—By Gail Bebee—
Lost in the maelstrom of federal budget coverage about raising the Old Age Security qualifying age to 67 were several important changes to Canada’s Registered Disability Savings Plan (RDSP). Many Canadians are not familiar with this program which helps Canadians with disabilities and their families save money to provide for the long-term financial security of disabled individuals.
RDSPs were introduced in the 2007 federal budget. Operational details took time to sort out and participating financial institutions (issuers in RDSP terminology) only began offering RDSPs in late 2008.
The basic concept is simple. A disabled person, her parents or guardian or legal representative chooses an issuer and arranges to open a special RDSP savings account with the disabled individual designated as the beneficiary. For purposes of the RDSP, a disabled individual is a person who is eligible for the disability tax credit, has a valid social insurance number and is a resident in Canada when the plan is opened. The beneficiary can have only one RDSP at any given time.
The person who opens the plan, termed the plan holder, manages the finances associated with the RDSP account – contributions, investment decisions and withdrawals. Contributions can be made until the end of the year the beneficiary turns 59. The lifetime maximum contribution is $200,000.
The federal government contributes additional funds annually to the RDSP of beneficiaries age 49 and under. A Canada Disability Savings Bond of up to $1,000 (lifetime maximum $20,000) is provided to families with low to modest annual incomes. A Canada Disability Saving Grant is also available for up to 300% of the plan holder’s contribution, depending upon the beneficiary’s family income. The maximum for this grant is $3,500 per year with a lifetime maximum of $70,000.
Contributions to an RDSP are not tax deductible and are not taxed when withdrawn. Any profits earned inside the RDSP and the aforementioned bonds and grants are only taxed on withdrawal and are included in the beneficiary’s income.
The RDSP changes proposed in the March budget reflect the government`s program review and stakeholder consultations, after three years of actual plan operation:
- Some adults with disabilities had difficulty opening an RDSP account because their contractual capacity was in doubt, and they did not have a legal representative to act as the plan holder. The changes will allow a qualifying family member (spouse, common-law partner, or parent) to open up an RDSP for such individuals.
- The original rules stated that if a beneficiary made a withdrawal, any Canada Disability Savings Grants and Canada Disability Savings Bonds received in the preceding ten years had to be paid back. This is clearly unfair for smaller withdrawals. The new rules provide for proportional repayment based on the size of a withdrawal.
- After 2013, the government will allow a tax-free rollover of registered education savings plan investment income into an RDSP if the beneficiary is the same for both plans and certain other conditions apply.
- For 2014 and beyond, there will be required minimum annual withdrawals once a beneficiary turns 60. Maximum annual withdrawals will be increased.
- New rules will reduce the administrative burden and provide more flexibility for terminating an RDSP if a beneficiary is no longer eligible for the disability tax credit but may re-qualify in the foreseeable future.
A Registered Disability Savings Plan is an effective way to provide for the future financial security of disabled individuals. If you think an RDSP could help your family, visit the Human Resources and Skills Development Canada website for complete program details.
Gail Bebee is the author of No Hype-The Straight Goods on Investing Your Money. Visit www.gailbebee.com