An incredibly useful and sometimes overlooked tool in planning for a client with a disabled loved one is the Registered Disability Savings Plan (“RDSP”). Here are a few key facts to know in discussing RDSPs with your client:
- To qualify for an RDSP, the beneficiary must be eligible for the disability tax credit (“DTC” ). A person will be eligible for the DTC only if a medical practitioner (usually the person’s doctor) certifies that the person has a “severe and prolonged impairment in physical or mental functions”. Determining whether a beneficiary qualifies for the DTC is a crucial step in the planning process, as it also determines whether a qualified disability trust can be set up for the beneficiary through the client’s Will or life insurance policy designation, which would allow the trust to be taxed at marginal rates.
- Anyone can contribute to an RDSP. The maximum lifetime contribution amount from all sources is $200,000.
- If the RDSP beneficiary is financially dependent on his or her parents, it is possible for a parent on the parent’s death to “roll over” funds from his or her RRSP or RRIF to the beneficiary’s RDSP on a tax-deferred basis.
- There are two types of payments that may be made to a beneficiary out of an RDSP: lifetime disability assistance payments (LDAP) and disability assistance payments (DAP).
- LDAPs must be paid at least annually once commenced and generally must begin by the end of the year in which the beneficiary turns 60. A formula applies to determine the maximum possible amount for a LDAP in any year. There are exceptions which allow higher amounts to be paid in certain years (e.g. if a doctor certifies that the beneficiary likely has fewer than five year left to live). The general goal of the formula is to ensure that roughly equal amounts of the RDSP are available to the beneficiary for each year of his or her life, with a life expectancy of 83 years of age.
- DAPs are non-recurring payments that may be made at any time and in any amount, but cannot reduce the value of the funds remaining in the RDSP below the “assistance holdback amount”. The assistance holdback amount is typically the total amount of government bonds and grants paid into a plan within the last 10 year period. If a DAP is paid from a plan, the assistance holdback amount generally needs to be repaid to the government. As a result, it is often preferable to avoid these payments.
- On a beneficiary’s death, the balance of the RDSP remaining will typically be paid to his or her estate as a DAP, less the assistance holdback amount which will be returned to the government.
- As with an RRSP, income accrues in an RDSP on a tax-deferred basis and is taxed when withdrawn by the beneficiary. Withdrawals and generally partly taxable and partly non-taxable. Generally, initial contributions to the RDSP are not subject to tax and government grants and income that has accrued within the RDSP are taxable. A formula is used to precisely calculate the non-taxable portion.
- The government provides matching grants and savings bonds to an RDSP, with the grant or bond amount tied to the beneficiary’s family income. A beneficiary’s family income is his or her income plus the income of his or her spouse (common law or married). These benefits are significant, with a maximum grant amount of $70,000 over a beneficiary’s lifetime and maximum bond amount of $20,000 over a beneficiary’s lifetime. To maximize these benefits, regular contributions should be made to the RDSP each year and the RDSP should be opened for the beneficiary as soon as possible. More information regarding the benefits is available here: https://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rdsp-reei/cdsg-eng.html.
In situations where parents plan to make gifts to the child of $200,000 or less, the RDSP has many benefits over a trust and will generally be a more appropriate vehicle: it is easier and less costly to administer, income accrues on a tax-deferred basis within the RDSP, the LDAP formula makes it less prone to abuse and it allows the beneficiary to receive a considerable amount in “free money” from government grants and bonds. Where parents plan to give more than $200,000 to a child, a RDSP will often complement other planning. In either case, it’s a crucial planning tool and shouldn’t be overlooked.
 The following discussion is not comprehensive.