For Canadians with disabilities and their families, financial security can be a pressing concern. The Registered Disability Savings Plan (RDSP) is a powerful tool designed to help individuals with disabilities save for their long-term financial needs. In this article, we’ll dive into what the RDSP is, how to qualify, the benefits it offers, the government grants and bonds available, and some considerations when using this plan.
What is an RDSP?
The RDSP is a savings plan introduced by the Canadian government in 2008 to help individuals with disabilities and their families save for the future. It offers tax-deferred growth and significant government contributions in the form of grants and bonds.
Unlike RRSPs, contributions to an RDSP are not tax-deductible. However, the investment income and government contributions are tax deferred, meaning they grow tax-free until withdrawn. When withdrawn, only the amount over and above the amount contributed will be included as income and taxable.
Who Can Open and Qualify for an RDSP?
To qualify for an RDSP, the beneficiary must:
Be a Canadian resident.
Be under the age of 60 (contributions are only allowed until age 59).
Have a valid Social Insurance Number (SIN).
Be eligible for the Disability Tax Credit (DTC). Click here to find out if you, or your family member, are eligible.
The beneficiary can be the account holder, or someone else can open the plan on their behalf and contribute to it (such as a parent or legal guardian). A beneficiary can only have one RDSP at any given time, although this RDSP can have several plan holders throughout its existence, and it can have more than one plan holder at any given time.
Key Benefits of an RDSP
Contribution Limit: The overall lifetime limit for a particular beneficiary is $200,000 with no annual limit.
Tax-Deferred Growth: Investment income earned within the RDSP grows tax-free.
Government Contributions: Eligible beneficiaries can receive generous government grants and bonds, which can significantly boost savings.
Long-Term Security: RDSPs encourage saving for long-term needs, with funds often used to support individuals in their later years.
Rollovers: The RDSP rules allow for a rollover of a deceased individual’s RRSP proceeds to an RDSP of the deceased individual’s financially dependent child or grandchild. Please note this amount would count towards the lifetime maximum of $200,000 and grants will not be paid on amounts that are rolled over.
Government Grants and Bonds
Canada Disability Savings Grant (CDSG)
The CDSG is a matching grant that the Government of Canada pays into a RDSP at a rate of 300%, 200%, or 100%, depending on the beneficiary’s adjusted family net income and the amount contributed. The grant is paid up until December 31 of the year the beneficiary turns 49. The maximum yearly grant amount is $3,500, with a lifetime limit of $70,000.
CRA uses the family income reported on your tax returns from 2 years before. For example, the amounts of grant and bond you are eligible for in 2024 are based on the family income reported on your 2022 tax return. The family income thresholds that determine your matching grant rate are indexed annually by the CRA, so they change slightly every year. For the 2024 calendar year, if your family income (the family income that was reported on your 2022 income tax return) is:
Equal to, or less than, $111,733 - maximum annual grant $3,500
If you contribute up to $500, the government will deposit $3 for every $1 you contribute (300%). Therefore the grant would be $1,500.
If you contribute up to $1,000 more to your plan, the government will deposit $2 for every $1 you contribute (200%). Therefore there would be an additional grant of $2,000
To get the maximum amount of grant you are eligible to receive for the year, you need to contribute $1,500 in the year, which results in a total grant of $3,500.
Greater than $111,733 - maximum annual grant $1,000
If you contribute up to $1,000 each year to the RDSP, the government will deposit $1 for every $1 you contribute (100%).
To get the maximum amount of grant you are eligible to receive for the year, you need to contribute at least $1,000 in the year.
Canada Disability Savings Bond (CDSB)
For low-income families, the government contributes up to $1,000 annually without requiring any personal contributions. Families with incomes below $34,863 (2024 threshold) receive the full $1,000; a partial bond is available for incomes up to $53,359.
To qualify for the bond or to earn a grant, the beneficiary must file income tax and benefit returns for the past two years and all future taxation years when they have an RDSP.
For a beneficiary under the age of 18, their grant and bond amounts are calculated using the combined income of their parents or guardians from filed income tax returns. To continue receiving the correct amount of grants and bonds in the year they turn 19 and for every year after that, the beneficiary must start filing personal income tax returns, every year beginning in the year they turn 17.
Before the end of the year you turn 49 years of age, you can carry forward up to 10 years of unused grant and bond entitlements to future years, as long as you met the eligibility requirements during the carry-forward years (for example, if you were approved for the disability tax credit and you were a Canadian resident).
Maximizing the RDSP: An Example
Let’s assume a family contributes $1,500 annually for 20 years, and the beneficiary qualifies for the maximum CDSG.
Annual Contribution: $1,500
Annual Grant (CDSG): $3,500
Total Annual Addition: $5,000
Over 20 years, with no additional growth, the account would accumulate $100,000 in contributions and grants alone. If invested at a modest 5% annual return, the RDSP could grow to over $200,000 by year 20.
Payments from an RDSP
There are three types of payments made from an RDSP:
Disability Assistance Payments (DAP), including:
Single disability assistance payments (lump sum DAPs)
A DAP is any payment from an RDSP to the beneficiary, or to their estate after their death. DAPs may consist of contributions, grants, bonds, proceeds from rollovers and income earned in the plan. Only the beneficiary or the beneficiary’s estate will be permitted to receive DAPs from the RDSP.
Lifetime disability assistance payments (LDAPs)
LDAPs are disability assistance payments (DAPs) that, once started, must be paid at least annually until either the plan is terminated or the beneficiary has died. These payments must begin by the end of the year in which the beneficiary turns 60 and, unless the year is a specified year, are subject to an annual withdrawal limit determined by the formula described below.
Direct transfers to another RDSP for the same beneficiary
Repayments under the Canada Disability Savings Act (CDSA) or designated provincial program
Considerations and Potential Downsides
Repayment Rules: If the RDSP is closed, the beneficiary dies, or if the beneficiary becomes ineligible for the Disability Tax Credit, government grants and bonds received in the previous 10 years may need to be repaid.
Withdrawal Restrictions: Withdrawals are subject to specific rules, including proportionate repayment of government contributions if withdrawals are made before 10 years after the last grant or bond.
Impact on Other Benefits: In most provinces, RDSP withdrawals do not affect federal or provincial income-tested benefits like GIS or provincial disability assistance. Still, beneficiaries should confirm local rules.
How to Administer an RDSP
Open the Account: Choose a financial institution offering RDSPs and complete the application. You’ll need the beneficiary’s SIN and proof of DTC eligibility.
Make Contributions: Contribute up to a lifetime maximum of $200,000. Contributions can be made by the beneficiary, their family, or other supporters.
Apply for Grants and Bonds: Ensure your financial institution submits the necessary forms to Service Canada.
Monitor and Invest: Work with your financial planner to select investment options aligned with your long-term goals and risk tolerance.
Plan Withdrawals Carefully: Work within the rules to maximize the benefits and avoid penalties.
Conclusion
The RDSP is a game-changing savings vehicle for Canadians with disabilities, offering unmatched opportunities for financial growth through government grants and tax-deferred growth. By understanding how to qualify, maximize contributions, and navigate the rules, you can build a secure financial future for yourself or your loved ones.
If you’re interested in setting up an RDSP or have questions about disability-related financial planning, please book a complementary consultation here.