I represent people who have been injured in accidents as a result of other peoples’ carelessness. I’m not an accountant. I’m not a financial planner. I’m a lawyer. I don’t have the expertise to give financial advice.
But not uncommonly, I have clients who are worried about their financial future because of their injuries – usually because they are unable to work or unable to earn the same money they did before their accident.
The federal and provincial governments have created a number of tools in an effort to help people with severe disabilities keep more of their money or make their money grow. These tools include the caregiver tax credit, disability tax credit and the registered disability savings plan or RDSP.
The caregiver tax credit and the disability tax credit reduce tax owed. They will be the subject of another blog post. The RDSP is what I would like to focus on in this post and it is about (a) building your savings; (b) reducing taxes owed; and (c) deferring taxes owed for another day.
In order to be eligible to have an RDSP, you must:
- Suffer from a severe and prolonged disability;
- Have a valid SIN;
- Reside in Canada;
- Be under 60 years old; and
- Have a family income below a certain level ($91,831.00 as of this post)
Severe disability is my phrase. To be eligible for the plan you must suffer from blindness, be markedly restricted in at least one basic activity of living, be significantly restricted in two or more basic activities of living, or need life sustaining therapy. A prolonged disability means you must have an impairment that is continuous for a period of 12 months and is present at least 90% of the time. It seems that at times it can be quite challenging to apply the disability test. For instance, how do you know if a disability is present 90% of the time?
The person with the RDSP (who benefits from the RDSP) is called a beneficiary. The plan, though, can be held by someone other than the beneficiary, called the holder, which is a nice option. The holder can open the plan, make contributions and allow other people to make contributions. But even with a holder, the money from the plan can only be received by the beneficiary, which is reassuring.
Anyone can pay into the plan – friends, family, neighbours, charities, etc. This is a great way to give people who want to help a way to help. Further, for every $1 contributed, the federal government will pay up to $3 into the plan to a max of $70,000! This is called a grant. In some cases (where the family income is below a certain level), the federal government will also pay a bond up to $1,000/year to a maximum of $20,000!
Once the beneficiary turns 60, annual payments are made for life, called an LDAP.
Money can also be withdrawn at any time, called a DAP, so long as there is enough money left in the plan to make the required repayments to the government.
If a DAP is received, beneficiaries repay the government the lesser of (a) 3 times the amounts withdrawn or (b) the sum of grants and bonds over the last 10 years.
Tax does not apply until payments are made out of the plan. DAP and LDAP payments are taxed at the source (money is held back in the plan), but two tax credits are applied to reduce the taxes owed.
Understandably, some people looking into this plan may be wondering how payments into or out of the plan will affect eligibility for disability benefits or other income assistance programs or if those payments would reduce disability payments from other schemes. Thankfully, the RDSP does not affect eligibility for, or reduce payments from, Old Age Security (OAS), CPP, CPP disability (CPPD) or ODSP.
Anyone can contribute to the plan. The government matches contributions up to 3:1. Tax credits apply to reduce taxes owed and tax is also deferred. The plan doesn’t affect OAS, CPP, CPPD or ODSP. And there are incentives to keep contributions in the plan to help people save. It’s definitely not a money tree, but there seem to be several nice savings features to help fill the proverbial piggy bank.
If the RDSP is of interest to you, contact your bank, accountant or financial planner. Make sure you speak with a financial expert, specifically with RDSP experience, who can give you accurate information and proper advice.