New rules add incentive to open a disability savings plan

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Matthew Quetton's son, Theo, was born with a rare genetic mutation, Cornelia de Lange Syndrome, which causes him to grow very slowly. At the age of seven, he is non-verbal, has cognitive and physical problems and has undergone numerous operations, including heart surgery.

He's also "cheeky and funny and catalyzes more change around him than anyone I've met," says Mr. Quetton, chief executive officer of the Planned Lifetime Advocacy Network (PLAN), the group that helped implement Canada's registered disability savings plan in 2008.

Theo will need 24-hour care for the rest of his life, a situation that, in the past, drove many people with disabilities into poverty, Mr. Quetton says. Before the RDSP, disabled people who were receiving payments from the welfare system could see those benefits revoked if they received financial aid from family.

Now anyone can contribute to an RDSP on behalf of someone who qualifies for the disability tax credit. The government will provide up to $70,000 in matching grants, depending on income, plus up to $20,000 in disability savings bonds for low-income beneficiaries, up until the year they turn 49.

"We're able to contribute up to $200,000 into an RDSP and he's able to draw on that without affecting his disability benefits. So it blows the roof off the financial restrictions that occurred before," Mr. Quetton says. "It means that Theo's on an equal footing."

The government provides two big incentives for using an RDSP. Through the Canada Disability Savings Grant, Ottawa matches contributions based on the recipient's income, or family income in the case of minors. The grant amount ranges between 100 per cent for recipients with income of more than $81,941 to 300 per cent for recipients with income below $23,855. For those with income below $40,970, there's also the Canada Disability Savings Bond, which provides up to $1,000 a year, regardless of whether they contribute any of their own money to their RDSP.

Two changes being implemented this year make it even more beneficial to open an RDSP. New tax rules allow you to carry forward unused government grants and bonds starting from 2008. So for those who qualify for the bond, simply opening an RDSP in 2011 will get them up to $4,000 in government bonds.

And beginning in July, the proceeds from a deceased individual's registered retirement savings plan, registered retirement income fund or registered pension plan can be rolled over into the RDSP of a financially dependent child or grandchild with a disability, without triggering taxes and probate fees. It's a simple, tax-efficient way to leave an inheritance.

Here are some additional tips on how to take advantage of RDSPs:

Get help qualifying for the disability tax credit

Al Etmanski, president and co-founder of PLAN, says filing for the disability tax credit is the hardest part of qualifying for an RDSP. "A lot of people are in a grey zone," he says. "They have a mental illness, they don't have an obvious physical impairment, they may have a brain injury, an intellectual handicap that's not quite obvious." As a result, Mr. Etmanski says, many people are turned down by the Canada Revenue Agency, and it's worthwhile to get a disability tax specialist to help you file an appeal. (He adds that while an individual with no income tax owing cannot currently appeal a CRA decision, the government is addressing this.)

Start early to maximize grants and bonds

The maximum government grant is $3,500 a year, with a lifetime limit of $70,000, and the maximum bond is $1,000 a year, with a lifetime limit of $20,000. That means it will take 20 years to maximize grants and bonds for an RDSP. In addition, you must wait another 10 years after the last grant is received to withdraw the government portion of the money without penalty, meaning it will take 30 years in total to take full advantage of an RDSP. Grants and bonds are available until the end of the year in which the recipient turns 49, but opening an RDSP early will allow the recipient to access the funds at a younger age. The RDSP calculator available at rdsp.com can help you maximize your resources.

Know the tax implications

Contributions to an RDSP are not tax deductible and can be made until the end of the year in which the beneficiary turns 59. Withdrawals of principal contributions are not included as income for the beneficiary when paid out of an RDSP. However, the disability grants and bonds, as well as the investment income earned in the plan, are included in the beneficiary's income for tax purposes upon withdrawal.

Maximize an inheritance

Tell family members how they can use the RDSP to leave an inheritance to their disabled relative without taxes and probate fees by rolling over the proceeds of their RRSP, RRIF or RPP. Tax will be due when withdrawn from the RDSP at the plan holder's income tax rate, which is likely to be low. The new rules will be applied retroactively to deaths occurring after 2007. Call the Canada Revenue Agency or visit cra-arc.gc.ca for more details.

Get free information

To learn more about RDSPs, attend a free seminar through PLAN.ca or request a free copy of Mr. Etmanski's book Safe and Secure: Six Steps to Creating a Good Life for People with Disabilities. In B.C., you can pick up a free copy at London Drugs stores.