Providing Security for Disabled Children | FBC, Canada's Farm & Small Business Tax Specialist

Providing Security for Disabled Children

Canada’s registered disability savings plan helps create peace-of-mind for parents and grandparents of special needs children.

If you are the parent of a child with special needs, a major concern likely will be to ensure the financial security of your child when you are no longer around. The Registered Disability Savings Plan (RDSP) can help you save for his or her future care.

RDSPs were first announced in the federal budget of 2007 and arose from the recommendations of the Expert Panel on Financial Security for Children with Severe Disabilities. The budget also announced a Canada Disability Savings Grant (CDSG) program and a Canada Disability Savings Bond (CDSB) program.

The basic design of RDSPs is similar to Registered Education Savings Plans (RESPs). Although your contributions will not be tax-deductible, the investment income from all funds contributed to the RDSP will accrue tax-free just like in an RESP. Contributions will not be taxable to a beneficiary when paid out of a RDSP; however, CDSGs, CDSBs and investment income earned in the plan will be taxable when paid out.

Anyone who is eligible for the Disability Tax Credit (DTC) and is a Canadian resident is eligible to set up a RDSP. The parents, grandparents or legal representatives of a Canadian resident eligible for the DTC also can establish an RDSP. Regardless of who sets up the plan, the child who is eligible for the DTC will be the plan’s beneficiary.

The beneficiary’s social insurance number – or your social insurance number – will be needed to set up the plan initially and whenever contributions are made to the plan.

There is no annual limit on contributions to a plan, and anyone can contribute to it. There is, however, a lifetime contribution limit of $200,000 for any one child. Contributions can be made until the end of the year in which the child reaches age 59.

All RDSP contributions during a given year can earn Canadian Disability Savings Grants at matching rates of 100, 200, or 300 per cent depending on the family’s net income and the amount contributed to the RDSP. The annual maximum CDSG is $3,500, with a lifetime maximum of $70,000.

Additional government contributions – the Canada Disability Savings Bonds – will be provided up to $1,000 per year and $20,000 per lifetime to RDSPs that are set up by lower and modest income families. These are not contingent upon family contributions to the plan.

The maximum annual $1,000 CDSB will be paid to a family whose net income does not exceed $20,883. The CDSB will be phased out gradually for those families with net income between $20,883 and $37,178. These were the income thresholds for 2007 and are indexed to inflation for 2008 and subsequent years.

When the beneficiary is under age 18, “family net income” will generally be the income of the disabled child’s family. When the beneficiary turns 18, the relevant income will be the combined net income of the disabled beneficiary and their spouse or partner.

In summary, families with income below $20,883 could receive $1,000 per year in CDSBs even if you contribute nothing. If you contribute $1,500 of your own money, you could receive $4,500. Families with incomes of over $74,357 may receive $1,000 in CDSGs if they contribute $1,000 to the RDSP.

An RDSP is eligible to earn Canada Disability Savings Grants and Canada Disability Savings Bonds until the end of the year in which the plan beneficiary turns 49.

Your child, as the plan beneficiary, will need to begin taking payments from the RDSP by the end of the year in which he/she turns 60.

The RDSP payments will be subject to a maximum annual limit that is determined based on both the life expectancy of the beneficiary and the fair market value of the plan. The beneficiary, or his/her legal representative, could also be allowed to withdraw additional amounts based on the details of the plan. But only the beneficiary or the legal representative will be able to take payments from the RDSP – contributors to the plan will not be entitled to receive a refund of contributions.

If the beneficiary should either cease to be eligible for the Disability Tax Credit or die, the RDSP must repay to the government all CDSGs, CDSBs, and associated income paid to the plan in the 10 years preceding a payment from the plan. The remaining funds in the RDSP, net of the preceding amounts, will either be paid out to the beneficiary or pass to his/her estate. That amount (net of contributions) will be included in the beneficiary’s income for tax purposes.

The federal government and the provinces have committed to work together to ensure that RDSPs are an effective way to supplement the income of people with disabilities. Therefore, the federal government has indicated that any amounts paid out of an RDSP should not be considered when the provinces calculate provincial benefits for disabled individuals that are based on a means test.

In addition, RDSP payments will not reduce benefits from either Old Age Security or Employment Insurance. Payments from an RDSP are intended to supplement these other benefits to help ensure the financial security of the disabled individual.

The RDSPs should provide some peace of mind for parents who have children of any age who are disabled and unable to support themselves.

"Wealth after all is a relative thing since he that has little and wants less is richer than he that has much and wants more." — Charles Caleb Colton