Tax Expert: Financial help for the disabled
The registered disability savings plan (RDSP) should really be the go-to registered vehicle for disabled Canadians and their families to not only enjoy tax-deferred investment compounding but to take advantage of significant government funds available, potentially retroactive to 2008, the year RDSPs were first launched.
The RDSP is a tax-deferred registered savings plan open to Canadians eligible for the disability tax credit. Up to $200,000 can be invested in the plan. While contributions are not tax-deductible, all earnings and growth accrue tax-deferred until withdrawn from the plan.
Generally, the most attractive feature of the traditional RRSP, RRIF or TFSA is the ability to earn tax-deferred or tax-free investment income. But assuming the beneficiary’s marginal effective tax rate doesn’t significantly fluctuate between the time a contribution is made and the funds ultimately withdrawn, the main advantage of the RDSP is the ability to supplement the plan with matching Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs) for beneficiaries age 49 and under.
CDSGs and CDSBs are based on family income. If the beneficiary is under 19, it’s generally the beneficiary’s parents’ family income, but once he or she reaches 19, it’s the beneficiary’s own family income that is used to determine the amount of government assistance.
CDSGs are equal to 300% of the first $500 of annual contributions and 200% on the next $1,000 for a maximum annual entitlement of $3,500, subject to a lifetime maximum of $70,000. If family income is over $83,088, the CDSG is simply 100% on the first $1,000 of annual contributions.
CDSBs of up to $1,000 annually up to a lifetime maximum of $20,000 can also be paid into RDSPs for lower-income families who have income below $24,183. The $1,000 CDSB is then phased out gradually as income increases above this amount until it’s fully eliminated once family income reaches $41,544.
Note that unlike the CDSG, the CDSB is not a matching amount, meaning that no contributions are required to get up to $1,000 in CDSBs annually, depending on family income.
This year marks the first time that CDSGs and CDSBs can be collected retroactively based on current contributions, although retroactive payments of this government assistance aren’t expected to paid into RDSPs until sometime in 2012.
As a result, now when an RDSP is opened for a beneficiary for the first time, CDSGs and CDSBs can be received retroactively to 2008 up to an annual maximum of $10,500 in CDSGs and $10,000 in CDSBs. And the best news of all is that the CDSGs will be paid first at the highest matching rate (300%, where applicable) and then at the lower rates (200% or 100%, as applicable). Retroactive CDSGs and CDSBs are based on family income in those particular years.
For example, if an RDSP is opened in 2011 for a disabled adult whose income in the current and past four years was below $24,000, the RDSP will receive $4,000 of CDSBs, representing $1,000 annually for 2008, 2009, 2010 and 2011.