Tax Matters: Registered Disability Savings Plan

By Michael Crawford

There are three components [parts] to the Registered Disability Savings Plan (RDSP). The first is the plan itself, the second is the Canada disability savings grant and finally the Canada disability savings bond.

An RDSP is a savings plan “...intended to help parents and others save for the long term financial security of a person who is eligible for the Disability Tax Credit...”. (For more on the disability tax credit see my article in the Jan/Feb 2010 issue.)

Generally, an RDSP at most financial institutions may be opened by the beneficiary of the plan, as long as that person is able to legally enter into contracts. In the case of a minor [child], an RDSP may be opened by a parent, guardian, any one legally authorized to act for the child, or a “...public department, agency, or institution that is legally authorized to act for the beneficiary”.

Money contributed to an RDSP is not tax deductible on the contributor’s tax return or anyone else’s, but is not included in the beneficiary’s income when withdrawn. However, like any investment income, the Canada Disability Savings Bond and Canada Disability Savings Grant are taxable in the hands of the beneficiary once withdrawn.

The Canada Disability Savings Grant is a matching grant of 100, 200 or 300 percent, based on the beneficiary's family income. Family income is determined as follows: From date of birth until December 31st of the year the beneficiary turns 18, the matching grant is based on the same information as the Canada Child Tax Benefit (CTB). In the year the beneficiary turns 19 until the RDSP is closed, income will be based on the beneficiary's income and his/her spouse as well. A maximum grant of $3,500 is possible each year, with a lifetime maximum of $70,000. Grants are only paid into the plan until the year the beneficiary turns 49. The Canada Disability Savings Bond is paid directly to an RDSP by the Government of Canada, up to a maximum of $1,000 year. It is intended for low income Canadians who are disabled. The lifetime limit of the bond is $20,000 and eligibility for the bond ends the year the beneficiary turns 49. The difference between the bond and the grant is that the bond does require any contribution by the beneficiary or the beneficiary's family. You simply open up an RDSP and make your application to the government. If the family income is $23,855 (2010) or less, the beneficiary is eligible for the full $1,000. For family income amounts between $23,855 and $40,970 (2010), the amount is based on the Canada Disability Savings Act formula (which is indexed for inflation). The Registered Disability Savings Plan was brought about by fairly recent legislation, and many accountants and financial institutions are still learning about it. Also there is much more information to be covered beyond the scope of this article. If you want to find out more, I recommend that you go to Canada Revenue Agency's website. The Income Tax Act and other related legislation are large and complex laws that frustrate even the professionals at times. This article is intended to increase your awareness of issues that affect you and encourage you to look more closely at the ones that relate directly to your situation. You are encouraged to seek professional guidance specific to your unique situation.