RDSPs: What Parents Need To Know

While it’s likely that most Canadian parents have heard of RESPs, the term RDSP (Registered Disability Savings Plan) may be less familiar. Yet if your child qualifies for the Disability Tax Credit, an RDSP offers some little-known but sweet savings incentives. In fact, families may receive grant money of up to $3,500 per year, plus another $1,000 annual bond depending on income, and in some circumstances RESP investment income may even be rolled over into an RDSP. Read on for the lowdown on RDSPs and how they may benefit your family.

What is an RDSP?

An RDSP is a registered plan to encourage families to save money for the life expenses of Canadians with a qualified disability.  This includes family contributions, government grant and bond money, plus investment earnings. While there are no annual limits on contributions, the lifetime limit is $200,000. As of 2008, grant and bond entitlements can be carried forward up to 10 years.

Though RDSP contributions aren’t tax-deductible, the plan allows investment earnings on grant, bond, and contributions to grow within the plan tax-free.  Contributions can be made to the plan each year until the beneficiary turns 59.

How Does an RDSP Benefit My Child?

Aside from the tax-sheltered growth of contributions to an RDSP, the biggest benefit has to be the grant and bond money available to the beneficiaries of these plans. The Canada Disability Savings Grant (CDSG) has a lifetime limit of $70,000, and is available on a sliding scale depending on family income.

In addition to the CDSG, lower income families may also receive a $1,000 annual Canada Disability Savings bond towards the RDSP (it has a lifetime limit of $20,000), even without an annual contribution, and this may continue until the beneficiary reaches the age of 49.

And parents of disabled children now have another option: as of 2013, parents and grandparents of a qualified disabled child can plan a tax-deferred rollover of RRSP, RRIF, or company pension funds to an RDSP on the death of the annuitant parent or grandparent. Taxes are deferred until withdrawal from the RDSP.

Transferring an RESP to an RDSP

The 2012 federal budget introduced the possibility of transferring RESP investment income to an RDSP (from 2013 onwards) on a tax-deferred basis, as long as there is a common beneficiary on both plans, and as long as the beneficiary meets the age and residency requirements for the RDSP. They must also meet at least one of the following conditions:

  • Have a mental impairment serious enough that they can’t attend and complete a post-secondary program;
  • The RESP has been open for at least 10 years and each beneficiary is at least 21 years old and not pursuing post-secondary education; or
  • The RESP was opened more than 35 years ago.

Take note: the rollover does NOT apply to all funds in the RESP. Contributions are returned to the RESP subscriber, and any Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB) funds will be returned to the government. The investment earnings on contributions, grant, and bond money may be rolled over from an RESP to an RDSP. Also, if an RESP to RDSP rollover is completed, the RESP must be closed by March of the following year.

For more information, visit the CRA website.

What to Watch For

While RESP earnings may qualify to be rolled over into an RDSP as a contribution, doing so must not push the lifetime maximum contribution over $200,000. Additionally, the CDSG will not be applied to these funds.

If withdrawals are made from the plan within the first ten years since it was opened, the grant and bond funds received must be repaid to the Canadian government, an amount called the Assistance Holdback Amount (AHA). As of 2014, repayments of $3 for every $1 withdrawn must be made until the AHA is reached.

If your family includes a child that is eligible for the Disability Tax Credit, consider opening an RDSP to maximize government contributions and help prepare for their long-term financial future.