—By Darren Klorfine—

The 2012 Federal Budget announced changes to the Registered Disability Savings Plan (RDSP) as a result of the government’s three-year review of the program. While all of the changes are welcome improvements in how the plan operates, the budget falls short in ironing out some of the RDSP’s major flaws.

broken savings

In my October 2011 RDSP submission to the minister of finance, I made three recommendations to clean up the parts of the program that left me scratching my head when the plan was introduced back in 2008. One of these recommendations has been addressed, at least in part, while the rest have been ignored.

Collapsing An RDSP

Funds in the plan need to be held for 10 years in order to keep the government’s generous grants and bonds, which are the highlight of the overall program. This is designed to maintain the plan as a savings vehicle and avoid a quick cash grab by participants. However, if a participant recovers from the disability and, as a result, fails to re-qualify for the Disability Tax Credit (DTC), this would force closure of the plan and all grants and bonds not held for 10 years would be lost. This is a harsh penalty for those with episodic disabilities that can go into remission. They could end up becoming disabled again, but never get back those grants and bonds.

The good news is that the budget addresses this point by extending the period that the plan remains open after failure to re-qualify for the DTC. In order to extend the period, the disabled participant must have their medical practitioner certify that the condition could likely return in the near future. This is yet another administrative carnival for participants to maneuver through. After the joy of learning you (or your loved one) has gone into remission from a severe disability, you need your doctor to state that it will likely come back. Financially, you will need your doctor to say that, but from a well-being point of view this is the last thing you want to hear. And what is the value in this? Which recoverable severe disability can you think of that can’t ever possibly return? How possible or likely does it need to be? We already know that the current DTC eligibility is subjective to begin with. Has Finance Canada just added another layer of subjectivity?

My recommendation to the minister would let plan participants always keep their plan open. Only new contributions would be disallowed on failure to re-qualify. Why is it so important to take grants and bonds away retroactively when they were rightfully earned during a period of disability?

Lost Grants And Bonds

Any grants and bonds not held for 10 years are lost when the participant dies. However, if an individual applies for a “shortened life expectancy” waiver while alive, withdrawals can be made without the 10-year rule penalty. However, for an individual who doesn’t apply to take advantage of the shortened life expectancy provision and subsequently dies before the 10-year vesting period, the 10-year vesting rule still applies and the funds are lost.

The timing of death is not always predictable and often families are not focused on understanding the financial pitfalls of an RDSP when a loved one’s health is failing. Clearly anyone who dies from his or her disability could have at some point in time qualified for a shortened life expectancy withdrawal if they had applied. It seems logical that on the death of any RDSP participant, the 10-year vesting rule should be waived and no grants or bonds should have to be repaid to the government.

It is a harsh reality for families to learn that such significant savings are lost this way. Canadians need to know the rules of this complex, tricky game at a time when they are very likely not up to playing. It is surprising that this wasn’t addressed in the budget.

Age Cutoff

The RDSP has the potential to be a welcome supplement to an employer’s Long-term Disability program, giving the participant additional funds to deal with the disability. But the grants and bonds are only available up to age 49 (though you can still contribute to the plan until age 60). Someone who starts an RDSP at age 25 can get 20 years of grants and bonds, while someone who starts an RDSP at age 40 would only get 10 years’ worth.

With the government cutting benefits like Old Age Security, clearly this budget was not willing to add more RDSP grants and bonds. After all, most of those eligible for the DTC are over age 49. The age cutoff is what makes this plan unattractive for employer participation. As most disabled employees would be over age 49, it currently does not make much sense for an employer to supplement a Long-term Disability program with an RDSP. Awareness of the program and participation will suffer as long as employers are not stakeholders.

Positive Improvements

The 2012 budget did provide some positive improvements to the RDSP:

  • Small withdrawals from an RDSP will now only trigger a proportionate forfeiture of the grants and bonds. Under current rules, a small withdrawal would forfeit all grants and bonds provided within the last 10 years.
  • Changes to the minimum and maximum withdrawal levels now allow for greater flexibility.
  • Investment income earned in an RESP can now be transferred to a disabled child’s RDSP on a tax-free basis.
  • Changes to the rules will help avoid administrative delays by RDSP issuers.
  • There are modifications to RDSPs to address situations where beneficiaries don’t have the capacity to enter into legal contracts.

The next three-year review is scheduled for 2014.

Darren Klorfine is an actuarial consultant with Buck Consultants, A Xerox Company.