It's been a full three years since Registered Disability Savings Plans (RDSPs) became widely available in Canada, but many of the people they could help the most still aren't aware they even exist.
That's unfortunate, say those who work on disability issues, because these plans have the potential to make a huge difference for a population that faces big financial obstacles – especially in adulthood.
These tax-assisted savings plans were the first anywhere in the world designed specifically to provide financial security for people with disabilities. But RDSPs are still under-used, even by their main target group – the disabled and their families. The latest figures show that only 46,500 RDSPs have been set up in Canada. So after three years, they've reached fewer than a tenth of the estimated 500,000 who could directly benefit from them. The average plan holds less than $10,000.
"There's still a definite lack of awareness," says Joel Crocker, director of planning at the Planned Lifetime Advocacy Network, a Vancouver-based non-profit group that lobbied for the creation of RDSPs.
"There are also many misconceptions, such as that you need to put money into the plans to get any help from the government," he told CBC News.
"There must be a catch," is a familiar comment advocates often hear. So it comes as a surprise when disabled people learn they can often get thousands of dollars without having to make any contribution to their own plans.
An RDSP is similar to an RESP (Registered Education Savings Plan), in that contributions to the plan are not tax-deductible, but the income inside the plan is allowed to grow on a tax-sheltered basis until funds are withdrawn.
Contributions are further bolstered by federal grants and savings bonds (more on this government assistance below) that provide up to $4,500 a year — to a lifetime total of $90,000 — of direct assistance, depending on income.
To have a Registered Disability Savings Plan, recipients must satisfy three main conditions. They must be:
Under the age of 60 when contributions are made.
A Canadian citizen with a Social Insurance Number.
Eligible for the Disability Tax Credit. This ensures that plans can only be set up for those with a severe and ongoing physical or mental impairment.
Parents can set up plans for disabled children. Disabled adults can set up plans for themselves. But only one RDSP can be set up per person.
Once someone sets up an RDSP for a particular beneficiary, anyone can contribute money to it as long as the plan holder gives written consent.
"This restriction is important," writes Jamie Golombek in the Canadian Tax Journal, "because it permits the RDSP holder to plan contributions strategically, in order to maximize matching government grants and bonds."
Depending on family income and how much is contributed, Ottawa will provide a grant of up to $3,500 a year. For lower-income Canadians with RDSPs, the federal government adds a bond of up to $1,000 a year, even if no contribution is made that year. These grants and bonds are available until the year the beneficiary turns 49. All grant and bond money must remain in the plan for at least 10 years.
There's no annual limit on how much can be put into a plan, but there is a lifetime contribution limit of $200,000, not counting the grants and bonds. The deadline for contributions each year is Dec. 31.
Parents or grandparents of a disabled child or grandchild can also arrange for a tax-free rollover of RRSP, RRIF or company pension plan money to an RDSP when the parent or grandparent dies.
The grants are called Canada Disability Savings Grants. An RDSP can receive a maximum of $3,500 in matching CDSGs in any one year and a total maximum of $70,000 over the lifetime of the RDSP's beneficiary.
The grant is on a sliding scale. For families with a net income over $83,088 in 2011 (thresholds are inflation-adjusted each year), the grant is equal to the first $1,000 contributed to a maximum of $1,000 a year. But for those with family incomes below $83,088, the grant is sweetened. On the first $500 contributed, Ottawa will contribute $1,500. On the next $1,000, the feds will kick in $2,000. So the maximum grant in any one year can reach $3,500 on a contribution of just $1,500.
For lower-income Canadians, Ottawa also provides Canada Disability Savings Bonds. For those with family incomes up to $24,183, the RDSP will get a $1,000 bond each year, even if nothing is contributed to the recipient's RDSP that year. For incomes between $24,183 and $41,544, the grant will be reduced proportionately until it disappears entirely at incomes above $41,544. The lifetime limit for bond payments is $20,000.
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For those just opening a plan, Ottawa allows a 10-year carry forward of unused grant and bond entitlements. Since RDSPs have been around since 2008, people can claim unused grant and bond money going back to that year.
A word about family income. For those RDSP beneficiaries under age 18, it's the net income of the child's parents or guardians that is the key figure. For those 18 or over, it's their own family income that is key, even if they still live with their parents.
The bottom line?
All disabled adults, even if they have no income, should apply for the disability tax credit, file tax returns, set up an RDSP and apply for grants and bonds.
The money can really add up. Here's one example provided by the Planned Lifetime Advocacy Network (PLAN): A low-income family contributes $1,500 a year for 20 years to an RDSP for a total contribution of $30,000. Assuming that the maximum $90,000 of federal grants and bonds are received in those 20 years and the plan is in place for another 10 years (to avoid any repayment issue), an RDSP could grow to be worth between $400,000 and $500,000, assuming a modest return of 4.5 to 5 per cent per year over the 30 years.
Advocates say the plans offer a huge incentive for families to contribute.
Several types of withdrawals can be made from an RDSP. Lifetime Disability Assistance Payments (LDAP) are paid at least once a year until the RDSP is terminated or the beneficiary has died. This payment arrangement, if selected, must begin no later than the end of the year when the plan's beneficiary turns 60. A complicated formula limits the maximum annual LDAP payout.
Disability Assistance Payments (DAP) can be made from an RDSP at any time, but grants and bonds may need to be repaid if they have not been in the plan for at least 10 years.
Payments in the early years of a plan are limited by the assistance holdback rule. Since all grants and bonds received in the previous 10 years must be repaid once a disability assistance payment is received, the plan must hold back an amount equal to that amount in case a benefit repayment must be made. In some cases, that can prevent any disability payment at all. Advocacy groups have asked for this rule to be changed.
Payments from an RDSP are partially taxable and partially non-taxable.
The portion of the withdrawal derived from grants, bonds and growth is taxable. The part derived from contributions is not taxable.
The really good news is that payments do not reduce the beneficiary's entitlement to any federal income-tested benefit, like the child tax benefit or the federal sales tax credit and the Guaranteed Income Supplement. Furthermore, most provinces and territories have announced a full exemption of RDSP income and assets from provincial income-tested support programs. Quebec and P.E.I. have partial exemptions in place.
As good as RDSPs are, disabled Canadians and advocacy groups have been pressing for further changes to improve the plans and make them more flexible.
Among the changes suggested during a federal consultation that just ended:
Enable funds from a Registered Education Savings Plan (RESP) to be rolled over to an RDSP, much as funds from other registered plans like RRSPs and RRIFs from a deceased individual can be.
Provide more exemptions to the 10-year rule. Currently, any grant or bond money paid into an RDSP in the 10 years before a withdrawal from an RDSP must be repaid, unless a doctor certifies that the beneficiary isn't expected to live more than five years. Advocates would like to see additional provisions that would give beneficiaries emergency access to some funds as well as one that would allow a beneficiary to withdraw funds to buy a home.
Improve the legal representation requirement. Once a disabled child reaches age 18, banks require that person to be the legal holder of an RDSP account. But what if a disabled adult isn't legally able to open an RDSP? Currently, the family must apply to have the adult child declared legally incompetent – a process that is time-consuming, expensive and often upsetting. Several groups are suggesting an easier process that would see a trusted adult like a friend or parent appointed as a joint RDSP account holder.
Bank of Montreal was the first big bank to establish an RDSP in December 2008. Now, all of the big banks have their own RDSP programs in place. A few credit unions also offer theEach financial institution offers its own investment choices. RDSPs can only be set up at institutions that offer the plans.
More information on RDSPs is available from the financial institutions, from the federal government, and various advocacy groups.
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