The Canada Revenue Agency recognizes that permanently disabled dependants and their families often face extra challenges financially. Registered disability savings plans are meant to help ease the burden by providing a savings vehicle expressly for the benefit of the disabled individual. While not as tax-sheltered as a registered retirement savings plan or a tax-free savings account, contributions to an RDSP are tax-free to the beneficiary upon withdrawal.
Eligibility for the RDSP
“A Canadian resident, under the age of 60, who qualifies for the disability amount on a federal return may be designated as the beneficiary of an RDSP,” says Jeff Stokley, chartered investment manager and financial management advisor with Investors Group in London, Ontario. Disability for tax purposes in Canada requires a qualified practitioner to certify on form T2201, the Disability Tax Credit Certificate, that the individual has a severe and prolonged physical or mental impairment. The form must then be approved by the CRA with the applicant deemed eligible. The applicant may request a determination of eligibility from the Minister of National Revenue. The beneficiary of an RDSP must be a Canadian resident at the time the plan is opened and when each contribution is made.
RDSP Holders and Contributors
Though an RDSP beneficiary must be Canadian, a contributor does not. Further, anyone can contribute to an RDSP with the written permission of the plan holder, who is the person who opens the RDSP. A plan holder does not need to be a Canadian resident but must have a Canadian social insurance number or a business number, depending on whether it is an individual or institution. An RDSP can be opened by the beneficiary, if he has reached the age of majority and is able to legally enter into a contract, though it may be more likely that another qualified person opens the RDSP on the beneficiary’s behalf. Qualified people include legal parents, guardians or an individual legally authorized to act on the beneficiary’s behalf. Similarly, agencies and institutions authorized to act on the beneficiary’s behalf can be an RDSP holder. Contributions and investment income from an RDSP can only be paid to the beneficiary or the beneficiary’s estate. There is no provision for a return of funds to a contributor.
Changing the Holder
When a beneficiary’s parents open a plan, they may continue as holders after the beneficiary reaches the age of majority. Once the beneficiary has reached this age and is legally able to enter a contract, the beneficiary can be added as a joint holder. When a qualified person on the the beneficiary or her parents opens a plan, the plan must be transferred to the beneficiary, and the qualified person removed, once the beneficiary reaches the age of majority. Qualified individuals or institutions who are no longer qualified, such as through death or loss of guardianship, are removed from the RDSP as holder, and the beneficiary, legal parents or other qualified person or institution may be substituted.
RDSP Financial Features
An RDSP differs from registered retirement plans in that RDSP contributions are made with after-tax dollars, so contributions are not deductible for purposes of tax relief. Contributions that are later withdrawn from the RDSP are not considered income for the beneficiary; however, investment income earned by the RDSP is considered income. While RRSPs have annual contribution limits, RDSPs do not, having only a lifetime limit of $200,000. One RDSP can be transferred to another for the same beneficiary, and directly transferred amounts don’t count against the $200,000 limit. RRSPs can be rolled over into RDSPs for the disabled child or grandchild of a deceased RRSP holder for deaths occurring after March 3, 2010, if the child or grandchild is financially dependent on the deceased.
References & Resources
- Canada Revenue Agency: Registered Disability Savings Plan (RDSP)
- Jeff Stokley CIM, FMA; Investors Group, London, Ontario
- Canada Revenue Agency: Eligibility and Contributions
- Canada Revenue Agency: Opening an RDSP
- Canada Revenue Agency: RDSP Limits and Transfers