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Sep 29, 2021

RDSPs An Essential Plank In Financial Planning For Disability

by Ed Arbuckle
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Ed ArbuckleThe late Jim Flaherty was primarily responsible for the implementation of the Registered Disability Savings Plan (RDSP) in 2008. With some adjustments since, the RDSP has survived as an outstanding opportunity to boost the financial resources of individuals with disabilities starting with mandatory pension benefits at age 60.

Better still, with some advanced planning, funds can often be drawn down out of plans earlier to help finance the need for funds as parents get closer to retirement and no longer are able to help out. Many individuals with disabilities have shorter life expectancies so this kind of planning is important.

RDSPs can be opened for anyone who qualifies for the disability tax credit. Contributions to the RDSP can be made to age 59 of the beneficiary but only contributions by age 49 will be eligible for up to $90,000 of government assistance in the form of bonds and grants. There is a lifetime contribution limit of $200,000 and only one plan can be opened for each person with a disability. Only the individual with a disability can be a plan beneficiary.

Strategic Professional Advice Is So Important

Yes, RDSPs are complicated but you should not be concerned about that if you are getting proper guidance from a financial institution or a disability advisor who works in this area. Knowledgeable advisors are hard to find so look around until you find the right person to work with.

RDSP And The Qualifying Activities Of Daily Living

A RDSP is available to individuals who qualify for the disability tax credit because they are markedly restricted in one or more activities of daily living. Those qualifying activities under DTC rules are as follows;

  • Walking, meal preparation, feeding and dressing oneself,
  • Speaking, hearing, seeing,
  • Eliminating – bowel and bladder functioning,
  • Requirement for life sustaining therapies,
  • Adaptive functioning – self-care, health and personal safety, social interaction, transactional skill and
  • Executive functioning - problem solving, goal setting and judgment together.

A beneficiary only needs to qualify in one of the fourteen areas listed above but it is also possible to combine two or more areas with less serious disabilities and still qualify for the DTC.

On the physical side, the primary test is whether a person cannot carry on an activity or is extremely slow at it. On the adaptive and executive functioning side, the test is usually whether you need constant care and attention from family or other caregivers. DTCs were dealt with in my earlier article in the MoneySaver in May 2020.

Government Assistance

The government will contribute up to $90,000 to a RDSP plan. $20,000 of this is in the form of bonds and $70,000 is in the form of grants. The bond money is paid into a plan without any need for contributions whereas government grant money is based on contributions to the plan.

In the case of grant assistance, the government will put in three times the first $500 of annual contributions and two times the next $1,000 of contributions to an annual limit of $3,500. Annual contributions above this level do not earn any government assistance so some careful planning is needed to maximize the grant amount.

And finally, both bond and grant amounts may be reduced by the income of parents to the age of majority of the beneficiary and by the income of the beneficiary after that. If annual income for this calculation exceeds about $31,500, the bond amount will be gradually reduced. The grant amount will be eliminated if annual income exceeds about $95,000. Tax returns for the plan beneficiary and the parents must be filed to validate annual income amounts or government contributions can be cut back.

Contributions For Previous Years

If you have not contributed to a RDSP in previous years, you are permitted to make contributions for up to ten previous years and pick up bond and grant assistance as well for those years. This is usually important when new plans are opened and there is a window to previous years. However, you cannot claim more than $10,500 in grants in any year for prior year contributions.

It is important to get your contributions into a RDSP as early as possible to maximize grant amounts. This may also avoid a clawback of government assistance should you need to withdraw funds from your plan earlier than expected.

The Family As Rdsp Contributors

With the good plan design, almost anyone can contribute to a RDSP. This is extremely valuable where family members want to contribute to a plan either now or in their wills. As well, the rules also allow individuals to transfer RRSP, RRIF and even pension plan amounts to a RDSP through their will and avoid significant tax otherwise payable on death. Pension transfers do not earn grant amounts.

Pension transfers cannot allow total contributions to exceed the $200,00 limit and they are not eligible for grant benefits. Good contribution tactics will allow greater family participation.

The RDSP Can Help Boost Social Assistance

Social assistance is a provincial matter and so the rules vary across the country. In Ontario, disability financial assistance is under ODSP which financially helps individuals who cannot function in the workplace, in the community or properly attend to personal care. Social assistance rules generally reduce or eliminate benefits if the person’s income or personal assets exceed certain levels. Exemptions are allowed for some assets and incomes so knowing about that is important.

Provinces provide a full exemption for RDSP assets and for the income coming from a RDSP. That makes a RDSP an excellent place to invest funds to avoid reduced social assistance benefits.

Early Withdrawals From A RDSP

Yes, there can be penalties for early withdrawals from a RDSP. In some situations, withdrawals are not permitted at all but in most cases early withdrawals simply claw back bond and grant assistance received in the previous ten years. In my opinion that is not all that bad if the added funds add to the quality of life of the beneficiary.

Summing Up

The RDSP is so important as a financial tool for individuals with disabilities and their families. They not only allow a tax efficient way accumulating of funds and also permit family participation in accumulating of savings for a loved one. In my opinion, families should be planning to get contributions in early so RDSP funds can be utilized earlier in the life of a loved one with a disability where life expectancy might be shorter than normal.

Ed Arbuckle

Phone: 519-884-7087