When looking at the RDSP we have found it helpful to compare it to the Registered Retirement Savings Plan (RRSP) and Registered Education Savings Plan (RESP). As the RRSP and RESP have been around for a long time, people can relate a lot more easily to the RDSP when we examine the incentives, treatment of income, and withdrawals from all three.
I think the first question that most people ask when looking at the RDSP is: what is the incentive to contribute into the RDSP other than helping your family member or friend with a disability? I think the RRSP is the main reason this question pops up so often and has conditioned us to look for a return on this type of plan. So what are the incentives for all three plans?
With the RRSP the incentive is a tax deduction. If you contribute into an RRSP you receive a tax deduction from the government based on the value of the contribution and depending on your income. As you pay more tax on higher incomes, the more income you have the larger your tax deduction.
With the RESP the Canadian Government provides incentive to contribute into the plan through the Canada Education Savings Grant. The CESG will contribute up to $200 on the first $500 you save annually in your child’s RESP, and up to $400 on the next $2,000. Unlike the RRSP, the RESP does not provide a tax deduction.
The RDSP is very much like the RESP in terms of incentives as it provides the Canada Disability Savings Grant that matches contributions into the plan. For someone with an income below or equal to $74,357 they can leverage $1500 for the first $500 contributed into the plan, and $2000 for the next $1000, up to $70,000 over 20 years. For someone with an income above $74,357 they can receive a matching grant of $1000 on the first $1000 contributed, up to a maximum of $20,000 over 20 years.
The similarity of the plans also extends to the treatment of income within each plan. When individuals receive contributions into the plan, those funds then become “sheltered” from any taxation while they are in the plan. This means that for the RRSP, RESP, and RDSP, you can receive contributions into the plans but will only be taxed on withdrawals.
Another difference between the plans is the withdrawals. With the RRSP, withdrawals made from the plan are fully taxable, but the expectation is that you will be older and therefore in a lower tax bracket. With the RESP and RDSP withdrawals made from the plan are only partly taxable. In the case of the RDSP, this means that the portion of the plan that is made up of contributions is non-taxable, but the portion of the plan which is grant and/or bond, and income is taxable. The important thing to remember in the case of the RDSP is that it will be taxed in the hands of the beneficiary, and therefore more likely to receive significantly lower taxation.