The Registered Disability Savings Plan (RDSP) is similar to a Registered Retirement Savings Plan (RRSP); the RDSP is a savings plan for Canadians with disabilities. The federal government introduced RDSPs in the 2007 Federal Budget to help parents, grandparents and others plan for the financial security of a member of the family with a disability.
There are three parties involved in the set up of a RDSP:
- The Holder – Establishes the RDSP;
- The Beneficiary – A resident of Canada who qualifies for the Disability Tax Credit; and
- The Issuer – A financial institution operating a RDSP plan approved by the Canada Revenue Agency (CRA).
Note that the beneficiary must be under the age of 60 years old on or before December 31st in the year the RDSP is opened, and the beneficiary can only have one RDSP at any given time.
Contributions to an RDSP:
- There is a $200,000 lifetime contribution limit;
- Contributions include regular contributions, RRSP, Registered Retirement Income Fund (RRIF) and Registered Education Savings Plan (RESP) rollovers;
- Contributions to an RDSP are not deductible for income tax purposes;
- Investment income (including interest, dividends and realized capital gains) earned in an RDSP will not be taxed in the plan, but will be taxable to the beneficiary, together with government grants and bonds, when paid out;
- Contributions are not allowed after the calendar year in which the beneficiary turns 59.
Canada Disability Savings Grant and Bond
The Canadian Government provides a grant and bond that increases the contributions to RDSPs. The maximum grant is $3,500 annually with a lifetime limit of $70,000, and the maximum bond is $1,000 annually with a lifetime limit of $20,000. The grant and bond amounts paid are dependant on the income of the beneficiary for beneficiaries age 19 and over, and on the income of the parents of the beneficiary for beneficiaries under the age of 19.
Note that there is an Assistance Holdback Amount (AHA), which means that all grant and bonds paid within the last 10 years must be repaid if:
- The beneficiary dies;
- The RDSP is closed;
- The RDSP is de-registered;
- The beneficiary is no longer eligible for the Disability Tax Credit.
RRSP and RESP Rollovers
RRSPs or Registered Retirement Income Funds (RRIFs) can be transferred from deceased individuals on a tax-free basis to the RDSP of a financially dependent child or grandchild. Also, the investment income earned in Registered Education Savings Plans (RESPs) can be transferred tax-free to an RDSP where the beneficiary of the RDSP and RESP are common.
Lifetime Disability Assistance Payments
Payments to the beneficiary must commence by December 31st of the year the beneficiary turns the age of 60.
It is advisable to seek professional advice to understand the tax laws that impact your particular situation, and to guide you through the complexities of Canadian Income taxes.
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