Any disabled person or parent with a disabled child should investigate the new Registered Disability Savings Plan (RDSP) established by the Government of Canada in 2007’s budget. This plan can be a valuable tool for any disabled person, and is particularly useful for low income families due to government assistance.
The time to act is right now, because in order to receive Canada Disability Savings Grants and Canada Disability Savings Bonds, the RDSP has to be established, and the contributions made, by December 31, 2009. Contributions for 2008 could be made until March 2, 2009; however, this was a one time extension and contributions for 2009 must be made by December 31, 2009.
RDSPs are different from RRSPs and RRIFs. Contributions to an RDSP are not tax deductible, and amounts withdrawn are taxable to the recipient. Why then would you want to have a RDSP? For two reasons:
- While the funds are in the RDSP, their growth is not taxed, so that investments can grow faster because they are tax free. This is particularly attractive when the beneficiary of the RDSP is young, and it may be many years before the funds are withdrawn. Voluntary withdrawals may be made at any age, subject to a maximum annual amount; however, no withdrawal is required until age 60, at which time minimum annual withdrawals must be made.
- The existence of Government of Canada grants and bonds mentioned above.
As well, since beneficiaries are eligible to claim the disability tax credit, and may not have much other income, they are likely to pay little tax on the withdrawn amounts.
Canada Disability Savings Bonds – If the family income of the beneficiary is less than $21,816, then a bond of $1,000 is paid into the RDSP by the Government of Canada. No contribution has to be made to the RDSP by the beneficiary to quality for the bond. As family income rises, the bond amount is reduced, until at $38,832 the bond becomes zero. Family income means the income of the disabled person and their spouse, or for minors, the family income is the same as for the Child Tax Benefit. The maximum lifetime bond amount is $20,000.
Canada Disability Savings Grants – the Government of Canada will match contributions made to the RDSP, up to a maximum $3,500 per year and a lifetime maximum of $70,000. The grant is dependant on family income. If family income is less than or equal to $77,664, the grant will be three times the first $500 ($1,500), and two times the next $1,000 ($2,000) for a total of $3,500. If family income is over $77,664, then the grant will be $1 per $1 contributed, to a maximum of $1,000.
On a cautionary note, RDSPs are meant to be a long-term savings plan. Early withdrawals result in all bonds and grants paid in the previous ten years to be repaid to the Government of Canada.
If you qualify for the Disability Tax Credit, or a family member does, talk to your accountant or advisor regarding the special rules discussed above.