RDSP choices remain limited, despite new entries

In less than a month the deadline for receiving any government contributions on the new registered disabled savings plan (RDSP) will expire for the 2008 tax year. Yet, only two financial institutions are offering RDSPs.

RBC announced Monday it will be offering RDSPs as of February 16, 2009. This will allow interested families to take advantage of the government contributions available to them for the 2008 tax year. RBC, only the second RDSP provider outside Quebec, joins BMO in offering the account.

Created in the 2007 federal budget, RDSPs came into effect in December 2008. They allow a family to contribute up to $200,000 for a disabled beneficiary until that beneficiary is 59 years of age. The plan is not tax-deductible but grows tax-free.

Any contributions to an RDSP are eligible for matching Canada Disability Savings Grants up to $3,500 for beneficiaries’ families earning less than $75,769. Families that earn more than that are eligible for $1 to $1 matching on the first $1,000 annually.

The money in an RDSP can be used for any purpose, as long as it is for the benefit of the plan’s beneficiary. The beneficiary must be a resident of Canada, under age 60, have a social insurance number and be eligible for the disability tax credit (DTC) as defined in the Income Tax Act.

The problem is Canadians have only until March 2, 2009, to contribute if they want to be eligible for the Canadian government contributions. Because accounts are available only through advisors affiliated with BMO and RBC, most advisors will likely not be able to take advantage of this year’s credits for their clients, unless they refer their clients to those institutions.

David Birkbeck, head of registered products strategy for RBC, says it’s been very difficult to set up the plans in such a short time frame. Given the complexity of the plan, the bank wants to ensure clients are using an advisor to open one.

“We’re suggesting eligible families come into the branch to get advice and so we can walk them through all the different permutations and accommodations. There are a lot of things they need to consider around these, and the rules are quite complicated,” he says. “It’s brand new for financial institutions. It’s brand new for the Canadian public.”

RBC has teamed up with Planned Lifetime Advocacy Network (PLAN), the non-profit organization that led the lobby effort that resulted in the creation of the registered disability savings plan. PLAN will work with RBC to educate and advise Canadians. It already offers a fairly robust educational site on RDSPs at aptly titled www.RDSP.com.

PLAN estimates there are about 400,000 to 500,000 families that can qualify for the disability tax credit. That doesn’t give RDSPs huge market penetration. However, there is a strong likelihood that each of the eligible families will place a heavy emphasis on contributing to the plans.

“The government has numbers which suggest 180,000 are eligible for the disability tax credit. That is everybody who is eligible from those that have applied,” Birkbeck says. “[RDSPs] are certainly not insignificant for those families. They are very focused on providing for the future care of their loved ones.”

Janet Freedman, a financial planner and president of Toronto-based Finance Matters, has some wealthy clients eager to get started on RDSPs, but they are concerned by the lack of choice in providers.

“I think a lot of the financial institutions don’t want to set these up because they don’t see money in it. I’ve got clients with disabled kids who are sitting on $4 million to $5 million in assets, and their kids are collecting Ontario Disability Support Program [payments],” she says. “There is a lot more potential for this program out there than the financial institutions have clued into. It’s not even the parents that will contribute. Grandparents would do it. Even friends of the family will do it for a severely disabled child.”

Given market conditions, Freedman expects that clients with a young disabled child will likely be okay to defer for another year. But parents of disabled adults are keen to start contributing. There’s a good chance Freedman will end up referring those clients to BMO or RBC. Freedman runs a fee-based practice, so she can be compensated for this, but she admits she has reservations about sending clients to another advisor.

“My concern is that some advisors may put my clients’ money into investments that are too risky. You’ve got a long-term time frame, but you don’t want the investment to be overly aggressive,” she says. “I’ve got a couple clients that will do it this year. Given how everything else is down, it could be another year or so for most of my other clients. The clients who are of most concern are the ones who already have children in their early 30s. Those are the ones who want to get going, more so than people who have a child who is seven years old.”

(02/09/09)