Registered Disability Savings Plan in Canada

When you have a permanently disabled family member, it can become a challenge to navigate life especially financially and emotionally. With Canada government’s Registered Disability Savings Plan you can get benefits for the disabled individual as it is meant to provide a saving vehicle for the family members. In this article we will discuss in detail all about Registered Disability Savings Plan – what is it, how does it work, how can you make use of the benefits, eligibility, and features.

What is Registered Disability Savings Plan?

In Canada the Registered Disability Savings Plan (RDSP) is a specially dedicated savings plan for helping people with disabilities, and the relatives who support them. It is aimed for the long-term economic safety of the particular person with disability. Therefore, RDSP was purposely designed for beneficiaries of disability tax credit (DTC.).

Key features of the RDSP include –

• Contributions

The family and friends can make contributions to the RDSP in support of an individual with disabilities. Contributions are not restricted by the year, but they have a limit for the whole life.

• Canada Disability Savings Grant (CDSG)

Through the CDSG, the government can match contributions it makes to the RDSP with regard to the amounts invested and beneficiaries’ family income.

• Canada Disability Savings Bond (CDSB)

The government may also inject funds into the RDSP for people earning low-to-moderate amounts of income under the CDSB by offering a bond that require no contribution from the family.

• Investment Growth

Funds in a RDSP grow without being subjected to taxes and only when they have finally been withdrawn.

• Withdrawals

The RDSP withdrawals are referred to as disability assistance payments (DAPs). Though contribution is not tax-deductible, while investment grows but government contributions are taxed when withdrawn. Nevertheless, being the beneficiary is usually accompanied with low levels of earned income; thus, it is possible to prevent adverse tax effects.

• Long-Term Savings

Since the RDSP is intended to ensure a lifelong financial cover, for people inability to work can be attributed to disability and/or excess disability costs.

RDSP eligibility

You have the option to nominate an individual as a beneficiary provided that the individual fulfills the following criteria –

• Holds approval for the Disability Tax Credit (DTC) unless transitioning from an existing Registered Disability Savings Plan (RDSP) to a new one.
• Possesses a valid Social Insurance Number (SIN).
• Maintains residency in Canada at the time of entering into the plan.
• Is below the age of 60, with the provision that a plan may be initiated for an individual until the conclusion of the calendar year in which they reach the age of 59. However, this age restriction is waived when the RDSP is established due to a transfer from the beneficiary's former RDSP.

It is important to note that a beneficiary is limited to a single RDSP at any given time. While this RDSP may have multiple plan holders over its lifespan, and there is the possibility of having more than one plan holder concurrently, the beneficiary is restricted to a single RDSP.

Why to choose RDSP over other savings account?

Choosing a Registered Disability Savings Plan (RDSP) over other savings accounts can be advantageous for individuals with disabilities and their families for several reasons –

• Government Contributions

The RDSP offers the potential for government contributions through the Canada Disability Savings Grant (CDSG) and the Canada Disability Savings Bond (CDSB). These contributions can significantly boost the overall savings in the RDSP, providing additional financial support.

• Tax-Deferred Growth

The funds invested in an RDSP can grow tax-deferred until they are withdrawn. This means that any investment gains within the RDSP are not taxed until the funds are taken out, allowing for potential compounding of earnings over time.

• Disability Assistance Payments (DAPs)

RDSPs allow for the withdrawal of funds in the form of Disability Assistance Payments (DAPs). While these payments are taxable, they are typically taxed at the beneficiary's lower income tax rate, potentially resulting in lower tax liability.

• Long-Term Financial Security

The RDSP is specifically designed to provide long-term financial security for individuals with disabilities. It can be a valuable tool for planning for future expenses related to the disability, such as medical costs, assistive devices, or supportive services.

• Flexibility in Plan Holders

An RDSP can have multiple plan holders over its existence, providing flexibility in managing the plan. This can be beneficial for families or individuals who want to collaborate in contributing to and overseeing the RDSP.

• No Annual Contribution Limits

Unlike some other tax-advantaged accounts, there is no annual limit on contributions to an RDSP, although there is a lifetime contribution limit.

• No Impact on Government Benefits

Funds in an RDSP do not affect eligibility for other government benefits or income support programs, providing a way to save without jeopardizing access to essential services.

Opening an RDSP

How to open an RDSP?

To initiate a Registered Disability Savings Plan (RDSP), an eligible individual, qualified to serve as the plan's holder, is required to get in touch with a participating financial institution that provides RDSP services. These financial entities are specifically referred to as RDSP issuers.

Who can open an RDSP?

There can be 4 scenarios –

1. The beneficiary is under the age of majority

A qualifying person is authorized in case, where the beneficiary has not attained the prescribed age limit, to develop an RDSP on behalf of the beneficiary as a plan holder. The qualifying person can be one of the following -

• A person who is a lawful guardian of an offspring.
• The guardian, tutor, curator or anyone authorized to act as a trustee for the beneficiary.
• The public department, agency, or an institution having a valid legal mandate to act in aid of a beneficiary.

2. The beneficiary has attained the age of majority and is competent to enter into a contract

Upon attaining the age of majority and acquiring the contractual competence necessary to engage in a plan, the beneficiary holds the option to independently establish an RDSP for themselves.

In situations where the legal parent(s) are the initial plan holders for an existing RDSP established for the adult beneficiary, there exists the possibility for the legal parent(s) to continue as the holder(s) of the new plan. Additionally, the adult beneficiary has the option to be included as a joint holder alongside their parents. This flexibility allows for collaborative management of the RDSP, accommodating both the independent decision-making of the adult beneficiary and the involvement of their legal parent(s).

3. The beneficiary has attained the age of majority but their contractual competency is doubtful

Regarding qualifying family members who can trigger a plan from June, 29th, 2012 until December 31st, 2026. In respect of a beneficiary, a QFM includes a spouse, common law partner, mother, brother, sister or father.

4. The beneficiary has attained the age of majority but is not contractually competent to enter into a contract

A person who has reached a majority but is yet incompetent to form an RDSP could still be eligible to benefit from it. Where a person may be qualified to establish an RDSP in respect of a beneficiary upon whose behalf he or she has legal authority under provincial law to act.

Changing RDSP holder

1. The plan was opened when the beneficiary was a minor – the beneficiary is now an adult

• Parent-Opened Plans

In instances where the plan was established by the legal parent(s) of the beneficiary, the parent(s) can persist as the plan holder(s) even after the beneficiary comes of age. Upon reaching the age of majority and achieving contractual competence, the beneficiary has the option to join the RDSP as a joint holder.

• Non-Parental Plans

If the plan was initiated by a legally authorized person or entity other than the beneficiary's legal parent(s), a transition occurs when the beneficiary reaches the age of majority and gains contractual competence. At this point, the non-parental holder must be removed from the plan, making way for the beneficiary to assume the role of the new plan holder. This transition ensures that the individual with contractual competence takes control of their RDSP.

2. The plan was opened when the beneficiary was an adult whose contractual competency was doubtful

There is a provision that enables a beneficiary, who may be distinct from a prior legal parent, to assume control over a plan if it is held by another qualifying family member in cases where such plans were established while the beneficiary was still at a young age prior to attaining ad Such transition can only be possible where it has been proved beyond reasonable doubt that the beneficiary has reached the required contractual age. If indeed a beneficiary confirms they have the capability to handle the plan, they can officially submit their claim for substituting the qualifying family member as the plan holder. With this mechanism, beneficiaries become able to manage their finances in the RDSP.

3. The plan was opened when the beneficiary was unable to enter into a contract

It is required to eliminate the person acting in the position of holder when this person ceases to be able to fulfill the role because of certain conditions such as the lapse of parental authority or death, unless the holder is a qualifying family member. In this case, a qualifying individual may resign as a plan holder if one qualified person can be named to receive their right. In these instances, the successor or assignee to the plan holder role can be one of the following - 

• The Beneficiary: This is provided that the beneficiary attained adulthood and is deemed capable of contracts.
• The Beneficiary's Estate: When the beneficiary has an estate, it should serve as the designated successor plan holder.
• Another Existing Holder: The primary plan holder is already another person or a certain organization that holds the plan already; thus, take its place. In such circumstance as when the two legal parents decide to be partners in RDSP planning, and one of them dies, then, the other parent will inherit the deceased’s rights and become the only holder of the plan.
• A Legal Parent of the Beneficiary who was Previously a Holder: It is possible for an ex-plan holder who was also the legal guardian of the beneficiary.
• A Qualifying Person at the Time the Rights are Acquired: The qualifying person acquires rights and becomes a plan holder where the acquisition occurs when the entity is a “qualifying person.”

This entails that the RDSP should be managed with flexibility to address any change in qualifications or circumstances by the plan holder.

Difference between Registered Disability Savings Plan and Canada Disability Savings Grant

The Canada Disability Savings Grant (CDSG) and the Registered Disability Savings Plan (RDSP) are related components of Canada's savings program for individuals with disabilities, but they serve different purposes within the framework of financial support.

Registered Disability Savings Plan (RDSP –

• Purpose: The RDSP is a long-term savings plan designed to help individuals with disabilities and their families save for the future. It aims to provide financial security for the person with a disability, particularly during periods when they may be unable to work or face additional expenses related to their disability.
• Contributions: Contributions to the RDSP can be made by the individual with a disability, their family members, or friends. The funds in the RDSP can be invested, and the investment growth is tax-deferred until withdrawn.
• Government Contributions: The government provides additional support through the Canada Disability Savings Grant (CDSG) and the Canada Disability Savings Bond (CDSB) to eligible RDSPs. The CDSG offers matching grants based on contributions made, while the CDSB provides bond payments without requiring contributions.
• Withdrawals: Withdrawals from the RDSP are known as Disability Assistance Payments (DAPs) and are taxable. However, since the beneficiary typically has a lower income, the tax impact can be minimized.

Canada Disability Savings Grant (CDSG) –

• Purpose: The CDSG specifically refers to the government grant component of the RDSP.
• Government Matching Grants: The CDSG provides matching grants from the government based on the contributions made to the RDSP. The matching rates depend on the beneficiary's family income and the amount contributed, with higher grants for lower-income families.
• Maximum Grant Amount: There is a lifetime limit on the amount of CDSG that can be received, and the maximum annual grant amount is also capped.
• Eligibility: To be eligible for the CDSG, the beneficiary must be under 49 years old, and they must be eligible for the Disability Tax Credit (DTC).

In summary, the RDSP is the overall savings plan, while the CDSG is a specific component that provides government grants to eligible RDSPs. The CDSG enhances the potential for savings in the RDSP and helps individuals with disabilities accumulate more funds for their long-term financial security.