Registered Disability Savings Plan
By: John K. Hale, CPA, CGA
Articling Financial Advisor
Recently, I was working with one of my clients and our conversation turned to their adult son, Todd. While they had mentioned Todd in the past, we had never spoken about their adult children in great detail. They explained that Todd had suffered from mental illness since he was a late teen and they wanted my advice on how they could help him secure his financial future.
Todd, who is 38 years old, lives in supportive housing and works part-time. While his illness is considered to be severe and prolonged, he is able to maintain a healthy and productive life with proper care and medication.
I asked my clients if they were familiar with the Registered Disability Savings Plan (RDSP) and they told me they were not aware of the program. RDSPs were established in 2008 as a government-sponsored savings plan designed for people with disabilities. This purpose of the account is to provide long-term savings from which the beneficiary (Todd) can draw an income later in life. In order to qualify for an RDSP, you must first qualify for the disability tax credit.
I asked my clients if Todd qualified for the disability tax credit and as he did. We were able to immediately open an RDSP account for him.
I explained that the RDSP account offers several benefits that will help Todd achieve some long-term financial security. The federal government provides up to $3,500 in annual Canadian Disability Savings Grants to a lifetime maximum of $70,000. Additionally, because Todd’s income is less than $25,000/year, he also qualifies for a $1,000 annual Canada Disability Savings Bond to a lifetime maximum of $20,000. In addition to the grants and bonds, earnings and growth on the invested funds invested within the plan are completely tax-free. As the RDSP is a long-term savings plan, the Grants and Bonds are intended to encourage savings and should remain in the account for at least 10 years.
We decided to establish the account with just enough money to attract the annual maximum amount of grants and bonds. In this case, this worked out to be an initial deposit of $3,750. The government allows you to carry forward unused grant and bond payments for up to ten years so we were able to back-apply for the unused grant and bond payments from to 2008 onwards.
In this case, our initial deposit of $3,750 attracted $10,500 in disability grants and $7,000 in bonds in the first year for a total account value of $21,250. The RDSP program is clearly a generous program that should be considered by anyone who is caring for a disabled family member.
These government incentives will substantially boost the value of the RDSP over time. Furthermore, when Todd does begin to draw an income from the account, his withdrawals will not affect the qualification for other government support payments such as Old Age Security or GST/HST credits.