Registered Disability Savings Plan (RDSP)

A Registered Disability Savings Plan (RDSP) has many benefits, but also many rules. It is very important to learn about the features and restrictions of an RDSP before you open an account.

What is a Registered Disability Savings Plan (RDSP)?

An RDSP is a tax-sheltered account which helps people with disabilities save for their future. You can open a simple savings plan or an investment account, which can hold different Types of Investments like GICs, bonds, mutual funds, exchange trade funds (ETFs), and stocks.

The beneficiary of an RDSP is the person who will receive the money when it is withdrawn.

Talk to your bank, investment firm or credit union about opening an RDSP. However, be aware that not all financial institutions offer RDSPs.

Before opening an RDSP investment account or savings plan, it is a good idea to:

Check what types of investments you can hold in the account.
Ask about the different types of charges and fees related to the investments and the account.
Compare fees and charges at other financial institutions.

Who is Eligible to be the Beneficiary of an RDSP?

Before you can open an RDSP, the beneficiary of the plan must qualify for the Disability Tax Credit (DTC), which involves obtaining certification from a medical professional. A beneficiary can only have one plan, and each plan can only have one beneficiary.

To open an RDSP the beneficiary must:

Be approved for the Disability Tax Credit (DTC).
Apply before December 31^st of the year they turn 59.
Be a resident of Canada.
Have a Social Insurance Number (SIN).

Who Can Open an RDSP?

The person who opens and manages the plan is called the planholder. If the beneficiary is under the age of majority, the planholder can be a parent or guardian (proof of legal authority must be provided).

If an adult beneficiary is not competent and unable to enter into a legal contract, the planholder can be a legal representative or qualifying family member (parent, spouse, or common-law partner).

An adult beneficiary must be the planholder if they are competent and able to enter into a legal contract.

How Does an RDSP Work?

Contributions

Contributions to an RDSP can be made until the end of the year in which the beneficiary turns 59. Unlike Registered Retirement Savings Plans (RRSPs), contributions to an RDSP are not tax deductible. There is no annual contribution limit. However, there is a lifetime contribution limit of $200,000. Any money earned in the RDSP is exempt from tax until it is withdrawn.

Government Grants and Bonds

The planholder can apply for government grants and bonds when the plan is opened. The grants and bonds are deposited directly into the account and grow tax-free. The amount received will depend on family income and the amount contributed. After December 31^st in the year the beneficiary turns 49, they are no longer eligible to receive grants or bonds from the government.

The Canada Revenue Agency (CRA) will issue a Statement of Entitlement every February until the beneficiary turns 49. This statement will indicate how much grant and bond they could receive in that year and how much needs to be contributed to get that amount.

Unused grant and bond entitlements can be carried forward for up to 10 years, before the end of the year the beneficiary turns 49.

It is important to be aware that any grants and bonds received in the previous 10 years have to be repaid, if any of the following events occur:

The RDSP is terminated.
The plan ceases to be an RDSP.
The beneficiary loses DTC approval before the age of 60, and the planholder chooses to close or withdraw any amount.
The beneficiary dies.

Canada Disability Savings Grant (CDSG)

The federal government will pay a matching Canada Disability Savings Grant (CDSG) 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 per year, and up to $70,000 over the beneficiary’s lifetime.

Canada Disability Savings Bond (CDSB)

For low income Canadians, the federal government will pay a Canada Disability Savings Bond (CDSB) of up to $1,000 per year. No contributions have to be made to get the bond. The lifetime bond limit is $20,000.

Transfers

You can transfer an RDSP to a different financial institution by completing an RDSP Transfer form. As a beneficiary can only have one plan, the transfer must be for the full amount in the plan and partial transfers are not allowed.

Withdrawals

Regular withdrawals from an RDSP must begin by December 31^st in the year the beneficiary turns 60. When withdrawing funds, the original contributions will not be taxed. However, the grants, bonds and growth on the investments will be taxed. Each withdrawal will include a portion of:

Contributions
Grant and bond amounts
Interest, dividends and gains earned on the investments

If a withdrawal is made before the beneficiary turns 60, the grant and bond amounts will need to be repaid if:

They received grants and bonds in the last 10 years.
They are not DTC approved.

If a withdrawal is made before the beneficiary turns 60, grants and bonds do not need to be repaid if:

A grant or bond was received more than 10 years ago.
The beneficiary has a reduced life expectancy of 5 years or less.

Warning

Making withdrawals from an RDSP may impact the beneficiary’s provincial benefits. Contact your provincial government for details.

What Happens if the Beneficiary Loses DTC Eligibility?

If the beneficiary loses eligibility for the DTC, you can keep the account open or close the plan. If you decide to keep the plan, you cannot make any additional contributions or receive government grants and bonds. In addition, if a withdrawal is made from the plan prior to the beneficiary turning 60, the grants and bonds received in the previous ten years have to be repaid.

If the beneficiary regains DTC approval, you can restart making contributions and will resume receiving government bonds and grants.

For more information on RDSPs, including more details on their tax treatment and limits, you can refer to the Canada Revenue Agency website or speak to an investment advisor.