Canada is a great country in many ways. For all of our complaints, most people at various socio-economic levels have it better here than almost anywhere else.
One example is how the Federal and Provincial governments worked together to launch the registered disability savings plan back in 2007. This plan provides meaningful tax sheltering, grant monies, and long-term financial support to those who are significantly disabled.
Whenever I raise the topic of the RDSP, one of the first questions people ask is "How disabled is disabled? What qualifies?"
This isn't a simple one to answer, other than to say that you have to qualify for the Disability Tax Credit in order to qualify for an RDSP. The application for the credit can be found here.
The short definition of qualifying is that a qualified 'practitioner' will "certify that you have a severe and prolonged impairment and suffer from its effects."
If the Canada Revenue Agency (CRA) agrees that you qualify, you will almost certainly want to open up an RDSP.
The account is open to any Canadian resident under age 60, with a valid social insurance number, who is also eligible for the Disability Tax Credit.
The short version of the benefits would be:
• The account is tax sheltered.
• You put $1,500 in, depending on the income of the beneficiary you would receive additional funds (a grant and bond) of up to $4,500 in a year. These additional funds are maxed out at $90,000.
• When funds are withdrawn as part of a disability assistance payment, they are taxable in the hands of the beneficiary – usually at a low tax rate.
• Anyone can contribute to the RDSP as long as they have written consent of the account holder. In most cases, parents, grandparents, siblings, aunts and uncles would contribute.
• The contribution limit over the lifetime of the individual is $200,000. This can be contributed over many years or in a lump sum. Because the grant money comes in only with an annual contribution, you would want to ensure there is room to add $1,500 a year.
• The deadline for contributions in order to receive grants and bonds for 2011 is Dec. 31.
One of the best sources of information on the RDSP is this website.
Possible improvements to RDSPs
Bank of Montreal was the first bank to make RDSPs available for Canadians in late 2007, and have stood out in their efforts to improve the program. Recently they announced their efforts to make two key improvements to RDSP.
The first is to increase the lifetime contribution limits from $200,000 to $500,000. They suggest that this is a more realistic maximum amount needed to care for those who often require much more financial support because of their disabilities.
The second was a recommended change to the 10-year rule. This rule currently states that people that receive grants or bonds must wait 10 years after the last contribution in order to withdraw money from their RDSP. BMO recommends a much shorter term of three or five years.
For those with a family member who suffers from a major disability, there is a constant worry about how they will be taken care of after their parents are no longer able to help. The RDSP provides some peace of mind. If they don't have an account set up, be sure to ask your bank or financial adviser for help.
Ted Rechtshaffen is president and CEO of TriDelta Financial Partners, a firm that provides independent financial planning advice. He has an MBA from the Schulich School of Business and is a certified financial planner. He was vice-president of business strategy at a major Canadian brokerage firm.
Follow Ted on his blog at The Canadian Financial Planner.
Ted Rechtshaffen