Opening a Registered Disability Savings Plan should be a priority for the disabled

Until recently, disabled taxpayers did not receive much help from the government when it came to putting away some savings. Since the amount that can be contributed to RRSPs is based on earned income, disabled taxpayers could only take advantage of RRSPs if they were working. And Registered Education Savings Plans, which provide parents with a vehicle for saving for their children’s post-secondary education, cannot be used for any other purpose.

All this changed in 2008 with the introduction of Registered Disability Savings Plans (RDSPs). The only eligibility requirement for opening a RDSP is that the beneficiary of the plan must qualify for the disability tax credit. Unlike RRSPs, contributions to RDSPs are not deductible. However, income earned in the plan is not taxed until it is withdrawn. Family members, friends or beneficiaries can contribute to the plan up until the year in which the beneficiary turns 59. The maximum amount that may be contributed over the lifetime of the DPSP is $200,000. Withdrawals must begin in the year in which the beneficiary turns 60.

An especially attractive feature of the plan is that the government will also make contributions in the form of Canada Disability Savings Grants (CDSGs). The amount it pays will be based on the family’s net income (or, if the disabled beneficiary is 19 or over, the beneficiary’s income). If net income is less than $83,088, it will pay $3 for every $1 of the first $500 contributed and $2 for every $1 of the next $1,000 contributed. For families with net income of $83,088 or more, it will pay $1 for every $1 contributed, to a maximum of $1,000.

Families with income less than $83,088 which contribute $1,500 in any one year will therefore receive $3,500 in grants to the plan. Grants are paid until December 31 of the year the beneficiary turns 49, to a lifetime maximum of $70,000. Once the beneficiary reaches 60 and starts making withdrawals from the plan, the portion relating to the grants will be included in income.

For families with net income less than $24,183, the government will also contribute a $1,000 Canada Disability Savings Bond (CDSB), even if no one contributes anything to the plan. Families with net income between $24,183 and $41,544 will receive a partial bond. The government will pay a lifetime maximum of $20,000 in CDSBs.

If you are kicking yourself for not having opened an RDSP already, you can relax. Prior to 2011, RDSP beneficiaries were unable to carry forward any unused entitlements to future years. However, the government will now allow a 10-year carry forward of CDSG and CDSB entitlements arising in 2008 and subsequent years. Taxpayers who qualify for the full CDSG entitlement may therefore open a plan now and receive $17,500 by contributing $1,500 for each of 2008, 2009, 2010, 2011 and 2012. Taxpayers who qualify for the $1,000 bond will receive $5,000 just by opening an RDSP. You do not often see deals like this.

In order to make sure all this money stays in the RDSP where it belongs, any withdrawal will trigger a repayment of all CDSGs and CDSBs received in the preceding 10 years. However, effective for 2011, an exception has been made to this rule for taxpayers with life expectancies of five years or less. The maximum they can withdraw per year without triggering a repayment will be $10,000 in taxable plan savings, plus a pro-rated amount of plan contributions.

RDSPs are available at participating financial institutions. If you have reached the age of majority and qualify for the disability tax credit, you can open an RDSP yourself. In the case of minors, the plan must be opened by the legal parent or guardian or by an individual or public agency legally authorized to act for the minor.

Peter Coles
Tax research guru with 25 years of experience