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Planning for Disabled Family Members

The future of disabled family members is often of great concern to parents and grandparents. Now there is one more tool to ensure that disabled loved ones will be looked after financially ,in the future when family may not be able to. Traditionally families have used inter vivos , testamentary or Henson trusts to provide for disabled family members . In 2007 the Federal government introduced the Registered Disability Savings Plan RDSP. The plan allows for tax-free income earned on funds deposited to a special account very much like the RESP program. When withdrawn the funds are taxed to the disabled recipient and will not interfere with any other government payments . The Federal government will also supplement the funds by contributing grants and bonds. Most financial institutions were slow to uptake this government program but after one minor change in 2008 all the major Canadian banks now offer the RDSP. The program may come in the future to mutual fund companies as well. Here is a snap shot of the rules and regulations associated with the RDSP program.

Who can open a RDSP ?

Any one !! parents ,grandparents , qualified person such as guardian of a mentally incompetent person , even the disabled person themselves if not a minor

Any one can contribute to an opened plan so long as contributions do not exceed $200000 lifetime amount ie grandparents , aunts, uncles , church groups or schools

Note that contributions are not refundable to the contributor and will only be allowed until the beneficiary ( disabled person) turns 59 years old

Who can be a beneficiary of the RDSP ?

Any individual who qualifies for the disability tax credit under the Income Tax Act

As defined in Section 118.3 note many kinds of disabilities qualify you need form T2201 signed by a physician or psychologist i.e. dementia, ostonomy or autism the disabled person must be markedly restricted in mental or physical capacity to perform a basic activity of daily living

have a SIN

is a resident of Canada when the plan opens and is contributed to

under the age of 60

Note that any one person can only have one RDSP

What goes in a RDSP ?

Any qualified investment very much like the RRSP and RESP programs

GICs, bonds, stocks, bank mutual funds

What does the Government do to help ?

Canada Disability Savings Grant

Federal Government will match contributions to the RDSP based on contributors income grants are available until the end of year the beneficiary turns 49

Maximum grant per beneficiary is $70,000 lifetime max per year is $3500

The best option for those in lower tax brackets is to contribute $1500 for 20 years

This is a 3 to 1 government match higher tax brackets receive a 1to 1 match

Please see the CRA rules and regs for the income bases for matching grants

Canada Disability Savings Bond

The government bond will automatically be received with no matching contribution required you can open a RDSP with a minimum amount and still get the bond

Based on an income threshold the maximum paid is $ 20000 lifetime $1000 per year

The RDSP will be eligible to receive the bond until the end of the year the beneficiary turns 49 again see the CRA rules for income thresholds and ratings

When can the Disabled get payments from their plan ?

Money can be withdrawn from a RDSP in three ways only

Payments to the beneficiary

Payments to the estate of a beneficiary

Repayments to the government of the CDSGrants and CDSBonds

Lifetime Disability Assistance payments must start the year the beneficiary turns 60, once started they must pay out annually until plan terminates or beneficiary passes away

These payments are taxable to the beneficiary but will not affect any other government benefits , effectively only grants and income earned are taxable

Disability Assistance payments can commence when the beneficary turns 27 to 59 but there are restrictions based on amounts of CDSG and CDSB versus plan holder contributions at the beginning of the year

Special Disability payments can be made for beneficiaries diagnosed with a terminal illness and not expected to survive for longer than 5 years

What happens if the beneficiary is no longer disabled ??

The RDSP must be closed no later than the end of the calendar year following the first year that the beneficiary no longer qualifies for the Disability Tax credit

All grants and bonds paid into the plan in the last 10 years must be paid back and there are rules to prevent premature collapse of plans using an Assistance Holdback Amount some portions of the funds will be taxable in the hands of the beneficiary

What happens with the Death of a beneficiary ?

RDSP must close and funds paid to estate no later than the end of the calendar year following the year of death

All grants and loans are paid back according to the previously mentioned 10 year rule

Taxable amounts are reported as income to the estate and remaining funds are distributed according to will

For further information on how the RDSPs can help you and your loved ones please see the CRA web site for more technical rules or your local bank .