An RDSP is a government assisted savings plan for those individuals that qualify for the Disability Tax Credit (“DTC”).  The plan is frequently overlooked despite the fact it can provide significant government assisted savings to those who qualify.  Individuals are often familiar with RRSP’s and TFSA’s, but the same is not true for RDSP’s.  An RDSP can be created for someone who is eligible for the DTC even if they do not need to use the DTC on their tax return.

Contributions to an RDSP are not tax deductible and can be made until the end of the year in which the beneficiary turns 59.  Contributions that are withdrawn are not included in the income of the beneficiary since they were not tax deductible in the first place.   Investment income earned in the plan and government grants to the plan are included in the beneficiary’s income when paid out.

The Canada disability savings grant is the amount the government of Canada contributes to the plan. The government will pay matching grants to the plan depending upon the beneficiary’s family income.
 

Beneficiary’s family income	Grant	Maximum
$83,088 or less
On the first                 $500	$3 for every $1 contributed	$1,500
On the next             $1,000	$2 for every $1 contributed	$2,000
More than             $83,088
On the first              $1,000	$1 for every $1 contributed	$1,000

*income thresholds based on 2011 rates

If the beneficiary’s family income is less than $83,088 and a contribution of the $1,500 is made to the plan, the government will contribute $3,500.  While the beneficiary is less than 18 years of age, family net income is that of the parent(s) or legal guardian(s).  From the year in which the beneficiary turns 18, the definition of family net income will generally be the beneficiary and spouse’s (if applicable) combined net income.  The total Canada disability savings grant during the beneficiary’s lifetime cannot exceed $70,000.

The plan can be established from birth, provided the beneficiary meets the criteria. The government of Canada will also pay up to $1,000 a year in a Canada disability savings bond to low-income Canadians with disabilities.  No contributions are required and the lifetime bond limit is $20,000.  The bond can be paid into the RDSP until the year the beneficiary reaches 49.

Beginning in 2011, an individual will be able to carry forward unused grant and bond entitlements to future years.  The carryforward period is ten years and starts after 2007.  Current legislation seems to result in harsh tax and government funding repayment results if a beneficiary loses DTC eligibility.  Since disabilities are intermittent, this issue is being taken up with the Department of Finance.

If you are entitled to the Disability Tax Credit, you should consider an RDSP.  Canada disability savings grants and bonds are available and investment income is not taxed in the plan until it is withdrawn.