Understanding the registered disability savings plan, from the basics to the budget's new rules
If you or someone in your family is living with a disability, then the Registered Disability Savings Plan (RDSP) can be an excellent way to save, tax-deferred, for the future as well as potentially collect up to $90,000 in government grants and bonds. And, favourable changes to the RDSP announced in last month’s federal budget means that should the effects of your disability improve such that you’re no longer eligible to claim the disability tax credit (DTC), you no longer have to close your RDSP and you can potentially keep any government funds contributed to date. Before reviewing the recent changes, however, let’s go over the basics of the plan.
Launched in 2008, the RDSP is a tax-deferred registered savings plan open to Canadians eligible for the DTC. Up to $200,000 can be invested in the plan and while contributions are not tax-deductible, all earnings and growth accrue tax-deferred until withdrawn from the plan.
The main allure of the more well-known registered plans, such as the RRSP, RRIF or TFSA, is the ability to earn tax-deferred or tax-free investment income. While this holds true for the RDSP, its main advantage is the ability to supplement the plan with matching government funds: the Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs), both potentially available for RDSP beneficiaries age 49 and under.
CDSGs and CDSBs are based on “family” income, which includes income of the beneficiary’s parents if the RDSP beneficiary is under 19. Once the beneficiary reaches age 19, it’s the beneficiary’s own family income that is used to determine the amount of government assistance.
When family income is below $95,259 in 2019, CDSGs are equal to 300 per cent of the first $500 of annual contributions and 200 per cent 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 that amount, the CDSG is simply 100 per cent on the first $1,000 of annual contributions.
Families who have income below $31,120 can also receive CDSBs of $1,000 annually, up to a lifetime maximum of $20,000. The $1,000 CDSB is then phased out gradually as income increases above this amount until it’s fully eliminated once family income reaches $47,630. 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.
Beneficiary ceases to be eligible for DTC
Under the current rules, when the beneficiary of an RDSP ceases to be eligible for the DTC, no further contributions may be made to RDSPs and no CDSGs or CDSBs can be paid into the plan. In addition, the tax rules generally require that the RDSP be closed by the end of the year following the first full year throughout which the beneficiary is no longer eligible for the DTC. Currently, there is one limited exception: if a medical practitioner certifies that a beneficiary is likely to be eligible for the DTC in the foreseeable future, an election can be made to keep the RDSP open for five years.
The RDSP issuer is required to set aside an amount (known as the “assistance holdback amount”) equal to the CDSGs and CDSBs paid into the RDSP in the preceding ten years. This requirement ensures that RDSP funds are available to meet potential repayment obligations. When the RDSP is closed, the assistance holdback amount must be repaid to the government, with any remaining assets going to the RDSP beneficiary.
Pretty much since the launch of the plan over a decade ago, individuals with disabilities, their families and other advocates have raised concerns about the need to close an RDSP and pay back the CDSGs and CDSBs upon loss of DTC eligibility as it did “not appropriately recognize the period of severe and prolonged disability experienced by an RDSP beneficiary.”
The new rules
The government has finally addressed these concerns in last month’s 2019 federal budget when it announced that RDSPs can continue to remain open even if the beneficiary becomes ineligible for the DTC (although contributions will not be permitted and further CDSGs and CDSBs will not be available).
For years throughout which the beneficiary is ineligible for the DTC and that are prior to the year in which the beneficiary turns 51, the assistance holdback amount rules apply and any RDSP withdrawals may prompt the repayment of grants and bonds. Once the beneficiary turns 51, however, the assistance holdback amount will be gradually reduced over 10 years, based on the CDSGs and CDSBs paid into the RDSP during a reference period. For example, for the year in which the beneficiary turns 51, the reference period will be the nine-year period immediately prior to the beneficiary becoming ineligible for the DTC. The assistance holdback amount will therefore be equal to the amount of grants and bonds paid into the RDSP in those nine years, less any repayments of those amounts.
If a beneficiary regains eligibility for the DTC, the regular RDSP rules will apply beginning in the year in which the beneficiary is once again eligible for the DTC. This means that contributions will again be permitted to the RDSP and new CDSGs and CDSBs can be paid into the RDSP.
These new rules will generally apply beginning in 2021 but, as of the budget date, RDSP issuers are no longer required to close an RDSP solely because an RDSP beneficiary is no longer eligible for the DTC.
Finally, the budget also contained another positive change to the RDSP rules. Under current rules, unlike RRSPs, amounts held in RDSPs are not exempt from seizure by creditors in bankruptcy. The budget announced the government’s intention to exempt RDSPs from seizure in bankruptcy, other than contributions made in the 12 months before a bankruptcy filing.