REGISTERED DISABILTY SAVINGS PLAN

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Peter Merrick

The registered disability savings plan (RDSP) is a viable program to assist clients and their family members in need. If you don’t know much about the RDSP option fortunately it is not too late to learn about it and help your clients who will benefit from it to act now. The Canadian government has extended the 2008 RDSP contribution deadline to March 2nd, 2009.

Parents across Canada each day ask themselves “what will happen to my child with special needs when I am gone?” These Families save to ensure for the long-term financial security of a child with a severe disability.

The most critical consideration for parents and grandparents of a child with a severe disability is how to best ensure that a child’s financial security when they are no longer alive to provide support.

The first RDSP were registered in 2008, unfortunately very few financial institutions invested in creating the platforms for offering these programs, unlike the efforts that most financial firms took to capitalize on the new Tax Free Savings Account (TFSAs) frenzy. Fortunately for 2009, 11 financial organizations across Canada have taken the lead and are now approved to offer RDSPs.

The RDSP is a federal plan where contributions will not be tax deductible, but will have both modest and major matching contributions by the federal government. It will only be available to families whose child qualifies for the ‘disability tax credit’ or disability amount in the Income Tax Act. The child must be approved by Canada Revenue Agency (CRA) as being ‘markedly restricted’ in the activities of daily living in one or more of several ways.

This plan, which is very similar to the already established RESP, (Registered Education Savings Plan), will allow contributions to the RDSP by family and friends of a person with marked disabilities. These contributions will not be tax deductible by the contributor, but the investment earnings in the plan will be tax deferred until withdrawal.

The lifetime RDSP contributions will have a limit of $200,000.

The RDSP will allow a lump sum contribution. However, the disadvantage of a lump sum contribution will be that it will not have the advantage of the government contribution associated with other dollar contributions except in the single year of settlement.

Capital contributions withdrawn from the RDSP will not be taxed, as the tax has already been paid on these sums. Accumulated investment income, will be taxable in the hands of the beneficiary, as they are withdrawn. Properly planned, this will result in not just deferral of taxes but also non-taxation, due to the use of the personal exemption and disability tax credits available to the person with the disability

For each RDSP that is established a Canadian Disability Savings Grant (CDSG) will be paid until the end of the year in which the beneficiary turns 49. There will be a maximum lifetime CDSG limit of $70,000. The family income ranges and corresponding federal contributions will be indexed to 2008 when the RDSP begins.

Example:

Family Net Income and contributions compared to annual CDS grants:

Ottawa will also provide a modest Canada Disability Bond, much like the RESP Canada Learning Bond, for very low income households.

Monies can be contributed to the RDSP until the end of the year in which the beneficiary turns 59. Payments must begin when the beneficiary turns 60. There will be limitations on how much can be removed each year, which will significantly hamper using the funds for larger necessary purchases such as homes or accessible vans.

Present information is the annual maximum withdrawal limit will be based on the recipient’s life expectancy, and the fair market value of the RDSP.

To ensure that RDSP payments do not reduce federal income-tested benefits, amounts paid out of an RDSP will not be taken into account for the purpose of calculating income-tested benefits delivered through the income tax system, such as the Canada Child Tax benefit and the goods and services tax credit. In addition amounts paid out of RDSP will not reduce Old Age Security or Employment Insurance benefits.

In provinces like Ontario, the provincial government is making it possible for social assistance recipients to take advantage of Registered Disability Savings Plans (RDSPs). Ontario has made changes to its social assistance rules meaning that both RDSP assets and withdrawals are fully exempt from counting as assets or income. Thus the RDSP will not impact these recipients’ social assistance payments.