What is an RDSP and How Does It Work?

A Registered Disability Savings Plan (RDSP) is a long-term savings plan designed to help Canadians with disabilities secure financial stability for the future. The Canadian government introduced the RDSP to provide tax-advantaged savings for individuals who qualify for the Disability Tax Credit (DTC). RDSPs are unique because they allow contributions from various sources, receive government grants and bonds, and provide tax-deferred growth.

Key Features of an RDSP

• Tax-Deferred Growth: Contributions grow tax-free, but withdrawals from government incentives and investment gains are taxable.
• Government Contributions: Eligible individuals may receive the Canada Disability Savings Grant (CDSG) and Canada Disability Savings Bond (CDSB) based on income levels.
• Lifetime Contribution Limit: $200,000 per beneficiary, with no annual contribution limits.
• Flexibility: Anyone can contribute with the written permission of the plan holder.
• No Impact on Federal Benefits: RDSP savings do not affect eligibility for benefits like the Canada Child Benefit (CCB) or the Goods and Services Tax (GST) credit.

Who is Eligible for an RDSP?

To qualify as an RDSP beneficiary, an individual must:

• Be approved for the Disability Tax Credit (DTC).
• Have a valid Social Insurance Number (SIN).
• Be a resident of Canada at the time the RDSP is opened.
• Be under the age of 60 (RDSPs can be opened until December 31st of the year the beneficiary turns 59).

Who Can Open and Contribute to an RDSP?

• If the beneficiary is a minor: A parent or legal guardian can open and manage the RDSP.
• If the beneficiary is an adult and contractually competent: The individual can open the plan themselves.
• If the beneficiary lacks legal capacity: A legal representative, such as a spouse, common-law partner, sibling, or parent, may open and manage the RDSP.
• Contributions: Anyone (including family, friends, or charitable organizations) can contribute with the written consent of the plan holder.

Government Incentives: Grants and Bonds

Canada Disability Savings Grant (CDSG)

• Matches contributions based on the beneficiary’s adjusted family income.
• Maximum of $3,500 per year, up to a lifetime maximum of $70,000.
• Matching rates:
  • 300% on the first $500 contributed.
  • 200% on the next $1,000 contributed.
  • 100% for beneficiaries with higher income levels.

Canada Disability Savings Bond (CDSB)

• For low-income Canadians with disabilities.
• No personal contribution required.
• Provides up to $1,000 per year, with a lifetime maximum of $20,000.

Both grants and bonds can be carried forward for up to 10 years if eligibility was met but funds were not previously claimed.

RDSP Withdrawals and the 10-Year Rule

Types of RDSP Withdrawals

1. Disability Assistance Payments (DAPs) – Lump sum withdrawals available at any time.
2. Lifetime Disability Assistance Payments (LDAPs) – Regular withdrawals that start no later than the year the beneficiary turns 60.

What is the 10-Year Rule for RDSPs?

The 10-Year Rule applies to government contributions (grants and bonds) received in the past decade. If any of the following events occur, the total government assistance paid in the last 10 years must be repaid:

• The RDSP is closed or deregistered.
• The beneficiary is no longer eligible for the Disability Tax Credit (DTC).
• The beneficiary passes away.

This is known as the Assistance Holdback Amount (AHA), which ensures that government contributions are used for long-term savings.

Proportional Repayment Rule (Introduced in 2014)

Instead of a full repayment of all government contributions received in the past 10 years, the proportional repayment rule requires that for every $1 withdrawn, $3 of government contributions from the last 10 years must be repaid, up to the assistance holdback amount.

Example of the Proportional Repayment Rule

• Jeff contributes $1,500 annually and receives $3,500 in government grants.
• After six years, his RDSP holds $21,000 in government grants.
• If he withdraws $600, the proportional repayment rule requires a $1,800 repayment (3x the withdrawal amount).

What Happens If the Beneficiary Loses DTC Eligibility?

Since 2021, if an individual loses eligibility for the Disability Tax Credit (DTC), they can keep their RDSP open but:

• No new contributions, grants, or bonds can be made.
• Withdrawals can be taken, but grants/bonds received in the last 10 years may need to be repaid.
• If DTC eligibility is reinstated, the RDSP returns to normal operation.

Tax Implications of RDSP Withdrawals

• Contributions are not taxable when withdrawn.
• Government contributions (grants, bonds) and investment earnings are taxable.
• Payments are reported on a T4A slip and must be included as income.
• Withdrawals do not impact income-tested benefits like the GST credit or Canada Child Benefit.

Opening an RDSP: Step-by-Step Guide

1. Confirm DTC Eligibility – Ensure the beneficiary is eligible for the Disability Tax Credit (DTC).
2. Choose an RDSP Issuer – Banks, credit unions, and investment firms offer RDSP accounts.
3. Designate a Plan Holder – The beneficiary (or their legal guardian/representative) must be named as the holder.
4. Make Contributions – Plan holders and third parties can contribute up to the $200,000 lifetime limit.
5. Apply for Government Grants & Bonds – The financial institution will apply for the CDSG and CDSB on behalf of the beneficiary.

Final Thoughts

A Registered Disability Savings Plan (RDSP) is one of the most effective ways for Canadians with disabilities to build long-term financial security. By leveraging government grants and bonds, tax-free growth, and flexible contribution rules, individuals and their families can maximize savings for future needs. Understanding the 10-Year Rule and the Proportional Repayment Rule ensures that withdrawals are made strategically to avoid unnecessary repayments.

If you’re eligible, opening an RDSP as soon as possible allows you to maximize grants, bonds, and long-term tax-deferred growth. Consult a financial advisor to ensure you’re making the most of your RDSP benefits and planning for a secure financial future.

Take Action Today!

If you have questions about how an RDSP fits into your overall financial plan, speak with a certified financial planner to get expert guidance tailored to your situation. Additionally, for comprehensive insights on planning for your financial future, purchase my book, The Art of Retirement, today!