Published: April 7, 2022
Introduction to the Registered Disability Savings Plan
As of 25 March 2022, eligible Canadian residents whose disabilities have been certified by a doctor or a nurse on Form T2201 can become a beneficiary of the Registered Disability Savings Plan (RDSP). RDSP is a Canada-wide registered matched savings plan offering tax benefits to help provide long-term financial security to people with disabilities. Although there can be multiple plan holders for each plan, a beneficiary can only have one RDSP at any given time. The terms “plan holder” and “beneficiary” for the purposes of the Registered Disability Savings Plan will be discussed in further detail later in this article. A plan can be opened until the end of the year in which the potential beneficiary turns 59.
Who qualifies for a Registered Disability Savings Plan?
A beneficiary is the person who can withdraw funds and receive payments from a Registered Disability Savings Plan in the future.
To become a beneficiary for a Registered Disability Savings Plan, an individual with disabilities who is eligible for the disability tax credit must be a Canadian resident under the age of 60 and have a valid social insurance number. The disability tax credit is a non-refundable tax credit that reduces the amount of income tax liability for those with disabilities or their supporting persons. The beneficiary must also remain a Canadian resident at the time when the plan is entered into and when contributions are made to his or her RDSP. For those who are unlikely to survive more than five years or who elect to opt in, his or her RDSP may become a Specified Disability Savings Plan, which has different rules in withdrawals.
Becoming a plan holder of a Registered Disability Savings Plan
A plan holder is the person who can make or authorize contributions on behalf of the beneficiary. Plan holders do not have to be a Canadian resident and there can be multiple plan holders for one RDSP at any time.
If the beneficiary is a minor, a legal parent of the beneficiary can become the plan holder. In the alternative, an individual or a public department that is legally authorized to act for the beneficiary can also become a plan holder such as the Ontario Public trustee.
If the beneficiary is a legally capable adult, the beneficiary can open an RDSP for themselves. If their parent(s) are holders of a previously opened RDSP, the beneficiary can either take over and become the sole plan holder or be added as a joint holder along with their parents.
If the beneficiary is an adult who may not be able to legally enter into a plan, a qualifying family member or a legal representative can be their plan holder and open an RDSP for the beneficiary. An adult may fall into this category if he or she lacks the mental capacity to enter into a legal contract, including but not limited to intellectual disability, advanced dementia, and severe depression. Despite the Income Tax Act requirement that a plan holder to be a legal representative of the beneficiary, a temporary government measure that has been effective since 2013 gives a qualifying family member permission to become a plan holder. The supposedly temporary measure has been renewed twice, and is currently expiring on 31 December 2023. A qualifying family member includes a cohabitating spouse, common-law partner or parent of the beneficiary. If the family member does not live with the beneficiary, he or she will not qualify to open an RDSP for the beneficiary.
Making contributions to a Registered Disabilities Savings Plan
With written permission from the plan holder(s), anyone can contribute to a beneficiary’s Registered Disabilities Savings Plan until the end of the year in which the beneficiary turns 59 years old. There is no refund of contributions to the contributors once the contribution is made and the contributions are not deductible from the contributor’s taxable income.
Although there is no annual limit on amounts that can be contributed to a Registered Disabilities Savings Plan, there is an overall lifetime limit for a beneficiary. The overall lifetime limit is capped at $200,000, which excludes amounts directly transferred from one beneficiary’s plan to another plan for the same beneficiary.
Matching federal government contributions are available in some circumstances. Whether the government matches individual contributions depends on the annual family income of the beneficiary. If the annual family income is under $98,040, a plan can receive up to $3,500 a year in government matching grants under the Canada Disability Savings Grant. Otherwise, the grant is capped at $1,000 per year. The Canada Disability Savings Bond makes additional contribution to the plan, up to $1,000 per year, if the beneficiary’s adjusted family net income is under $49,020. The grants and bonds may need to be repaid to the government under certain conditions following the 10-year repayment rule. Consequently, part of the funds in the plan may be reserved in the Assistance Holdback Amount, as described below, and saved for potential repayments.
Receiving Payments from a Registered Disabilities Saving Plan
A beneficiary or a beneficiary’s estate can receive RDSP payments via Disability Assistance Payments (DAP) or Lifetime Disability Assistance Payments (LDAP). Both types of payments permit the beneficiary to withdraw funds from their Registered Disabilities Savings Plan unless the balance of the plan is lower than the Assistance Holdback Amount (AHA). The Assistance Holdback Amount is the total amount of government grants and bonds within a 10-year period that has not been repaid. The AHA may need to be repaid when a beneficiary becomes ineligible for the Disability Tax Credit, passes away, closes the RDSP or makes a withdrawal.
A Disability Assistance Payment is any payment from an RDSP to the beneficiary or to the beneficiary’s estate after he or she passes away. There is no limit on the amount of DAP payable to the beneficiary in a specific year except for Lifetime Disability Assistance Payments.
A Lifetime Disability Assistance Payments is a recurring withdrawal made from an RDSP, payable to the beneficiary. Once the LDAP starts, in contrast, it must be paid at least annually until either the RDSP is terminated or the beneficiary has passed away. This type of payment must begin by the end of the year when the beneficiary turns 60 years old.
A beneficiary only needs to pay tax on Registered Disability Savings Plan income, which includes withdrawal from the government matching contributions, investment income of the plan and proceeds from rollover. However, the taxable portion is excluded from the beneficiary’s income when calculating certain benefits, such as the GST/HST credit, the Canada Child benefit, social benefit repayment and the refundable medical expense supplement.
A payment can also be made to transfer funds directly from one RDSP to another for the same beneficiary. Since a person can only be the beneficiary of one RDSP, once funds are transferred from one RDSP to another, the previous RDSP is closed. A transfer is not a withdrawal and therefore it is not taxable.
Pro Tax Tips – Maximize Government Matchings!
Under the Canada Disability Savings Grant, the government matches individual contributions made to the plan up to 300% of the contributed amount until December 31 of the year in which the beneficiary turns 49. The grant is capped at $3,500 per year and $70,000 over the beneficiary’s lifetime. Additionally, for those who qualify as low-income families, the federal government will invest up to $1,000 each year for maximum 20 years under the Canada Disability Savings Bond. There is no contribution required. However, if the beneficiary makes withdrawals from the Registered Disability Savings Plan before the age of 60, he or she may need to repay the bonds and grants.
For advice on best leveraging your RDSP, contact our expert Canadian tax lawyers.
What is the Registered Disability Savings Plan?
The Registered Disability Savings Plan (RDSP) is a Canada-wide registered matched savings plan for people whose disabilities have been certified by a doctor or a nurse on Form T2201. The federal government matches individual contribution up to $3,500 per year or up to $70,000 over the beneficiary’s lifetime. For low-income Canadians with disabilities, the government may also make additional contribution in the form of a bond, up to $1,000 a year, with no additional contributions required.
Who can be a beneficiary of the Registered Disability Savings Plan?
If you have received a certified T2201 form from a doctor or a nurse stating your disabilities, you may qualify for being a beneficiary of the Registered Disability Savings Plan. You must also be a Canadian resident under the age of 60 with a valid social insurance number and live in Canada.
Will I have to pay tax when I withdraw from the Registered Disability Savings Plan?
You only need to pay tax on Registered Disability Savings Plan income, which includes withdrawals from the government matchings, investment income of the plan and proceeds from rollover. However, the taxable portion is excluded from your income when calculating certain benefits, such as the GST/HST credit, the Canada Child benefit, social benefit repayment and the refundable medical expense supplement.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."