Although the registered disability savings plan is now three years old, the vast majority of Canadians who are eligible for the program have not made use of it. Joel Crocker, director of planning with the Planned Lifetime Advisory Network, a Vancouver-based non-profit organization that works on behalf of families with members with disabilities, says only 10% of eligible Canadians have an RDSP.
Like RRSPs, assets invested in RDSPs grow tax-free until the funds are withdrawn. Unlike most other registered programs, however, RDSPs are eligible for many thousands of dollars in government grants. As a result, many Canadians with disabilities are missing out on a potentially life-changing savings vehicle. “An RDSP is the first step,” Crocker says, “people with disabilities can take to move toward ownership of assets.”
The first step in opening an RDSP is to apply for eligibility for the disability tax credit, a separate credit that requires a physician’s approval. (See story, above.) Once that eligibility has been obtained, the taxpayer can proceed to open an RDSP.
The biggest advantage of these plans, says Jamie Golombek, managing director of tax and estate planning Canadian Imperial Bank of Commerce’s private wealth-management division in Toronto, is the “very generous” government benefits that come along with it. That includes the Canada disability savings grant, which can be worth up to $3,500 per year, to a lifetime maximum of $70,000. In addition, the Canada Disability Savings Bond can be worth up to $1,000 annually, up to a lifetime maximum of $20,000.
For the first time, the government is allowing the grants and bonds to be collected retroactively on new contributions this year. When an RDSP is opened, the grants and bonds will be paid on unused entitlements for the preceding 10 years (but not earlier than 2008, when the plans were established), up to an annual maximum of $10,500 and $10,000, respectively.
“You can get $90,000 of free government money deposited directly into an RDSP for the benefit of the disabled person,” Golombek says. “When I do planning, I say if anybody in the family has a disability, RDSPs are the No. 1 thing they should be doing.”
Janice Wong, a financial planner with Royal Bank of Canada in Winnipeg, agrees. She says RDSPs are “fabulous” accounts, but the RDSP message simply hasn’t been adequately communicated by the financial services industry. It’s not common for clients to volunteer the information in a meeting that they have a child with a mental or physical disability, she adds: “It takes a while to get to know people. It’s not one of the first questions we ask, although maybe it should be.”
RDSPs are modelled on the registered education savings plan. Besides the grant and bond incentives, other similarities include contributions not being tax-deductible, lifetime contribution limits but no annual limits, and tax deferral on growth.
One of the biggest criticisms of RDSPs has been the 10-year repayment rule. That provision requires that any grants or bonds paid into an RDSP in the decade before a withdrawal of any amount, no matter how small, must be repaid to the government. The rule was put into place to ensure RDSPs were used for long-term savings and to prevent the grants and bonds from being recycled through withdrawals that are then used to obtain more matching grants. Plan beneficiaries can receive grants and bonds until age 49. Withdrawals must start by age 60. When RDSP payments begin, they must be paid to the beneficiary, but there are no restrictions on how the money can be used.
The withdrawal rules are subject to an exception in which the beneficiary has a reduced life expectancy due to their disability. The 2011 budget made a change that allows these beneficiaries to withdraw money from the RDSP without triggering the repayment rule. Says Golombek: “That’s very good news.”
Crocker says further changes are needed to make RDSPs even more useful. He would like to see the 10-year rule cut in half for all beneficiaries and introduction of a penalty-free, one-time withdrawal for emergencies.
Crocker says there are a number of reasons why RDSPs aren’t as popular as they could be. For example, needing a doctor and the CRA to sign off on the disability tax credit can be a hurdle. While people with physical disabilities may research the plans, those with mental disabilities may not be inclined to do so. Crocker adds that the sheer number of rules for RDSPs also may discourage some people. IE