Registered Disability Savings Plan

I think the most interesting program in today's Canadian Federal Government budget is the Registered Disability Savings Plan ("RDSP"). Beginning in 2008, a parent of a child with a disability may contribute to a RDSP for the child. There is no tax deduction for the contributions, but there are some matching grants from the Federal Government. You will be able to accumulate income inside the RDSP tax free. The person with a disability pays tax when benefits are paid out from the RDSP.

A person with a disability can also contribute to his or her own RDSP. It appears that, in addition to parents, other family members may contribute as well, but it is not clear to me from reading the budget if anyone can contribute, or if there are restrictions on who can contribute.

I expect that this program will work well for those families who can afford to put some funds away for a person with a disability.

For very low income families, the Federal Government will contribute up to $1000 per year to an RDSP without requiring matching contributions.

Before I reproduce part of the budget dealing with RDSPs, I have a couple of caveats. First, the criteria for the disability tax credit requires a "severe and prolonged mental or physical impairment." The tests may be quite stringent, and not all people with disabilities will qualify. See Canada Revenue Agency's Interpretation Bulletin "IT-519R2 (Consolidated)."

Secondly, the effectiveness of this program will depend on how the various provinces treat the savings in the RDSP. For example, British Columbia's provincial disability benefits are means tested. (I have written a previous post on this issue here.) If an RDSP, or payments from an RDSP, disqualify a person with a disability from receiving provincial disability benefits, the program will be of little or no benefit to the beneficiary.

The following is an excerpt from the Annex 5 Tax Measures: Supplementary Information and Notices of Ways and Means Motions, of the 2007 Federal Budget:

Registered Disability Savings Plan

To help parents and others save for the long-term financial security of a child with a severe disability, Budget 2007 proposes to introduce a new Registered Disability Savings Plan (RDSP) with a Canada Disability Savings Grant (CDSG) program and Canada Disability Savings Bond (CDSB) program. The RDSP will be based generally on the existing Registered Education Savings Plan (RESP) design, as recommended by the Expert Panel on Financial Security for Children with Severe Disabilities.

The main design elements of the RDSP are described below. Further technical details will be provided when legislation is brought forward. Certain design details and administrative mechanisms will be developed in consultation with financial institutions. The Government will work with financial institutions to put the necessary administrative mechanisms (for example, for paying CDSGs and CDSBs to RDSPs) in place to allow financial institutions to begin offering RDSPs to Canadians as soon as possible in 2008. Individuals establishing an RDSP in 2008 will be eligible for a full year’s CDSG and CDSB entitlement.

Eligibility

Generally, any person eligible for the disability tax credit (DTC) and resident in Canada, or their parent or other legal representative, will be eligible to establish an RDSP. The DTC-eligible individual will be the plan beneficiary. The Social Insurance Number of the beneficiary, and of the parent or other legal representative, will be required in order to establish the plan. These requirements must be met when the plan is established and whenever a contribution is made to the plan or a CDSG or CDSB is paid to the plan.

Tax Treatment

Contributions to an RDSP will not be deductible. The investment income on contributions, CDSGs and CDSBs will accrue tax-free. Contributions will not be included in income for tax purposes when paid out of an RDSP. CDSGs, CDSBs, and investment income earned in the plan will be included in the beneficiary’s income for tax purposes when paid out of an RDSP.

Contributions

Contributions to an RDSP will be limited to a lifetime maximum of $200,000 in respect of the beneficiary, with no annual limit. There will be no restriction on who can contribute to the plan. Contributions will be permitted until the end of the year in which the beneficiary attains 59 years of age.

Canada Disability Savings Grants (CDSGs)

To provide additional direct government assistance to help ensure the future financial security of a child with a severe disability, RDSP contributions made in a year will qualify for CDSGs at matching rates of 100, 200 or 300 per cent, depending on family net income and the amount contributed. Table A5.2 sets out the specific matching rates that will apply to annual contributions, by family net income
level.

Table A5.2

Canada Disability Savings Grant (CDSG)Matching Rates on Contributions
Family Net Income ($)
[Table provides that for income of up to 74,357, the grants are 300% for the first $500, and 200% on the next $1000. For those with incomes of over 74,357 the grant is 100% on the first $1000.]

The family net income threshold shown in Table A5.2 is in 2007 dollars. This threshold will be indexed to inflation for 2008, when RDSPs become operational,
and for subsequent taxation years. Family net income will generally be determined in the same manner as for the Canada Education Savings Grant, except that, for years after the year in which the beneficiary attains 18 years of age, the relevant income will be that of the beneficiary and their spouse or common-law partner.

There will be a lifetime limit of $70,000 on CDSGs paid in respect of an RDSP beneficiary. An RDSP will be eligible to receive CDSGs until the end of the year in which the beneficiary attains 49 years of age.

Canada Disability Savings Bonds (CDSBs)

To ensure that RDSPs help promote the future financial security of children with a severe disability in lower-income families, CDSBs of up to $1,000 will be paid annually to the RDSPs of low and modest-income beneficiaries and families. CDSBs will not be contingent on contributions to an RDSP.

The maximum $1,000 CDSB will be paid to an RDSP where family net income does not exceed $20,883. The CDSB will be phased out gradually for those with family net income between $20,883 and $37,178. These income thresholds are in 2007 dollars and will be indexed to inflation for 2008, when RDSPs become operational, and for subsequent taxation years. Family net income will be determined in the same manner as for the CDSG.

There will be a lifetime limit of $20,000 on CDSBs paid in respect of an RDSP beneficiary. An RDSP will be eligible to receive CDSBs until the end of the year in which the beneficiary attains 49 years of age.

Payments

Payments from an RDSP will be required to commence by the end of the year in which the beneficiary attains 60 years of age.

Payments from an RDSP will be subject to a maximum annual limit determined by reference to the life expectancy of the beneficiary and the fair market value of the
property of the plan, consistent with the Expert Panel’s proposals.

In addition, the beneficiary of an RDSP, or the beneficiary’s legal representative,
will be permitted to encroach on the capital and income of the plan, in such amounts and for such purposes as the plan may provide.

To ensure that RDSP contributions, CDSGs and CDSBs are used to support the beneficiary, only the beneficiary or the beneficiary’s legal representative will be permitted to receive payments from the RDSP. Contributors will not be entitled to receive a refund of contributions.

Repayments of CDSGs and CDSBs

There will be a requirement for an RDSP to repay to the government all CDSGs and CDSBs (and associated investment income) paid to the plan in the ten years preceding a payment from the plan, upon the cessation of the beneficiary’s eligibility for the DTC or the death of the beneficiary.

Death or Cessation of Disability

Where the beneficiary of an RDSP either ceases to be eligible for the DTC or dies, the funds in the RDSP (net of repayments as described above) will be required to be paid to the beneficiary or pass to the beneficiary’s estate. That amount (net of contributions) will be included in the income of the Beneficiary for tax purposes.

Treatment of the RDSP for Means-Tested Benefits

Budget 2007 proposes that amounts paid out of an RDSP will not be taken into account for the purposes of calculating income-tested benefits delivered through the income tax system. In addition, RDSP payments will not reduce Old Age Security or Employment Insurance benefits.

Provinces and territories provide income support for persons with disabilities through means-tested programs. The Expert Panel noted that, for the RDSP program to be effective, RDSP assets should not disqualify a plan beneficiary from receiving provincial or territorial income support provided to persons with disabilities.

The Expert Panel also noted that income payments from the plan should supplement—not reduce—income support provided under these programs at least
until the level of income support plus RDSP payments exceeds the Low Income Cut
Off (LICO) for the province or territory.

The Minister of Human Resources and Social Development, in collaboration with the Minister of Finance, will work with the provinces and territories to ensure that the RDSP is an effective savings vehicle to improve the financial security and well-being of children with severe disabilities.