Registered Disability Savings Plan

Registered Disability Savings Plan

What is an RDSP?

As the name implies, a Registered Disability Savings Plan (RDSP) is a Savings Plan that is registered with the Canada Revenue Agency (CRA). The RDSP is a long-term savings plan designed to help Canadians with disabilities effectively save for their, and their family’s future.

An RDSP is an arrangement between the RDSP issuer and the holder(s). The holder makes, or authorizes, contributions to an RDSP. In return, the RDSP’s issuer uses the accumulated funds to make Disability Assistance Payments (DAPs) to the holder’s designated beneficiary. Earnings made through an RDSP are not taxable until they are withdrawn from the RDSP.

When contributions are made to the RDSP, the Government of Canada provides matching grants that range in value depending on the initial amount contributed and the beneficiary’s family income. The Canada Disability Savings Grant can be worth up to a maximum of $70,000. In addition to the grant, low-t0-modest income families may be eligible for the Canada Disability Savings Bond, worth up to a maximum of $20,000.

Who is Eligible?

In order to be eligible for an RDSP, the beneficiary must first be eligible to receive the Disability Tax Credit (DTC). The beneficiary must reside in Canada in the year in which the contribution to the RDSP is made, or in some cases, the year to which the contribution is allocated. In addition, the beneficiary must also reside in Canada in the year, or years, to which a bond is payable, along with the time period immediately before the bond is paid.

In order for the grand or bond to be paid, an application must be made on or before December 31st of the year the beneficiary turns 49 years old. To receive the grant, contributions must also be made on or before this date.

The DTC will reduce taxes when the beneficiary’s disabilities have been recognized. The credit is claimed when taxes have been filed. The DTC is non-refundable. In other words, savings are made in the form of lower taxes and not through receiving money back.

Making Up for Entitlements from Previous Years

As the RDSP became available in 2008, if a beneficiary has met all eligibility criteria since its inception but has not received grant and bond entitlements, they can still receive the unused contributions.

Again, an application and a contribution (if applicable) must be made on or before December 31st of the year the beneficiary turns 49. The applied matching rate for grants will be the same rate that would have been applied earlier, had the contribution been made in the year in which the grant entitlement was earned.

The amount of unused grant and bond entitlements depend on the family income earned for the particular year that the unused entitlement was earned.

Grants and bonds can be paid on unused entitlements up to an annual maximum of $10,500 for the grant, and $11,000 for the bond.

Is Money Withdrawn from the RDSP Taxed?

The government classifies every dollar withdrawn from an RDSP to be made of three parts:

  • Private contributions
  • Government contributions
  • Income / growth

When you withdraw money from an RDSP, private contributions are not subject to taxes. However, both government contributions (grant and bond) along with any applicable income or growth count as income. You will have to pay tax on them.

To Receive the Bond, Savings are not Required!

The Canada Disability Savings Bond is one way that the federal government will provide contributions to your RDSP. If your net income is less than $26,364 / year, the federal government will put $1,000 into your RDSP each year. If the beneficiary is younger 18, the amount will be based on family income.

  • If net income is between $26,364 and $45,282, the government will contribute a portion of $1,000 into the account.
  • The maximum amount that the federal government will invest in an RDSP during a beneficiary’s lifetime is $20,000.
  • In order to receive the bond, income taxes for the previous two years must have been filed. For beneficiaries below the age of 18, this applies to their families.

Value of the Canada Disability Savings Grant

The value of the proceeds received through the Canada Disability Savings Grant depend on the beneficiary’s annual income.

  • If income is $90,563 or less:
    • For the first $500 contributed into the RDSP, the beneficiary will receive $3 for every $1 contributed. For the next $1,000 the beneficiary will receive $2 for every $1 contributed.
    • The maximum grant for any single year is $3,500. The lifetime maximum grant value is $70,000.
  • If income is above $90,563:
    • For the first $1,000 contributed into the plan, the beneficiary will receive $1 for every $1 contributed.
    • The maximum grant for any single year is $1,000. The lifetime maximum is $70,000.
    • A beneficiary may receive the full $3,500 grant one year, and $1,000 the next year as the value is completely dependent on the income two years prior.

Making Withdrawals from Your RDSP

Proceeds that are withdrawn from an RDSP can be used on anything that the beneficiary wants. But, there are a few very important things that should be kept in mind!

  • If a beneficiary receives a federal government grant or bond, there is a “holdback period” of 10 years from the year of the last federal contribution.[1]
  • If the government has contributed more to your RDSP than you have, you can withdraw a limited amount in one year. The amount is either the total funds in your RDSP divided by the number of remaining years before you turn 83 years old, or 10% of the amount in the plan per year.
  • You must begin to receive money from your RDSP starting at the age of 60. However, you can take one-off payments or start regular payments at any age.

[1]Note: there has been a recent change in the penalty. Up until the end of 2013, withdrawals made during the holdback period required that all funds received from the government in the past 10 years be paid back. As of January 2014, this rule has been changed to become a “proportional repayment rule” so that for each $1 withdrawn from an RDSP, only $3 of any grants or bonds paid into the plan in the 10 years needs to be repaid.