Are you and/or someone in your family living with a disability and wishing to save for the future? Registered Disability Savings Plans (RDSPs) are one of the newest (although they have been around since 2008) and most evolving tools at your disposal. The Federal’s Government’s latest budget announced a number of welcome changes to the program.
RDSPs: The Basics
In case you are not familiar with this type of asset, an RDSP is a long-term savings plan that gives you the ability to earn tax-deferred or tax-free investment income. An individual with a disability can qualify for up to $90,000 in contributions from the Government of Canada in the form of Canada Disability Savings Grants (Grant) and Canada Disability Savings Bonds (Bond).
Building Savings with an RDSP
Step 1: Apply for the Disability Tax Credit (DTC). This is a non-refundable tax credit that can help you reduce the amount of income tax you may have to pay. An individual must have the DTC in order to open an RDSP.
Step 2: Identify the beneficiary by carefully interpreting the requirements for such person. Remember, that an RDSP can only have one beneficiary.
Step 3: Identify the holder of the RDSP. This is the person who will manage the RDSP on behalf of the beneficiary.
Step 4: Contact a participating financial organization to help you complete an RDSP application as well as an application for the Bond or Grant. You may find the list of participating financial organizations here.
Changes to RDSPs in Federal Budget 2019
The Federal Government recently announced some welcome changes to RDSPs:
First, RDSPs can continue to remain open even if the beneficiary becomes ineligible for the DTC (although contributions will not be permitted, and further Grants and Bonds will not be available). A transitional rule to this effect is already in force. This offers some relief to RDSP beneficiaries who no longer qualify for the DTC in that they will no longer have to close their RDSP account and risk having to repay some or all of the Grants and Bonds they have already received.
Second, starting in 2021, the “assistance holdback amount” will begin to gradually reduce when the RDSP beneficiary attains the age of 51. The “assistance holdback amount” is equal to the Grants and Bonds paid into the RDSP in the preceding ten years. This amount must be repaid to the Government in certain circumstances i.e., the beneficiary dies, a payment is made to the beneficiary, etc.
Third, the Government of Canada also intends to exempt RDSPs from seizure in bankruptcy, other than contributions made in the 12 months before a bankruptcy filing.
While considering whether an RDSP makes sense for you or a loved one, remember that the funds contributed to an RDSP grow tax free until you take it out of the RDSP. Generally, money can be taken out at any age; however, restrictions apply and the Grants and Bonds may need to be returned in certain circumstances. You must begin to take out money annually by December 31st of the year you turn 60.
Given the evolving nuances of the RDSP challenges and opportunities, please consult with experienced professionals who can help you determine whether an RDSP makes sense for you or your loved one and how best to address the RDSP in your estate plan.