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The Companion Advisor:
Retirement PlanningThe new RDSPs (May 2008) Registered Disability Savings Plans (RDSPs) were first proposed in the March 2007 federal budget, they were set to be available for the first time in 2008, and yet nearly halfway through the year you still can't open one for a disabled beneficiary. So what's the holdup? It's not the legislation itself, which was actually passed into law late last year, but rather the enormous complexity financial institutions and Human Resources and Social Development Canada (HRSDC) face when establishing the plans, the infrastructure and systems programming that will be needed to track not only contributions, but the government bonds and grants as well. That said, it's only a matter of time before the first RDSP is established in Canada, hopefully by the end of 2008. Once these plans are established and available, they will prove to be a very useful tool to encourage long-term savings by and for persons with disabilities. Overview of RDSPs An RDSP is a registered investment plan under the Income Tax Act, largely modelled after the Registered Education Savings Plan (RESP) and the associated grant and bond incentive programs, but there are some significant differences. As with RESPs, money contributed to an RDSP is not tax-deductible. Government grants and bonds are deposited directly into the plan. Such grants to the plan can be as much as 300% of contributions, and bonds can even be obtained without making any contributions, as long as a "net income" test, discussed below, is satisfied. Earnings and growth on all deposits accrue on a tax-deferred basis. The disabled beneficiary is the only person entitled to any payments. The beneficiary is taxed on the earnings and growth when payments are received from the plan. Contributions are not deductible and therefore not taxed in the beneficiary's hands. As well, there are absolutely no restrictions placed on the use of RDSP payments, as long as they are either received by the beneficiary or applied for his or her benefit. Who may benefit from an RDSP? In order to open a disability savings plan, the beneficiary of the plan must qualify for the disability tax credit (DTC) in the year of establishment. As long as the person continues to be a DTC-eligible individual, the plan may continue to receive deposits, shelter growth and earnings from taxation, and eventually distribute the accumulated funds to the plan beneficiary. One-to-one relationship There is an absolute one-to-one relationship between a plan and a beneficiary — each plan can have only one beneficiary and each individual can have only one plan at any given time. This differs from other plans such as RRSPs, RRIFs and RESPs where you can open multiple plans, provided you stick to contribution limits across all plans. Contributions Contributions to a plan are not tax-deductible. There are no annual limits but there is a lifetime limit of $200,000 of total contributions (excluding grants, bonds and growth). Contributions can be made in a given year provided that the beneficiary is eligible for the DTC. Unlike RESPs where the subscriber is entitled to a tax-free return of his or her contributions, once RDSP contributions have been made to a plan, those funds can only be paid out for the benefit of the disabled beneficiary. Canada Disability Savings Grant (CDSG) The CDSG encourages the use of an RDSP by matching up to 300% of annual contributions made into a plan, to a lifetime maximum of $70,000. Qualification for a grant is determined by measuring "net family income" (defined below) against a threshold level. Where net family income is below the threshold level, $75,770 in 2008, the government will provide:
Where net family income exceeds the threshold, the government will provide:
"Net family income" is determined by considering the age and spousal status of the beneficiary. For a beneficiary under 19, it is the combined net income of that person's parents. For a beneficiary 19 or older, it's the disabled beneficiary's own family "net income." Grants are available for contributions made up until the end of the year in which the beneficiary turns 49. Canada Disability Savings Bonds (CDSB) The CDSB is targeted to support low- and modest-income families, children in care, and adults without family support. CDSB entitlement is not dependent on contributions. It provides up to $1,000 per year to RDSPs, up to a maximum lifetime limit of $20,000 per disabled beneficiary. The maximum annual amount of CDSB assistance of $1,000 will be paid to an RDSP where family net income is below $21,229 (2008) and will be phased out fully at income above $37,884 (2008). Payments There are two types of RDSP payments: • Lifetime disability assistance payments (LDAP) and • Disability assistance payments (DAP). Lifetime disability assistance payments or LDAPs must commence no later than the year in which the beneficiary turns 60 years of age. The total of all LDAP payments in a calendar year is subject to a maximum as follows: Fair market value of the RDSP Whether a plan is allowed to make the more general "disability assistance payment" or DAP must be specified in the particular plan documentation at outset or in later amendments to plan documentation. Such payments, random lump sum payments that can be withdrawn prior to age 60, can give the beneficiary more flexibility. These are not subject to any life expectancy constraints. Although plans can allow both payment types, beneficiaries will be required to withdraw LDAPs. In a given calendar year, if the total of all past bonds and grants paid exceeds the total of all past contributions made, a minimum payment equal to the LDAP maximum formula above must be taken each year once the beneficiary reaches age 60. Each RDSP payment is a blended return of contributions (non-taxable since the contributions were made using after-tax dollars) and grants, bonds, and earnings on all deposits (taxable), making each payment dollar partially taxable. Assistance holdback amount In the event an RDSP is terminated by the holder, the beneficiary ceases to be eligible for the DTC, the beneficiary dies or a DAP is paid, any grants or bonds received in the ten years prior must be repaid This amount is called the "assistance holdback amount." Note, however, that earnings and growth on the amount need not be repaid. If the beneficiary dies, the contributions and earnings (less the holdback) belong to the beneficiary's estate. Effect on income-tested government benefits The last remaining issue to be resolved before these plans begin to become widely accepted is whether a disabled beneficiary who has accumulated assets in an RDSP or who begins to receive DAPs or LDAPs will be disqualified from receiving government disability benefits that are based on an asset or income test. The federal government has already taken the lead on this by amending the Income Tax Act to ensure that RDSP income will not affect the disabled beneficiary's entitlement to the GST credit, the Canada Child Tax Benefit or Old Age Security payments. As of the time of this writing, only British Columbia and Newfoundland have explicitly stated that RDSP assets and income will not affect provincial income-tested disability entitlements. Will other provinces follow? It remains to be seen. Jamie Golombek, CA, CPA, CFP, CLU, TEP, is the vice-president,
taxation and estate planning, at AIM Trimark Investments. Jamie.Golombek@aimtrimark.com
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