The Registered Disability Savings Plan (RDSP), which became available to Canadians in 2008, can be a very good way to accumulate tax-deferred savings (and obtain ‘free’ matching grants/bonds) for a disabled person.
Here’s how it works:
Any Canadian resident eligible for the Disability Tax Credit can be the beneficiary of an RDSP. There is no lower age limit — an RDSP can be established for a minor and, generally, the sooner the better.
The beneficiary and/or their family and friends can invest funds in an RDSP that will grow on a tax-deferred basis.
Contributions are usually not tax-deductible and can be made by anyone authorized by the holder of the plan up to a maximum lifetime contribution of $200,000 per beneficiary.
There is no limit on annual contributions, other than the lifetime limit.
Contributions must cease at the end of the year in which the beneficiary reaches age 59 and the beneficiary must begin taking payments from the plan (known as Disability Assistance Payments/DAPs) at age 60, although DAPs can be taken at an earlier age in some circumstances.
The federal government will usually contribute quite generous Canada Disability Savings Grant (CDSG) and Canada Disability Savings Bond (CDSB) amounts to an RDSP.
The amount contributed will be based on the family net income of the beneficiary, the value of the contributions each year, and any CDSG or CDSB contribution room carried forward from the preceding 10 years.
However, when DAPs are made, all the CDSG and CDSB received by the plan in the preceding 10 years will be clawed back. The best RDSP strategy is to start saving early and leave money in the plan for at least 10 years.
By the way, if you’re setting up a plan for a beneficiary who will turn 50 or older in a year, that RDSP isn’t eligible to receive CDSG or CDSB.
DAPs do not affect eligibility for federal income-tested benefits or credits but may affect eligibility for certain provincial or territorial benefits or credits.
If you intend to leave substantial assets to a disabled person, it is recommended that the assets in question flow into your estate, and that in your will you direct that the disabled person’s share of your estate is to be set aside in a testamentary trust known as a discretionary Henson trust, such that your trustee has the discretion to decide if, when and how much to distribute to or for the disabled person’s benefit.
It would be useful to specify within the will that the trustee may, if he or she thinks it appropriate, use trust funds to make contributions to an RDSP on the disabled person’s behalf, but the trustee should not be required to do so.
An RDSP can be a valuable planning tool — but there are many others to consider. Talk to your professional adviser about what’s best for your situation.
J. Kevin Dobbelsteyn is a certified financial planner with Investors Group Financial Services Inc. His column appears every Wednesday.