A registered disability savings plan (RDSP) is a savings plan that is intended to help parents and others save for the long-term financial security of a person who is eligible for the Disability Tax Credit.
Contributions to an RDSP are not tax deductible and can be made until the end of the year in which the beneficiary turns 59 years of age. Contributions that are withdrawn are not to be included as income for the beneficiary when paid out of a RDSP. However, the Canada disability savings grant, Canada disability savings bond and investment income earned in the plan will be included in the beneficiary’s income for tax purposes when paid out of the RDSP.
A beneficiary can have only one RDSP at any given time, although this RDSP may have several plan holders throughout its existence, and it can have more than one plan holder at any given time. The plan holder is the person who establishes the RDSP and makes contributions on behalf of the beneficiary. Additional information on RDSP's can be found here.
Any person can be a beneficiary if he/she
is eligible for the Disability Tax Credit;
has a valid Social Insurance Number (SIN);
is a resident in Canada and at the time the plan is entered into;
is under the age of 60. This age limit is not applicable when a beneficiary’s RDSP is opened as a result of a transfer from the beneficiary’s prior RDSP.
Anyone can contribute to an RDSP with the written permission of the plan holder.
There is no annual limit on amounts that can be contributed to an RDSP of a particular beneficiary. However, there is an overall lifetime limit for a particular beneficiary. Contributions are permitted until the end of the year in which the beneficiary turns 59 years of age. For more details on contribution limits click here.
The Government of Canada will pay matching grants depending on the beneficiary’s family income and the amount contributed. There is a maximum amount of matching grants in one year as well as over the beneficiary’s lifetime. A grant can be paid into an RDSP on contributions made to the beneficiary’s RDSP up to December 31st of the year the beneficiary turns 49 years old. For more details on grant amounts and limits click here.
The government will pay income-tested bonds to low-income Canadians with disabilities, regardless of the amount contributed. There is also a lifetime bond limit. A bond can be paid into an RDSP until the year in which the beneficiary turns 49 years old. For more details on bond amounts and limits click here.
All grants and bonds paid into the plan in the ten years preceding one of the following events, must be repaid to the Government of Canada;
the RDSP is terminated (voluntary closure);
the plan is deregistered;
a disability assistance payment is made from the plan;
the beneficiary ceases to be eligible for the disability amount; or
the beneficiary dies.
A beneficiary can open an RDSP and become a holder of the plan.
If the beneficiary is a minor, another person will be qualified to open an RDSP for the minor and become a holder if that person is:
a legal parent of the beneficiary;
a guardian, tutor, or curator of the beneficiary, or an individual who is legally authorized to act for the beneficiary; or
a public department, agency, or institution that is legally authorized to act for the beneficiary.
When a plan is opened by a beneficiary’s legal parent(s), the legal parent(s) may continue as holder(s) of the plan after the beneficiary reaches the age of majority. When the beneficiary becomes an adult, the beneficiary may be added to the RDSP as a joint holder if they so wish. In all other cases, the beneficiary is the only one qualified to be a holder of the plan once they have reached the age of majority and are contractually competent. If a plan is opened by somebody other than the beneficiary or the beneficiary’s legal parent(s), that person or body must be removed as a holder of the plan when the beneficiary reaches the age of majority.
Similarly, an individual who is eligible to be a beneficiary of an RDSP (but for whom a plan has not been established) may have reached the age of majority but not be competent to enter into a contract. If so, another person may open an RDSP for the beneficiary and become a holder. These qualified persons are:
A legal parent may open a plan for a beneficiary who has reached the age of majority and is not contractually competent only when the plan is opened as a result of a transfer from another RDSP under which they are named as a holder. Also a legal parent of a beneficiary, who has reached the age of majority and is not contractually competent, can open a plan for the beneficiary provided the legal parent is legally authorized to act on behalf of the beneficiary.
A holder who is not the beneficiary of the plan does not have to be a resident of Canada but must have a valid Social Insurance Number or Business Number (for public institutions, departments and agencies) in order to establish the plan.
If the guardian, tutor, or public department ceases to be a holder because they are no longer qualified (for example the beneficiary’s guardian ceases to be their legal guardian or have died) they must be removed from the plan as holder. In such a case, the following may be added to the plan as successor or assignee of a holder:
the beneficiary’s estate;
an entity of the plan who is already a holder. For example, two legal parents enter into an RDSP contract together and one parent passes away. The other parent would receive the deceased parent’s rights and become the sole holder of the plan;
an entity who is qualified to be a holder; or
a legal parent of the beneficiary who had previously been a holder of the plan.
If the beneficiary is no longer eligible for the Disability Tax Credit, no contributions can be made to the plan unless the contribution is a specified RDSP payment in respect of the beneficiary. The plan remains open unless the holder requests to close the plan. A beneficiary who stops being eligible for the DTC might, due to the nature of their medical condition be eligible for the DTC for some later year.
If the beneficiary of an RDSP dies, the RDSP must be closed no later than the end of the calendar year following the year of the beneficiary’s death. Any funds remaining in the RDSP, after any required repayment of government bonds and grants, will be paid to estate. The RDSP must be closed and all amounts paid out of the plan by the end of the calendar year following the year in which the beneficiary dies. If a disability assistance payment (DAP) had been made and the beneficiary is deceased, the taxable portion of the DAP must be included in the income of the beneficiary’s estate in the year the payment is made.
Robin Muir, CFP®, CLU®, CH.F.C.