What is an RDSP?
Ensuring the long-term financial security of a loved one with a disability is critically important to their families. In order to encourage them in this effort, the Canadian federal government introduced the Registered Disability Savings Plan (RDSP) in 2007, which allows individuals to save for a disabled person while enjoying significant benefits.
However, only 15% of Canadians who are eligible for the RDSP take advantage of this savings tool, which is still too little known and somewhat complex. In other words, more than four out of five Canadians with disabilities are missing out on the considerable benefits of the RDSP.
Are you the parent of a child with a disability in Canada, or are you yourself disabled? If you would like to learn more about the conditions of the RDSP, how to use it, and its advantages? The exclusive guide below covers everything you need to know about the Registered Disability Savings Plan, how it works and how it can help you.
What is a Registered Disability Savings Plan (RDSP)?
So what is an RDSP? The RDSP was started in 2007 by former federal Finance Minister Jim Flaherty.
It is a savings tool designed to provide long-term financial protection for people with disabilities. Parents, relatives or individuals themselves can participate in the plan. It allows for the accumulation of tax-sheltered savings for a person with a severe and prolonged mental or physical impairment.
With the RDSP, several types of savings and investments are possible:
- Deposits, which are amounts entrusted to a financial institution
- Shares, which are equity securities that give the right to a share of ownership in a company
- Bonds, which are securities issued by a government or company
- Mutual funds, which are pools of capital from several investors
However, it's mainly through government bonds and grants that you can build real long-term savings with an RDSP.
Would you like to know how to invest in an RDSP, which RDSP offers the best return, or if it's the best option for your investor profile? Get investment advice from our financial experts in just a few minutes.
Grow your savings with an RDSP
What are the advantages of an RDSP?
The RDSP is a smart savings investment with several advantages, including:
|Tax deferral on investment income||Taxes on investment income and capital gains earned are deferred while in the RDSP, helping the account to grow faster.|
|Free use of funds||Funds can be withdrawn for any purpose, as long as it benefits the person with a disability. In addition, family and friends can contribute to the plan, provided the plan holder agrees in writing.|
|Obtaining Government Contributions||The federal government provides matching contributions in the form of Canada Disability Savings Grants of up to $70,000 annually. Low-income families may also be eligible for additional assistance in Canada Disability Savings Bonds for up to $20,000.|
What are the eligibility requirements for an RDSP?
To be eligible for a Registered Disability Savings Plan, the beneficiary must meet four conditions, including an age limit. They must:
- Qualify for the federal disability tax credit*.
- Be under 60 years of age (if the beneficiary is 59 years of age, you must apply before the end of the calendar year in which the person turns 59 years of age)
- Have a Social Insurance Number (SIN)
- Reside in Canada at the time the plan is established.
Good to know
*An individual can only qualify for the DTC if the Canada Revenue Agency approves Form T2201, Disability Tax Credit Certificate. A health professional must certify in writing that the individual has a severe and prolonged impairment and describe the effects of that impairment using the new digital form for health professionals or by completing Form T2201 manually.
What are the best RDSPs in Canada?
Many institutions, including banks, offer RDSPs.
Consult our guides on the RDSPs offered by the major Canadian banks:
- Desjardins RDSP
- TD RDSP
- BMO RRSP
- Great West RDSP
- Manulife RDSP
- BNC RDSP
- RBC RDSP
- Sun Life RDSP
- Tangerine RDSP
- Industrial Alliance RDSP
How much money can you save with an RDSP?
It is possible to earn over 600% in the first year, just by taking into account government grants. The Government of Canada will pay a grant of 100% to 300% depending on the beneficiary's adjusted net income and contribution level.
However, the return on an RDSP will of course depend on:
- the financial institution you choose
- the investments held in an RDSP account
- the amount and frequency of contributions you make
- your tax rate at the time of the RDSP withdrawal
- the number of years you have saved
Good to know
Here is an example of how an RDSP works in Canada:
- Julie and Mark contribute $1,500 to an RDSP for their son Louis who qualifies with a disability.
- Their family income is $22,000.
- The government givs them $1,000 in Canada Disability Savings Bonds because their family income is less than $31,711.
- The government also provides $3,500 in Canada Disability Savings Grants since their family income is less than $97,069.
The total amount of the RDSP, in Louis' name, will be $6,000, while his parents, Julie and Mark, contributed only $1,500.
How do I open an RDSP?
After shopping around for the different investment offers from banks, to open an RDSP, simply make an appointment with the financial institution in Canada that is right for you. Most financial institutions, including banks, are eligible to offer the RDSP. However, it is a complex product, and we recommend that you contact an institution trained in the subject or make an appointment with an investment expert who can guide you and help you in the process of opening an RDSP.
Grow your savings with an RDSP
How do RDSP contributions work?
There are several important points to note about RDSP contributions:
- RDSP contributions belong to the beneficiary, i.e. the person with a disability, even if they are not the ones direct making the contribution.
- Only the RDSP holder (or someone with their written permission) can contribute to the RDSP at any time.
- There is a lifetime RDSP contribution limit of $200,000, which can be made in any one year.
- Contributions are not tax deductible, but the investment earnings are tax-deferred for as long as the money is held in the plan.
- There is no annual contribution limit.
- The deadline for contributions is December 31 of the year in which the beneficiary turns 59.
When can you withdraw from an RDSP?
The money contributed to the RDSP belongs to the beneficiary. This money can be:
- withdrawn and used by the beneficiary
- withdrawn by the holder and used for the beneficiary (for example, for home care or assistance)
There are two types of RDSP withdrawals:
- Lifetime disability payments (LDAP), which are recurring annual payments that continue until the beneficiary's death. Payments can begin at any age, but must begin before the end of the year in which the beneficiary turns 60.
- Disability Assistance Payments (DAPs), which are periodic lump sum payments that can be made to the beneficiary at any time after the RDSP is established. These payments may be subject to an assistance holdback amount.
The purpose of the holdback amount is to ensure that RDSPs are used for long-term savings and to prevent government payments from being withdrawn and used later for matching grants.
Since January 1, 2014, a ratio of $3 of government grants and bonds for every $1 withdrawn from the account has been in place. This eases the financial burden on RDSP beneficiaries who rely on the financial assistance provided by their RDSPs.
How are RDSPs taxed?
RDSPs are taxed as follows:
- Contributions are generally not taxable as long as they remain within the RDSP.
- Contributions are taxable when they are rolled over from a deceased supporting parent's or grandparent's RRSP, RRIF or RPP or an an AIP rollover from an RDSP.
- They are also taxable if the beneficiary withdraws money from the RDSP equivalent to government grants, or money resulting from investments.
Good to know
Here is another example:
When Lucile contributes to an RDSP there is no tax reduction for her contribution. If she receives grants and investment income from the same RDSP, no taxes will be deducted from them.
Similarly, if she decides to withdraw the money equivalent to the contributions she paid, she will not be subject to tax.
On the other hand, Lucile may have to pay tax if she withdraws money equal to the government grants or investment earnings.
What RDSP grants are available?
There are two government grants that can be added to an RDSP:
|Type of grant||Maximum amount per year||Lifetime amount||Conditions|
|Canada Disability Savings Grant (CDSG)||$3,500||$70,000||Linked to contributions and the income of the beneficiary or family.|
|Canada Disability Savings Bond (CDSB)||$1,000||$20,000||Only for low- and middle-income Canadians, no contributions are required|
Grants are based on family income. If the RDSP beneficiary is over 18 years of age, the calculation is based on their income, which is to their advantage. If the beneficiary is a minor, the parents' income is taken into account.
For example, let's take the case of Lucile, a 20-year-old disabled woman. If she earns $20,000 a year, she will benefit from the Canada Disability Savings Bond, which represents $1,000 annually, without even having to contribute to the RDSP (the lifetime maximum is $20,000). Best of all, this bond is retroactive back 10 years from the beneficiary's majority. Since 2019, you must earn under $31,120 to be eligible for this bond.
These grants are paid until the beneficiary's 49th birthday.
Good to know
In order to maximize the grants, it is advantageous to spread your contributions over several years.
Note that RDSP payments do not affect other federal government income-tested programs such as:
- Old Age Security Pension
- Guaranteed Income Supplement (GIS)
- Canada Pension Plan (CPP)
- Goods and Services Tax Credit
- Social assistance benefits.
How do I apply for an RDSP Grant?
You must apply for an RDSP grant from the financial institution where you opened your RDSP.
For your convenience, you can fill out and print the application form before you meet with your financial institution (the Canada Disability Savings Grant or Canada Disability Savings Bond application form). Here is a copy of the RDSP grant form.
RDSP calculator: contribution, return, taxation
With our RDSP calculator, you can see how much money you could receive from grants and bonds based on your contributions to the plan and your annual family income. You can also calculate the total interest you could earn.
Note that the calculator is for general estimates and information purposes only. It is not intended for financial planning purposes. For that, you should speak with an expert. The actual value of an RDSP may be higher or lower, depending on the investment performance and amounts and frequency of contributions.
Grow your savings with an RDSP
Are RDSP grants retroactive?
Yes, RDSP grants are retroactive under certain conditions.
If you opened an RDSP in 2008 or later and contributed less than the maximum amount allowed, you can receive the unused grant and bond from previous years. You can use these amounts for your current RDSP or for RDSPs opened in January 2011 or later.
To receive unused grant and bond amounts, you must have been eligible for the grant and bond in previous years. You can apply until December 31 of the year when you turn 49.
The amount of the bond and grant you qualify for depends on your family income in those years. The amount of the grant you receive also depends on your total contributions to your RDSP. The matching rates will be the same as those for the year in which the grant entitlement was earned. Matching rates for RDSP Contributions will be paid using all grant entitlements at their highest rate first.
Grants and bonds will be paid based on unused entitlements, up to an annual maximum of:
- $10,500 for grants;
- $11,000 for vouchers.
The maximum grant amount payable over the lifetime of the beneficiary is $70,000.
The maximum bond amount payable over the lifetime of the beneficiary is $20,000.
What happens to an RDSP after the death of a contributor?
Using an RDSP for estate planning purposes can provide a tax benefit. If the heir was financially dependent on the deceased individual at the time of death, it is possible to rollover an amount from the deceased's RRSP, without any tax impact, into the RDSP. Such a transfer can save taxes savings on the deceased's estate (approximately 50% of the value of the RRSP).
This transfer does not qualify for the Canada Disability Savings Grant or the Canada Disability Savings Bond. However, the money transferred can continue to grow tax-free within the RDSP.
Estate planning for a person with a developmental disability can be complex. However, it is possible to find a tax-efficient and financially advantageous solution to protect this person.
What happens after the death of an RDSP beneficiary?
Following the death of an RDSP beneficiary:
- The plan must be closed by December 31 of the following year.
- The total amount of grants and bonds received in the 10 years preceding the death must be repaid.
- Any money remaining in the RDSP after this repayment is paid to the beneficiary's estate.
- Growth income, grants and bonds are taxable in the hands of the beneficiary's estate.
- Initial contributions are tax-free.
- The proceeds of the terminated RDSP will be distributed in accordance with the provisions of the Beneficiary's Will. If the beneficiary did not leave a will, the proceeds of the RDSP will be distributed in accordance with provincial intestacy rules.
RESP vs. RDSP: Which one to choose?
|Beneficiary||A person with a disability under age 60, resident in Canada possessing a SIN||Canadian resident with a SIN|
|Goal||To provide long-term financial security||To save for post-secondary education|
|Matching Contributions||Canada Disability Savings Grant (CDSG) and Canada Disability Savings Bond (CDSB)||Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB)|
|Maximum Grants||$3,500 and $1,000||$500 and $2000|
The RESP, or Registered Education Savings Plan, is a savings account registered with the Canada Revenue Agency (CRA) to set aside money for your child's education. The contributions you make to this plan are not tax-deductible. However, contributions can grow tax-free until the child begins to withdraw funds. You can invest money by purchasing stocks, mutual funds, ETFs, Guaranteed Investment Certificates (GICs) and other investments
The government will match 20% of contributions made in the year to a maximum of $500 per year. This government grant is called the Canada Education Savings Grant (CESG). Low-income families receive 40% of the CESG and are eligible for the Canada Learning Bond (CLB), which provides a maximum grant of $2,000 per child.
The child receives the money when they are ready to attend a post-secondary institution. The initial amount of the contribution is tax-free. However, the amount of investment growth is taxable.
If the child does not wish to pursue post-secondary education, the Contribution amounts will be returned to you tax-free. The investment is taxable and any government grants must be repaid.
If the beneficiary is a child with a disability who has an RESP account and decides not to pursue post-secondary education, you can transfer their RESP to an RDSP. This is the only time you can transfer the RESP to another registered plan.
Good to know
Here’s an example:
George's parents, whose net family income is $90,000, want to invest $2,500 in January 2021. In 2019, George became eligible for the DTC.
By investing $2,500 in an RDSP, his parents could get $3,500 in CDSGs for 2020 (since they are entitled to claim the unused grant) and $2,500 in CDSGs for 2021. Their income is too high to qualify for CDSB. The total plan amount would therefore be $8,500.
By investing $2,500 in an RESP instead, George’s parents could receive $750 in grants. The total amount of the plan would be $3,250.
Clearly, in this case, the RDSP seems more advantageous. Five years later, the balance in the plan would be $10,340 (assuming a 4% return).
As for the RESP, at the same time, the amount available will be $3,954 (with a 4% return). The more George's parents contribute to the RDSP, the greater the gap between the RDSP and the RESP.
Although this strategy seems to be the most appropriate in this case, each case must be carefully evaluated based on the situation of the child and his parents.