This is a must open especially if you don’t have money to put into this plan as it triggers bond contribution (aka free money from government) and if you are able to contribute to it, it triggers grant contribution (aka free matching money from government). This is a savings plan designed to help parents or anyone save money for someone who has a disability. Important to note, contribution to this plan is NOT tax deductible so the money you put in was already taxed hence why when you withdraw money this portion will be tax free because you have already been taxed on it when you put the money in. However, money generated from investments, the bond and grant contributions, and rollovers will be taxed when the beneficiary pulls money out. You can contribute to this plan up to the end of the year when the beneficiary turns 59. Beneficiary is the person who will benefit from this account usually your dependent child.
Eligibility and contributions
Must be eligible for the disability tax credit (DTC). This means if you don’t have an approved disability tax credit you can’t open this savings account.
Must have a valid social insurance number (SIN). On March 28, 2014 Service Canada stopped producing plastic cards. All SIN issued after this date is just the paper format instead of a card. Hopefully you haven’t lost this paper, but if you did lose it, you can get the number t by visiting a Service Canada office.
Must be resident in Canada.
Must be under the age of 60.
Note you can only have 1 RDSP account. RDSP payments can only be made to the beneficiary (or to the beneficiary’s estate after the beneficiary’s death). Ideal if the beneficiary has a will in place.
Canada disability savings bond aka free money
The bond is an amount that the Government of Canada pays into a registered disability savings plan (RDSP). This bond is geared towards low income Canadians with disabilities. You literally don’t need to put in a dime to get the bond as long as your income is below the dollar threshold. The income amounts are updated each year based on the rate of inflation. If your child is under 18, the determining income will be the family’s combined adjusted income (explanation of what is adjusted family income below). When your child turns 18, it will be based on his or her income plus spouse if applicable. You can get up to $1,000 a year pending on your adjusted family net income. The lifetime bond limit is $20,000.
The income thresholds for 2017 are as follows:
$30,000 or less = the bond is $1,000;
Between $30,000 and $45,916, part of the $1,000 is based on the formula in the Canada Disability Savings Act;
More than $45,916 = no bond is paid.
For those who don’t qualify for this bond at the moment, it is important to note that once your child is 18, you can use his or her individual income as the determining factor to trigger this bond. Please note, CRA uses your income from the previous two years. For example if you were eligible in 2017, they base your bond/grant allowance on your 2015 tax return. When your child turns 16, you should file his or her income tax so when they are 18 they can start using their own income as qualifier. Assuming your 16 year old won’t be making a killer at that age they will likely maximize the grant.
Canada Disability Savings Grant (CDSG) aka free money
Like the bond, the amount is paid by the government of Canada directly into your RDSP. The lifetime maximum limit is $70,000. The Government will pay matching grants of 300%, 200%, or 100%, depending on the beneficiary’s adjusted family net income and the amount contributed.
An RDSP can get a maximum of $3,500 in matching grants in one year, and up to $70,000 over the beneficiary’s lifetime. A beneficiary’s RDSP can receive a grant on contributions made until December 31 of the year in which the beneficiary turns 49. Reason it is 49 is because you have to wait a 10 year period before withdrawing funds in order to keep the bonds and funds. Essentially you want to be able to maximize all the bond and grant contribution from government by age 49 and wait the 10 year period to take out money at age 59. Of course if you get a early start on this you can maximize at an earlier age and watch the money grow more.
The amount of the grant is based on the beneficiary’s adjusted family net income. The beneficiary adjusted family net income thresholds are indexed each year to inflation. The income thresholds for 2017 are as follows:
Family income is $90,563 or less:
On the first $500 contribution—$3 grant for every dollar contributed, up to $1,500 a year.
On the next $1,000 contribution—$2 grant for every dollar contributed, up to $2,000 a year.
If this is your situation, then it will take you 20 years to fully take advantage of the lifetime limit of $70,000 at at limit of $3,500 per year.
When family income is more than $91,831:
On the first $1,000 contribution—$1 grant for every dollar contributed, up to $1,000 a year.
If this is your situation, remember to note that once your child turns 18 you can use their individual income as determining factor. Depending on when you open this account for your child, your child likely can take full advantage of this grant. Again I’m assuming your 16 year old is not bringing home over 91K a year to take advantage of this grant. Now remember it is age 16 since CRA looks at the income from 2 year prior.
Let’s use an example to try to clarify. Jack is 2 when he qualifies for DTC and his parents opened his RDSP right away. They make over 92K so they only qualify for max of 1K per year of government grant. Family contribute $1,000 per year till Jack is 18. That is 16 years of $1,000 each year of family contribution plus same amount as government grant $16,000 ($1,000 x 16 years) and of course plus investment interest/growth. By time Jack is 18 he already has $32,000 plus interest from growth and investments.
When Jack turned 16 he found a job at small retail store and started making $10000 a year and his parents started to file his own income taxes. At age 18 he can use his own income to determine if he qualifies for grants and bonds. He will need to contribute the minimum of$ 1,500 to trigger the $3,500 per year grant for the next 16 years and to fully take advantage of the bonds he will need 20 years to catch up the the bond max of $20,000. For easy math let’s say from age 18-38 Jack contribute $1,500 each year to trigger the maximum grant money and bonds. At age 38, Jack will have:
$32,000 (money his parents put in from age 2-18) plus government’s matching. Not since he only claimed $16,000 for grant allowance so he still has $54,000 left to claim.
$30,000 (20 years of contributing $1,500)
$54,000 of grant money allowance (it will only take 16 years to reach the full amount but we want to fully maximize the bond allowance hence why he contributed for another 4 years)
$20,000 of bond money allowance ($1,000 per year at 20 years)
= $136,000 plus interest/growth at age of 38.
Out of that $136,000, $90,000 is the government’s contribution. If you do the math that is 1/3 of your own contribution and 2/3 of free money. Why not?
The ideal is to wait the full 10 years before withdrawing so he doesn’t have to repay government for bonds and grants. At age 48 he is free to start withdrawing funds to live. Of course the account can still grow during this 10 year waiting period by more personal contribution plus interest/growth.
What is adjusted family net income?
The beneficiary adjusted family net income thresholds are indexed each year to inflation. Your net income is the amount from line 236 of your income tax and benefit return. Your family net income is your net income plus the net income of your spouse or common-law partner, if you have one. “Adjusted” family net income means they don’t count any universal child care benefit (UCCB) and registered disability savings plan (RDSP) payments you receive. CRA do this to make sure that people with low and modest incomes get the most benefits they can. However, if you have to repay any UCCB and RDSP amounts, they will include them as part of your adjusted family net income. This is done automatically and if you qualify for the bond, the government puts that money into your RDSP.
Who can contribute to an RDSP
Usually the plan holder (parents if child is under 18) and anyone with permission from the plan holder. As long as the holder gives you written permission the grandparents, aunts, uncles, relatives or even a friend.
What is the contribution limit for RDSPs?
No annual limits on amount you can contribute in a given year but there is a lifetime limit of $200,000. You can contribute until the end of the year in which the beneficiary turns 59.
An amount can be transferred from one RDSP to another RDSP can be made only under the following conditions:
- the transfer must be made directly from a beneficiary’s current RDSP to a new RDSP for the same beneficiary
- a transfer can only be made if all holders of the current RDSP agree to the transfer
- all funds must be transferred from the current RDSP to the new RDSP
- the current RDSP must be terminated immediately following the transfer
- where the beneficiary has attained 59 years of age before the year in which the transfer takes place, the issuer of the new plan agrees to pay any DAPs required to be made under the plan.
You can rollover your RRSP on a taxed deferred basis to an RDSP. Keep in mind any rollover amount is subject to the total lifetime limit of $200,000. Also rollover money will not trigger grants. This rollover from RRSP is beneficial to defer taxes and may play in your favour pending on the amount. I advise you to speak to an accountant.
To open an RDSP
Major financial institution offers RDSP and they are known as issuers. If the beneficiary is under the age of majority, then the parents or legal guardian can open and become the plan holder. If plan was opened before child is 18, when he/she turns 18 you as parents can continue being plan holder and your adult beneficiary could also be added as a joint holder. If someone other than legal parents opens the account that person must be removed as a holder of the plan when the child turns 18.
What happens if the beneficiary is no longer eligible for the DTC?
If you don’t qualify for DTC then you must close your RDSP. The holder must terminate the RDSP no later than December 31 of the year following the first full calendar year in which the beneficiary is no longer eligible for the DTC. For example, if you were given letter stating you are not qualified for DTC let’s say June 2017 then you have till December 31, 2017 to be eligible. 2018 is your first full calendar year where you are ineligible for DTC. The end of 2018 (December 31) is when you must close the account. Any funds remaining after repayment of government grants and bonds will be paid out to beneficiary and taxable. There is an exception to this, if your doctor certified that the beneficiary may be eligible again for some years later then you can postpone closing the plan. You can postpone up to 5 years.
What happens if the beneficiary dies?
If beneficiary dies, the account must be closed the following calendar year by December 31 and government will take back any grants and bonds and whatever is left will be paid to the estate. The remainder amount will be distributed according to beneficiary will or if no will in accordance with the rules of intestacy in each province. Hence why it is so important to have wills.
Qualification for previous years, how do you get those grants and bonds?
Each year the government sends plan holder an annual summary called a “Statement of Entitlement” explaining how much grant room is available and how to maximize it for the year. The carry forward provision allows individuals to access unused bond entitlements from the past 10 years. The grant and bond will be paid on unused entitlements up to an annual maximum of $10,500 for the grant and $11,000 for the bond.
Let us take Roger for example: (this example taken directly off CRA site)
- He is a person with a disability.
- His income has been less than $15,000 each year since 2007.
- He has been eligible for the disability tax credit (DTC) each year since 2007.
- He is not, and has never been, a holder or beneficiary of an RDSP.
- He has reached the age of majority and is contractually competent to enter into a plan.
In August 2017, Roger opens an RDSP. Although opened in 2017, Roger’s plan has accumulated grant and bond entitlements over the past 10 years, going back to 2008 when RDSPs became available.
The following is a breakdown of Roger’s accumulated grant and bond entitlements.
- $1,500 in grant entitlements per year at the 300% matching rate ($1,500 x 10 years for a total of $15,000);
- $2,000 in grant entitlements per year at the 200% rate ($2,000 x 10 years for a total of $20,000);
- $1,000 in bond entitlements per year ($1,000 x 10 years for a total of $10,000).
Upon application for his bond, his RDSP will receive $10,000 in accumulated bond entitlements.
After the RDSP is opened, with Roger’s written consent, his family contributes $800 to his RDSP in October 2017, for which his RDSP receives $2,400 ($800 × 300%) as a grant.
Roger carries forward $12,600 ($15,000 – $2,400) in unused grant entitlement at the 300% rate and still carries $20,000 in unused grant entitlement at the 200% rate.
10-Year Repayment Rule
All government grants and bonds paid into the plan during the preceding 10 years before the termination of account must be repaid to the Government of Canada. This is also known as the assistance holdback amount (AHA). There is an exemption, if you have a life expectancy of 5 years or less you will be allowed to make withdrawals up to 10000 in taxable plan savings as well as pro-rated amount of plan contribution without having to repay the grants and bonds preceding 10 years. As of January 1, 2014 instead of having to repay all of the Government grants and bonds that were contributed to the account over the last 10 years, the ratio will be 1 to 3. Every dollar you withdrawn from the account you must repay government 3 dollars.
When it comes to withdrawal this amount does not impact other income tested federal government program like Canada Child Tax Benefit, Old Age Security (OAS), Guaranteed Income Supplement (GIS), Canada Pension Plan (CPP), The Goods and Services Tax Benefit (GST Benefit), Employment Insurance, and Social assistance benefits. For Provincial and territorial you need to contact your provincial or territorial government to make sure you get the most up-to-date details. Prince Edward Island and Quebec are the only two provinces that does not full fully exempt RDSP assets. To read more about your provincial or territorial benefits https://www.canada.ca/en/employment-social-development/programs/disability/savings/pt-benefits.html