The Registered Disability Savings Plan (RDSP) is a long-term savings vehicle for people with disabilities that started in 2008. As more advisors are assisting families to open these plans, be aware of two specific points.
1. Carryforward rules
In 2010, the Federal Budget introduced new carryforward rules allowing qualified RDSP beneficiaries to catch up on government assistance to their plans.
This assistance takes the form of a contribution-matching Canada Disability Savings Grant (CDSG) and a non-matching Canada Disability Savings Bond (CDSB).
The CDSG and CDSB are based on family net income levels, and can be calculated back to 2008, the past 10 years or date of diagnosis, whichever date is most recent.
Rules also establish the level of family income that qualifies for CDSG and CDSB. The levels are indexed to inflation each year, so in order to benefit from the following calculation, clients must have family income that is below the annual threshold.
The numbers illustrate the planning opportunity available to clients. Carryforward amounts are calculated from the highest to lowest matching level and go back to the furthest year first, allowing clients to maximize the benefits of these rules.
The government will match the first $500 in contributions each year at 300%, and the next $1,000 at 200%. And the maximum CDSG paid into an RDSP is $10,500 per year.
So the carryforward for a qualified beneficiary who opens up a new RDSP in 2013 can go all the way back to 2008 (assuming the beneficiary was eligible then). Here’s how to get the maximum $10,500 per year with minimal contributions:
Year 1 – 2013
A contribution of $3,750 will trigger $10,500 in CDSG as follows:
6 years (2008 to 2013, due to carryforward) x $500 x 300% = $9,000
0.75 years* x $1,000 x 200% = $1,500
*Since there is a cap of $10,500, to generate $1,500 in government matching, you only have to use up 0.75 years of the $1,000-per-year carryforward, leaving you with 5.25 years (6 – 0.75) to use in 2014.
Year 2 – 2014
A contribution of $5,000 will trigger a further $10,500 in CDSG:
1 year (2014) x $500 x 300% = $1,500
4.5 years** x $1,000 x 200% = $9,000
**You now have 6.25 years’ worth of $1,000-per-year carryforward. Since there is a cap, to generate $9,000 in government matching, you only have to use 4.5 years of that carryforward, leaving you with 1.75 years (6.25 – 4.5) to use in 2015.
Year 3 – 2015
A contribution of $3,250 will trigger $7,000 in CDSG. This amount will then bring the RDSP account up to the same amount of CDSGs as would be in the account if the qualified beneficiary had received CDSG annually since 2008 (8 years). A total of $40,000 in either case would now be in the account in addition to investment growth.
1 year x $500 x 300% = $1,500
2.75 years*** x $1,000 x 200% = $5,500
***The remaining $1,000-per-year carryforward, 1.75, plus the 2015 $1,000-per-year matching.
In addition to the catch-up for CDSG, lower income beneficiaries can benefit from a carryforward of CDSB of $1,000 per year, to a maximum amount of $11,000 in any given year. The carryforward again is allowed as far back as 2008, 10 years or date of diagnosis, whichever is most recent. CDSBs do not require any contributions to the account.
Careful planning is necessary to ensure the CDSG is maximized for those beneficiaries who are trying to save as much as possible each year.
2. Transferring RDSP accounts
Under the legislation, there can be only one active RDSP account per beneficiary. That’s why it’s important to find out if clients who are opening an RDSP already have one at another financial institution.
Human Resources and Skills Development (HRSDC) and Canada Revenue Agency (CRA) work together to monitor and enforce the rules for RDSPs, including the transfer rules.
In cases where the client already has an RDSP account, a transfer can be processed and the entire history of the account will move to the new account.
This requires that the old account be transferred over and then physically closed by the transferring company. In the meantime, no CDSG or CDSB will be paid to the new account.