One of the more interesting proposals from the 2007 federal budget may have escaped detailed analysis by many commentators…until now. For younger taxpayers qualifying for the Disability Tax Credit (“DTC”), the new Registered Disability Savings Plan (“RDSP”) should be considered as an important part of a financial plan.
In 1986, an expert panel produced a report to the Minister of Finance outlining its recommendations for a savings plan designed in a similar manner to the Registered Education Savings Plan, that would assist families in providing long term financial security for severely disabled children. The result was the introduction of the RDSP, which came into existence in 2008.
The plan is available to taxpayers under the age of 60 years who are eligible for the DTC. A plan is set up by its “Director” – generally the parent or guardian of a minor child. A competent adult would be the Director of his own plan.
Contributions and Government Grants
Like an RESP, contributions to the plan are not tax deductible, but income accruing is not taxed. Contributions can only be made by the plan’s Director, and there is a lifetime contribution limit of $200,000.
When a contribution is made to a plan, the government will pay a Canada Disability Savings Grant (“CDSG”) equal to a specified percentage into the plan to augment the contributions. The amount of the CDSG depends on the family income of the Director and is limited to a lifetime total of $70,000.
For families with net income equal to or less than $74,357, the government will provide:
- $3 for every $1 on the first $500 of contributions; and
- $2 for every $1 on the next $1,000 of contributions.
For families with net income over $74,357:
- $1 for every $1 on the first $1,000 of contributions.
A further amount of $1,000, called a Canada Disability Savings Bond (“CDSB”) is paid where family income is below $20,883, and is gradually decreased until such income reaches $37,178.
The income thresholds are to be indexed and apply to the family income of the parents where a minor child is the beneficiary, and to the beneficiary and his spouse in any other case.
The CDSG’s and CDSB’s are available only until the end of the year in which beneficiary turns 49 years of age.
The provisions are intended to promote long-term savings for young people who are disabled. As such, there is a fairly strict rule that provides for the repayment of all grants/bonds paid into the plan in the ten years prior to one of the following events:
- A withdrawal from the plan;
- The death of the beneficiary; or
- The beneficiary is no longer DTC eligible
Payments from the plan must begin at age 60. Payments received will be made up of a repayment of capital (non-taxable) and a combination of income earned, CDSG’s and CDSB’s, which are taxed in the hands of the beneficiary.
Payments out of the plan are limited to a maximum annual amount based on the life expectancy of the beneficiary.