In recognition that life can be more financially draining for disabled Canadians, the federal government created the Registered Disability Savings Plan (RDSP).
What is an RDSP?
An RDSP is a registered, matched savings plan for people with disabilities designed to help them and their families save for their long-term needs. Savings can grow quickly because, depending on your eligibility, the government will match contributions with as much as $3 for every dollar put into the plan (up to a lifetime maximum of $70,000).
In addition to matched contributions, the government also gives up to $1,000 dollars a year (up to a lifetime maximum of $20,000) to qualifying low-income plan beneficiaries.
» MORE: Can you transfer Registered Education Savings Plan earnings to an RDSP?
RDSP tax considerations
The RDSP is not only a boon for people with disabilities because contributions are matched by the government, it also helps accelerate saving because the interest and investment income generated within the account is tax-deferred — so funds really have a chance to grow.
Note that private contributions, like those you, your parents or friends make, are not tax-deductible, and therefore are not taxable upon withdrawal. Only the federal government’s contributions (both grant and bond amounts, see below) and income growth are viewed as income and are subject to tax when withdrawn.
» MORE: How to use a Tax-Free Savings Account
Who qualifies for an RDSP
To qualify for the RDSP you must fulfill the following criteria:
- Be a resident of Canada and have a social insurance number
- Be under the age of 60
- Have a long-term disability that makes you eligible for the Disability Tax Credit. (You must apply and be approved for the DTC before you can open an RDSP.) You can read more about qualifying and applying for the DTC on the Government of Canada’s website.
How do RDSP contributions work?
If you meet the criteria you can apply for an RDSP account at any qualifying financial institution. Not all banks in Canada offer RDSP accounts, but you can check for participating institutions.
Once you’ve opened an account, you can begin making contributions. Anyone can contribute to an RDSP – family, friends or even acquaintances – as long as they have written permission from the account holder.
There is no yearly contribution limit to an RDSP. However, there is an overall lifetime maximum of $200,000. Government matching contributions and investment earnings do not count towards the $200,000. Contributions are not permitted after the end of the year that the beneficiary turns 59.
In terms of government contributions, there are two types of contributions the government can make to your RDSP: a Canada Disability Savings Grant and a Canada Disability Savings Bond.
Canada Disability Savings Grant
With the Canada Disability Savings Grant, the Canadian government puts money into your RDSP whenever you or a permitted contributor adds money to your RDSP.
Your net family income (based on income tax returns for the previous two years) determines the rate at which the government will match the contribution, and the qualifying income amounts are indexed each year for inflation. The government will match contributions of up to $3,500 annually until the year in which the beneficiary turns 49, up to a lifetime limit of $70,000.
If family income in 2021 is $98,040 or less:
On the first $500 in contributions, the beneficiary will receive a CDSG grant of $3 for every $1 contributed to the RDSP, to a maximum of $1,500. On the next $1,000 in contributions, the government will give a $2 grant for every $1 contributed, to a max of $2,000.
If family income in 2021 is more than $98,040:
The beneficiary will receive a $1 grant for every $1 contributed to the RDSP, up to $1,000.
Canada Disability Savings Bond
The CDSB is available only to lower-income RDSP beneficiaries. The bond is not contingent on any other RDSP contributions.
The CDSB is available up to the year in which the beneficiary turns 49 and there is a $20,000 lifetime limit. Each year the baseline income amount is adjusted for inflation.
For 2021, if your net income is $32,028 or less, you’d receive a bond of $1,000. If your net income is between, $32,028 and $49,020, the government would contribute a portion of $1,000 into your account. (The exact amount is based on a formula in the Canada Disability Savings Act). If your family’s net income is above $49,020 in 2021, you will not receive the bond for the year. For those younger than 18, bond eligibility is based on your family income.
Withdrawals must be used only for the care of the beneficiary and can be made at any time; however, withdrawals must begin before the end of the year in which the beneficiary turns 60.
Note, however, that if withdrawals are made when any of the grants and/or bonds have been in the RDSP for fewer than 10 years, you will have to pay back all or some of the money. Withdrawal provisions and exceptions can be quite complicated, so make sure to seek professional advice.
What happens if the RDSP beneficiary dies?
Upon the death of the RDSP beneficiary, any government grants and bonds that have been in the account for less than 10 years will have to be repaid to the government. Any remaining funds will be paid to the estate and will be distributed according to the beneficiary’s will.
The portion of the funds that come from grants, bonds and investment earnings are taxable to the estate, while the contributions themselves are tax exempt.
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