If you or a family member qualify for the Disability Tax Credit, the Registered Disability Savings Plan (RDSP) can allow you to accumulate assets, and others (usually family members) to offer financial support, without affecting government benefits.
There is no annual contribution limit, but there is a lifetime limit of $200,000. Contributions can be made after the age that you qualify for the Disability Tax Credit, until the end of the year you turn 59.
“It’s a tremendous savings tool,” says Kenneth Pope, an Ottawa-based lawyer. But it’s also underutilized. Of more than 600,000 Canadians approved for the Disability Tax Credit, only about 48,000 have opened RDSPs.
When establishing an RDSP with a lump sum, leave room for $1,500 annual contributions for 20 years to continue to qualify for up to $4,500 a year in matching government contributions, which stop at age 49.
Some general issues to be aware of include vesting rules, age limits, and competency for those over the age of 18. If a person cannot sign for powers of attorney, a guardian may have to apply to the courts before they can sign the paperwork for an RDSP.
You should also be careful when receiving advice about RDSPs, as misinformation about them is both frequent and costly. There are three common misconceptions about RDSPs you should know.
1. You no longer qualify for the disability tax credit if your adult child does not live with you. Wrong.
The Truth: Your adult child can live with you, and the credit also applies if your child goes into supported living if you are continuing to provide food, occasional shelter or clothing.
2. To qualify for specific benefits, you need to charge rent to a disabled adult child if you also make meals for that child. Wrong.
The Truth: To avoid having to repay benefits, the adult child must plan and prepare their own meals, or if they are not capable of doing so, then someone must be paid to help with food planning and preparation for the lease agreement to be accepted. Charging rent and preparing the meals yourself won’t meet the requirements.
3. If an unmonitored mutual fund increases in value to $5,000, that won’t affect benefits eligibility. Wrong.
The Truth: To qualify for support in Ontario, people cannot have more than $5,000 in liquid assets. RDSPs, Henson Trusts and segregated funds are the three tools that can allow you to accumulate assets without jeopardizing government benefits.
Provided you do your research first, RDSPs are a great savings vehicle that you shouldn’t overlook.