What is a Registered Disability Savings Plan (RDSP)
A registered disability savings plan (RDSP) is a savings plan designed to help individuals who qualify for the disability tax credit save money towards providing an income during their lifetime.
Who Qualifies for Register Disability Savings Plan?
To qualify to open an RDSP, the individual who will be the beneficiary of the account must meet the following criteria;
- Have a valid social insurance number
- Is eligible to receive a disability tax credit
- Is a resident of Canada when the plan is opened
- Is under the age of 60
If you do not qualify for a disability tax credit, you will be unable to qualify as a beneficiary to benefit from the plan.
What is Required to Qualify for Disability Tax Credit?
To be eligible for a disability tax credit, a medical practitioner must certify that you have a severe and prolonged impairment or receive therapy to support a vital function. Your severe and prolonged impairment can be in 1 of the categories below or have a significant limitation in 2 or more categories. CRA will also require you to confirm your eligibility status on Form T2201.
Categories of disability tax credit eligibility
- Walking
- Mental functions
- Dressing
- Feeding
- Elimination (bowel or bladder function)
- Hearing
- Speaking
- Vision
- Life-sustaining therapy
If you do not meet the criteria in one of these categories, you can see if you may meet them if you have a combined disability in two or more areas.
How to open a Registered Disability Savings Plan?
Who can open a registered disability savings plan depends on if the beneficiary is of the age of majority or not, along with their contractual competency to enter into a contractual agreement.
Who Can Open a Registered disability if the beneficiary is a minor?
If the beneficiary of a registered savings plan is a minor (not the age of majority), then the plan can be opened by;
- Legal parent of the beneficiary for who the disability savings plan is being opened for
- A guardian, tutor, curator of the beneficiary, or another individual who is legally authorized to act for the beneficiary
- A public department, agency or institution that is legally authorized to act for the beneficiary
If the beneficiary is of legal age and legally competent to open a plan
- If the beneficiary is of the age of majority and there are no issues or doubt around their contractual competence, they can open the registered disability savings plan.
If the beneficiary is of legal age, but their ability to enter into a contractual agreement is in doubt.
- A qualifying family member may open an RDSP for a qualified beneficiary if they are of legal age, but their contractual competency is in question.
If the beneficiary is of legal age but is not contractually competent
- A qualified person that is legally authorized to act for the beneficiary in their jurisdiction may open an RDSP for the individual and would become the holder of the account.
An RDSP can be opened by a qualified holder of the plan with a financial institution that offers RDSP, which is referred to as the issuer.
How Much Can You Contribute to a Registered Disability Savings Plan?
The lifetime contribution limit to a registered disability savings plan is $200,000. Contribution to the program is allowed until the year the beneficiary turns 59. Unlike an RRSP, the contributions made to a registered disability savings plan are not tax deductible. Therefore, withdrawn contributions are not included as income to the beneficiary when paid out of the plan. Anyone can contribute to a registered disability savings plan if they have written permission from the plan holder.
What are the Benefits of a Registered Disability Savings Plan?
A registered disability savings plan enables the beneficiary to access grants from the Government of Canada. Those grants amount to $70,000 over a beneficiary’s lifetime e with a maximum yearly matching grant of $3,500.
These additional grants and the contributions paid into the account can grow tax-free on a deferred basis. The beneficiary is only taxed on the money when they pull the funds out at their marginal tax rate. This allows families or parents to save money for their loved ones who might not be able to fully provide for themselves due to their disability.
The plan provides them with a savings plan to grow their savings over their lifetime while accessing additional grants from the government, further enhancing their investment returns and the overall value of their savings.
What is a Specified Disability Savings Plan (SDSP)?
Beneficiaries with a shortened life expectancy may qualify for a specified disability savings plan, which provides them with greater flexibility to access the savings from their RDSP. A specified plan also has the additional benefit of not triggering the repayment of grants if withdrawals made do not exceed $10,000.
You may qualify for an RRSP rollover upon death into an RDSP. Suppose the beneficiary qualifies for a disability tax credit and is the child or the grandchild of the deceased holder of the RRSP and is financially dependent on the deceased for support. In that case, it’s possible for the decreased to rollover their RRSP value over to the RDSP, assuming they have elected to name the RDSP beneficiary as their RRSP beneficiary.
The maximum rollover allowed into an RDSP is $200,000.
What Happens to an RDSP upon Death of the Beneficiary?
If a beneficiary of an RDSP dies, the RDSP must be closed with the remaining proceeds paid out to the beneficiary’s estate by December 31st the following calendar year after the beneficiary’s death.
Furthermore, suppose if, for any reason during the plan’s lifetime, the beneficiary no longer qualifies for the disability tax credit. In that case, no contributions can be made to the plan unless it’s a specified RDSP payment.
Do Registered Disability Savings Plan Grants have to be Paid Back?
All government grants and bonds will have to be paid back if any of the following occurs during the proceeding ten years;
- RDSP is terminated or closed
- Plan ceases to be an RDSP
- The beneficiary dies
How to Withdrawal Money from a Registered Disability Savings Plan
There are two methods of withdrawing payments from an RDSP; disability assistance payment (DAPs) and lifetime disability assistance payment (LDAPS).
A disability assistance payment (DAP) is any payment made to the beneficiary from the RDSP. You can also use a DAP to make payment to the beneficiary estate upon their death. The payment is a combination of contributions, government grants, and income earned on the investment, and it’s usually a singular payment that can be made at any time.
A lifetime disability assistance payment (LDAPs) are actual DAP payments that, once started, must be paid annually until the plan is terminated or the beneficiary has died. LDAP payment must begin when the beneficiary turns 60.
If the beneficiary requires a one-time payment, then they will make a DAP payment, and if they wish to start an ongoing withdrawal that’s regularly received, they will be doing LDAPs.
A registered disability savings plan can be a valuable tool to help provide for loved ones when you are no longer around to assist them. The government grants and bonds provided makes this program a must for anyone who qualifies for it.
Responses