Canadians are fortunate to have access to a variety of registered savings accounts. These types of accounts have various financial and tax benefits. One of the plans available is the Registered Disability Savings Plan. The purpose of this plan is to provide financial relief to individuals living with disabilities. They incur additional barriers and costs which other taxpayers do not face. To learn more about the inner workings of an RDSP, continue reading below.
Table of contents
- What is the Registered Disability Savings Plan (RDSP)?
- What are the benefits of a Registered Disability Savings Plan?
- How does an RDSP work in Canada?
- Registered Disability Savings Plan Eligibility
- How much can you contribute to an RDSP?
- How much does the government contribute to an RDSP?
- How to maximize your Registered Disability Savings Plan
- How do you make withdrawals from an RDSP?
- Can you use the RDSP to buy a house?
- RDSP tax rules
- How to open a Registered Disability Savings Plan
What is the Registered Disability Savings Plan (RDSP)?
The Registered Disability Savings Plan, or RDSP for short, is a financial plan intended to help individuals with disabilities and their caregivers save money and enhance financial security. RDSPs are only available to people who are eligible for the disability tax credit (DTC).
Unlike with a Registered Retirement Savings Plan (RRSP), contributions to an RDSP are not tax deductible. You can contribute until the end of the year in which the beneficiary turns 59. Withdrawals from an RDSP can cover the cost of disability and non-disability related costs. The Canada disability savings grant, the Canada disability savings bond, earned investment income and proceeds from rollovers are included in the beneficiary’s tax return when paid out of an RDSP.
What is the disability tax credit (DTC)?
The disability tax credit (DTC) is a non-refundable tax credit which helps people with disabilities, or their supporting persons, reduce their income taxes. To claim the DTC, you must meet a specific eligibility criteria and go through a process with the Canada Revenue Agency (CRA). The processing times can be lengthy as there are various requirements and submissions. Be sure to start as soon as possible if you believe you’re eligible.
The purpose of the DTC is to provide more significant tax equity by allowing financial relief for disability costs. These are unavoidable additional expenses that other taxpayers do not incur.
Individuals who are eligible for the DTC are also eligible for the Registered Disability Savings Plan (RDSP). You cannot open an RDSP if you are not enrolled in the DTC tax credit program.
What are the benefits of a Registered Disability Savings Plan?
Like other registered accounts with the CRA and Canadian government, there are financial and tax benefits to having an RDSP. See below for a list.
- Investing options. Invest money however you want in your RDSP.
- Spending options. You can withdraw and spend funds from an RDSP as you wish.
- Tax savings. Like other registered accounts, investment income earned in your RDSP is tax-free.
- Generous government contributions. Depending on your family’s income level, for every dollar you save, the government matches up to $3. This is the Canada savings grant. If you have low income (less than $31,120 per year) and cannot invest yourself, the government still invests $1,000 every year for 20 years. This is the Canada Disability Savings Bond. If your income is between $31,120 and $47,630, you can still receive a partial bond.
- Other government benefits. Even with an RDSP, you can still access other government benefits.
- Anyone can contribute to an RDSP. Contributions are not limited to you and/or a care provider. Family, friends, neighbors, foundations, organizations and charities can also make contributions! The only requirement is they have written consent to contribute from the plan holder.
How does an RDSP work in Canada?
Since an RDSP is a registered account with the Canada Revenue Agency (CRA), there are various rules and requirements in place. To learn more about how an RDSP works, continue reading below.
Registered Disability Savings Plan Eligibility
Eligibility for an RDSP is dependent on eligibility for the disability tax credit (DTC). When eligibility for the DTC applies, eligibility automatically applies for an RDSP as well.
Throughout a person’s life, they can become eligible for DTC, then ineligible. This does not mean your RDSP must be automatically closed. It can remain active and if the individual becomes eligible for the DTC again, they can continue to access the benefits at that time.
Below is the eligibility criteria for the DTC:
- Have an impairment in physical or mental nature that is severe and prolonged, resulting in a marked restriction
- Eligibility for the DTC falls under these categories:
- Mental functions necessary for everyday life
- Cumulative effect of significant limitations
- Life-sustaining therapy
Other eligibility criteria for opening an RDSP:
- Have a valid social insurance number
- Be a resident of Canada
- Be under the age of 60
How much can you contribute to an RDSP?
The maximum amount you can contribute to an RDSP over a lifetime is $200,000. However, there is no annual contribution limit or limitations based on earned income. Contributions to an RDSP are not tax deductible.
How much does the government contribute to an RDSP?
The government supports RDSPs through two programs to encourage long-term savings. The deadline to apply for these programs is December 31 of each year. Below is a summary of the grant and bond programs.
RDSP Canada Disability Savings Grant (CDSG)
The Canada Disability Savings Grant, or CDSG for short, is a federal government grant program that matches contributions of 100%, 200% or 300%. The maximum matching contribution per year is $3,500. The amount of the matched contributions is based on the family’s net income. There is a lifetime limit of $70,000.
RDSP Canada Disability Savings Bond (CDSB)
The Canada Disability Savings Bond, or CDSB for short, is a federal government bond program designed for low to modest income families. The program intends to assist families who may not have adequate resources to make a contribution to an RDSP. To be eligible for CDSB, you must file a tax return two years prior to the year you wish to attract a bond. The maximum annual limit is $1,000 and the lifetime maximum is $20,000 under the CDSB.
How to maximize your Registered Disability Savings Plan
Investment income earned in your Registered Disability Savings Plan is tax-free. For this reason, you should invest the funds and avoid making withdrawals, where possible. In some cases, the CDSG and CDSB programs require repayment when you make a withdrawal. By avoiding withdrawals, you won’t have to repay these benefits — which you can’t get back again. In addition, you should wait 10 years after maxing out the RDSP Canada grant and bond programs before making withdrawals. By doing so, you will not have to repay the grant and bond benefits.
How to invest in an RDSP
Similar to other registered accounts, you can invest your RDSP savings into stocks, bonds, and other investments. Most banks and credit unions allow you to easily invest your funds where you please. Work with your bank and financial advisor, if you have one, to begin investing in your RDSP. Remember, investment income earned in an RDSP is tax-free!
How do you make withdrawals from an RDSP?
There are two types of withdrawals you can make from an RDSP: Disability Assistance Payments (DAPs) and Lifetime Disability Assistance Payments (LDAPs). Only beneficiaries can receive payments from an RDSP. Other RDSP rules apply in Canada, more information found below.
Disability Assistance Payments (DAPs)
DAPs are lump sum payments made from the RDSP to the beneficiary or the beneficiary’s estate. As a beneficiary, you can request DAPs when you turn 27, provided the total government grant and bond exceed all account holder contributions at the beginning of the calendar year. DAPs can be put towards disability and non-disability expenses.
Lifetime Disability Assistance Payments (LDAPs)
LDAPs are recurring annual payments that must continue once started until the death of the beneficiary or until termination of the RDSP. In other words, they are recurring payments from a Registered Disability Savings Plan to the beneficiary. LDAPs can begin at any time, but they must start by the end of the year in which the beneficiary turns 60. The exact amount of LDAPs is subject to legislation. It is calculated based on life expectancy, the fair market value of the plan or 10% of the account. LDAPs can be put towards disability and non-disability expenses.
Do withdrawals affect benefit payments?
Yes. DAPs and LDAPs require that for each dollar withdrawn from an RDSP, $3 of any grant or bond paid into the plan from the proceeding 10 years must be repaid. All grants and bonds received prior to the 10 year mark are the beneficiary’s to keep.
For this reason, it’s best to collect as much of the grants and bonds as you can from the Canadian government. Then, hold and invest the funds for 10 years. Once you pass that mark, then you should begin making withdrawals. This will optimize the funds in your Registered Disability Savings Plan.
Taxation of RDSP withdrawals
Since RDSP payments can only be made to the beneficiary, they are also taxed in the hands of the beneficiary. In other words, the beneficiary must report RDSP withdrawals as income on their annual tax return.
Can you use the RDSP to buy a house?
DAPs and LDAPs can be put towards non-disability related expenses. This means the funds from an RDSP can be put towards a home purchase, such as a down payment or recurring mortgage payments.
RDSP tax rules
Below is a summary of the tax rules for RDSPs:
- Contributions. Everytime you contribute money to an RDSP, it is not tax deductible. This is similar to a Tax-Free Savings Account (TFSA).
- Withdrawals. When you have a DAP or LDAP from your RDSP, the beneficiary must include it in their taxable income each year. Withdrawals face taxation at the beneficiary’s respective rate.
- Investment income. Any investment income earned in an RDSP is tax free. This includes investment income from GICs, bonds, stocks and so on.
How to open a Registered Disability Savings Plan
To open an RDSP, follow the below steps:
- Step 1: Establish eligibility for the disability tax credit (DTC)
- Step 2: Complete the application process for the DTC and receive confirmation from the CRA regarding enrollment
- Step 3: Use DTC status to open an RDSP Canada account
- Step 4: Start making contributions and accessing CDSG and CDSB
- Step 5: Invest funds in your RDSP