When we think about registered accounts, we think of Registered Retirement Savings Plan, Registered Retirement Income Fund, Registered Education Savings Plan and more recently Tax Free Savings Account. However there is one other plan that 27% of Canadian are eligible for and less than 40% have one opened. That is the Registered Disability Savings Plan, introduced by the federal government in December 2008. While they may not be common place, we have certainly seen an increase in plan assets from both owner and government contributions. Since 2008, $2.6 billion has been contributed to RDSPs by account owners, bringing us to a total fair market value as of December 31, 2022 of $8.8 billion in RDSP plan assets, which represents growth in plan assets of approximately $6.3 billion since December 31, 2015. [Source: Government of Canada]

Taking a step back, we first have to understand why this plan was created, and that was to help individuals and families procure long term savings and financial security for those impacted by severe disabilities. There have always been forms of financial relief to those in need, dating back to pre 1986, when the CRA would grant a standard tax deduction for those who are visually impaired or in wheelchairs. The definition of disability has evolved over time to include those in both the physical and mental form, with the CRA continuing to introduce more taxable income benefits. In 2005, the formal definition was changed to “prolonged impairments” which created a route for more individuals to receive the Disability Tax Credit (DTC), which was originally established in 1988.

To be eligible to be a beneficiary of an RDSP, the individual must be a resident of Canada, have a valid Social Insurance Number, be less than 60 years of age and most importantly, be eligible (and approved) for the DTC. If these criteria are met, then the RDSP becomes a vital tool to help achieve long-term financial stability. It’s important to distinguish between a “beneficiary” and “account holder.” In all cases, the beneficiary is the individual with the disability. However, for those over 18 with legal capacity, they may also serve as the account holder. When the beneficiary is a minor and does not have legal capacity, a parent/guardian or other representative who is authorized to act may be the account holder. Currently (and until 2026), a parent or spouse/common-law partner and siblings can open an RDSP on behalf of a beneficiary over the age of 18 without court authorization.

Now that we’ve covered the qualifying requirements, we can get into the mechanics and benefits. Like other registered accounts, funds in the RDSP grow tax sheltered. Contributions are non-deductible and can be made by anyone, however the account owner must authorize any third party contributions. There is no annual limit, but the plan is subject to a $200,000 lifetime maximum which can be made anytime up to the end of the year in which the beneficiary turns 59. This lifetime maximum excludes government grants and bonds contributed to the plan (we will get into that shortly). Of course, if there is a year in which the beneficiary is no longer eligible for the DTC, then no contribution can be made. In the past, it was a requirement that an RDSP needed to collapsed (and pay back bonds and grants) upon loss of DTC eligibility, however this rule has such been changed so that the RDSP may remain open. Contributions can be structured in such a way to maximize government grants, or can be made as one lump sum to maximize tax sheltered investments.

Similar to an RESP, contributions to an RDSP may be eligible for federal grants and bonds. The first one we will look at is the Canada Disability Savings Grant (CDSG). A beneficiary is eligible to receive the CDSG until December 31st of the year they turn 49 up to a lifetime maximum of $70,000. The amount of the grant will be dependent on net income; which will change it’s meaning based on the age of the beneficiary. In the case where the beneficiary is a minor, it will be the net income of the family (or legal guardian); in the year following the beneficiary’s 18th birthday, it will be their income to determine the grant (even if they still reside with parents/legal guardian). Income for the prior two years is looked at when determining net income, so it is vital that tax returns be filed. As quick example, suppose family net income is under $111,733, the CDSG will be payable as follows: 300% on the first $500 and 200% on the next $1,000 (up to a maximum annual grant of $3,500). When net income is over $111,733, the grant falls to 100% on the first $1,000 (up to an annual max. of $1,000).

What if an RDSP was opened but contributions are not feasible? Here is where the Canada Disability Savings Bond (CDSB) becomes critical since contributions are not required to be eligible to receive the bond. The bond is also income tested and has a lower lifetime maximum vs the grant of $20,000. For net income up to or equal to $36,502, the annual max. bond is $1,000; for income between $36,502 and $55,867 the bond is reduced on a prorated basis until a full elimination when income is over $55,867. This certainly makes a case for prioritizing the account even if there may not be sufficient funds to make a contribution.

There is also entitlement for CDSG and CDSBs for prior year’s missed/unused amounts going back 11 years (the current year and 10 previous years). The maximum annual carryforward amounts for the CDSG and CDSB are $10,500 and $11,000 respectfully. Grants are also paid in descending order, starting with the 300% match first, then 200% (based on income) and they are applied to the oldest years first. The carryforward timeline is aligned with the CRAs reassessment of returns for an individual upon becoming DTC eligible, which at this time the CRA may go back a maximum of 10 years or to the date of diagnosis. These reassessments, plus past grant and bond entitlements, can translate to not only substantial refunds but also increased RDSP savings. The chart below provides a brief example of a grant maximization strategy for an individual with net income not exceeding the maximum threshold, who recently filed paperwork to qualify for the DTC in 2020 and wants to catch up on grants for the past 10 years (as they qualified for the DTC since 2010). With contributions over 5 years totaling $21,500 the RDSP attracted $50,500 in grants for a total of $72,000 in tax sheltered savings.

Source: Mackenzie Resource Centre

To ensure that these plans are used for the purpose of long-term savings, there is an assistance holdback amount as a strategy to prevent government paid grants and bonds from being withdrawn as soon as they were received. This holdback amount is calculated by totaling the grants and bonds paid into the RDSP within the 10 preceding years, less any previous repayments that may have already occurred. These proportion repayment rules are based on amounts withdrawn and timing, and the RDSP issuer will have this and other specific information on the assistance holdback readily available in case a repayment must be made. Based on these rules, grants and bonds are only available up to the beneficiary’s 49th year, so that when the required payments commence, no government repayments need to be made.

A withdrawal from an RDSP is referred to as a Disability Assistance Payment and they can be made to the beneficiary at any point in their lifetime, or to their estate upon death. There are certain restrictions to amounts based on market values and maximums but for today’s purpose, we will focus on the Lifetime Disability Payment (LDAPs) which must begin before December 31st of the beneficiary’s 60th year, and continue until death. The maximum that may be paid out is based on a formula which takes into account the fair market value of the plan assets and the beneficiary’s age. This maximum is set to ensure there are sufficient assets to sustain an event payment throughout the beneficiary’s lifetime. The maximum LDAP is derived by taking the FMV of the RDSP (at Jan 1 of current year) divided by [(the greater of 80 or the beneficiary’s age) plus (3) minus (the beneficiary’s age)]. For example, if we had a beneficiary who was 60 at the start of the year with a RDSP FMV at Jan 1 equal to $300,000, the maximum LDAP would be $13,043.48.

The tax treatment of DAPs and LDAPs are broken into taxable and non-taxable portions, but most importantly, payments from an RDSP do not impact an individual’s eligibility to receive other federal or provincial asset-tested support payment (Ontario Disability Support Payments for example). RDSP payments would also not reduce Old Age Security amounts or Employment Insurance benefits. There are also certain rollover provisions for assets from RRSPs and RESPs into an RDSP in the event that a disability occurs later in life, allowing for the continuation of tax-deferred savings. Other important factors to note are the protection of RDSP assets against bankruptcy and creditors (certain conditions must be met) as well as the restriction of only being able to have one RDSP opened at one time (this is in contrast to the ability to have multiple TFSAs opened for example).

On the surface, RDSP may seem complex and onerous, perhaps a reason why they are underutilized. However, they can have a significant impact on your or a loved one’s financial security over the long-term. They have also proven to be a powerful planning tool in events where a disability has occurred in early-mid adulthood as a result of physical or mental health changes. This week’s newsletter only scratched the surface of RDSPs and there are many other important facts to consider; please reach out with any questions or if you are contemplating whether an RDSP should be a consideration in your financial future.

On behalf of Pyle Wealth Advisory, have a wonderful weekend!

Ally Pyle