDSP.

Are RDSP withdrawals taxable?

While the contributions you have made yourself are not taxable once withdrawn, you will pay taxes on the grants and bonds portions that have been in the fund for 10 years or more. Any investment income earned is also taxable.

What happens if the RDSP beneficiary dies?

Should the beneficiary die, any bonds or grants contributed by the government that have been in the account for less than 10 years will be repaid to the government. All remaining funds will be paid to the beneficiary’s estate. 

There are many reasons you’ll want to be prepared for your financial future, and there are lots of ways to invest to meet those goals. The RDSP is a powerful investment vehicle to help persons with disabilities save and meet long-term financial needs. With grants from the government, tax-deferred investments and flexible contribution arrangements, there are many benefits for eligible Canadians to opening an RDSP. These accounts can also be complex with many considerations to think about.