Editor’s note: This is an updated version of a story that first ran in 2012.
Registered Disability Savings Plans (RDSPs) were first introduced in 2008 to help people with disabilities and their loved ones save for their long term financial security. The RDSP was heavily modeled after the RESP, which helps parents save for their children’s education.
While these plans do resemble each other in many aspects, there are other features of the RDSP which are worlds apart from its RESP cousin. One aspect of contrast is with respect to how individuals can access the Canada Disability Savings Grant (CDSG) and Canada Disability Savings Bonds (CDSB) entitlements carried forward from previous years.
Most advisors are very familiar with the RESP carry forward rules. Under these plans, if the subscriber does not make a contribution in any one year, unused Canada Education Savings Grant (CESG) room can be carried forward for use in another year, to a maximum CESG of $1,000 per year. Therefore, regardless of how many years of CESG grant room exists, the most that can be recovered annually is two years, or $1,000, first applying for grants in the current year, and then going back to recover unused CESG.
However, what’s most exciting about the RDSP carry forward rules (and what is drastically different from RESPs) is how the government will apply the matching rates on RDSP contributions and make the best use of the carry forwards for the benefit of the disabled individual.
Primer on grants and bonds
The federal government is providing up to two incentives for those who establish an RDSP. First, there is the CDSG, a grant paid by the federal government based on contributions and family net income, up to a lifetime maximum of $70,000. For family net income under $91,831 for 2017, the government will provide CDSGs at a matching rate of 300% on the first $500 contributed, plus 200% on the next $1,000 contributed to the plan. For family net income over $91,831 in 2017, the matching CDSG rate is 100% on the first $1,000 contributed to the RDSP. CDSGs are available annually up until the end of the year in which the RDSP beneficiary turns 49 years old.
Second, the federal government may also annually deposit a CDSB into an RDSP. The CDSB is not based on contributions to the plan, but rather is based solely on family net income. If family net income is under $45,916 for 2017, the RDSP will be eligible for a CDSB of up to $1,000. A lifetime limit of $20,000 in CDSBs may be paid to an RDSP up until the end of the year in which the beneficiary turns 49 years old.
RDSP carry forward rules
The 2010 Federal Budget introduced new carry forward rules that nowhere near resemble RESP carry forwards. Effective for 2011, RDSP beneficiaries are entitled to previously unclaimed CDSGs and CDSBs going back to 2008 when RDSPs were first introduced. In addition, they will also be able to carry forward unused CDSG and CDSB entitlements for a period of 10 years, to an annual maximum of $10,500 for CDSGs and $11,000 for CDSBs.
For CDSBs, it’s quite simple. When an RDSP is opened, any previous years’ CDSB entitlements of up to $1,000 per year will be paid into the plan over the preceding 10 years (as far back as 2008 when RDSPs were first available) plus the current year. Bonds are based on family net income in each of those years and will be paid if the RDSP beneficiary was otherwise eligible for the bonds for each year respectively. With an annual maximum of $11,000, RDSPs haven’t been around long enough to have the maximum CDSB paid into an RDSP in any one year.
For CDSGs, it gets interesting. Previously unclaimed CDSG entitlements will be paid for the previous 10 years (starting with 2008) when a contribution is made into the RDSP, up to an annual maximum CDSG of $10,500. However, the government will apply the entitlements in descending order, starting with the highest available matching rate of 300%, followed by any grant entitlements at 200%, then if applicable, 100%. In addition the CDSGs will be first applied to the oldest year, beginning in 2008 and then move forward.
Given how these carry forward rules are designed, clients who are eligible and have yet to establish an RDSP have a tremendous opportunity to take advantage of these rules by setting up an RDSP and having the government deposit significant dollars into it, with little investment.
Michelle is a low-income adult who has been eligible for the Disability Tax Credit (DTC) for her entire life. She opens an RDSP in 2017. Let’s assume that for each year since 2008, she would have been eligible for CDSG matching rates at 300% and 200% respectively, and $1,000 in CDSBs for each year. To maximize the RDSP carry forwards, Michelle (or anyone else) could contribute $3,500 into the RDSP in 2017, $4,250 in 2018, followed by annual contributions of $5,000, $5,000 and $3,250 for the 2019-2021 inclusive years. By doing so, by the end of 2021, Michelle will have caught up on all her grant and bond entitlements, and have accumulated $63,000 of grants and bonds in her RDSP. With $21,000 of private contributions, she will have $84,000 saved in her RDSP in 5 years or less. Here’s how.
When Michelle opens her RDSP in 2017, her plan will automatically receive $10,000 in CDSBs, which represents 10 years (2008 through 2017) worth of bonds. A contribution of $3,500 will attract the $10,500 annual CDSG maximum paid into the RDSP. As the table below highlights, the 300% matching rate is applied first and attracts $10,500 on the entire $3,500 contributed ($500 per year for seven years from 2008 to 2014). The remaining 3 years of entitlements at the 300% matching rate will carry forward to 2018. Since no entitlements at the 200% matching rate were obtained, the full $10,000 will carry forward to 2018 as well.
In 2018, an additional $1,000 in CDSB is paid and Michelle contributes $4,250 into the RDSP. This contribution attracts another $10,500 in grants and allows Michelle to catch up on all her carry forwards at the 300% rate; additional entitlements at the 200% level, however, will carry forward to 2019. As the table below highlights, the first $2,000 contribution attracts $6,000 (for 2017) at the 300% matching rate. The remaining $2,250 in private contributions will attract the grants at the 200% matching rate (representing carry forward from 2008, 2009 and part of 2010), for an additional $4,500 in CDSG. As a result, the maximum CDSG of $10,500 is obtained.
Following this pattern, annual contributions are scheduled each year from 2019 through 2021 (see table below for details), and are designed to maximize the annual $10,500 grant, based on the grant entitlements Michelle still has available. Therefore, it will take Michelle about five years or so to finally catch up on her grant entitlements. Once she is done, she will have an RDSP that will have amassed $84,000 in contributions, grants and bonds — a great start to securing her financial future.
Michelle’s Grant & Bond Entitlements
|From 2008 through 2017 (10 years)|
|Accumulated CDSG Entitlement @ 300%||$15,000|
|Accumulated CDSG Entitlement @ 200%||$20,000|
|Accumulated CDSB Entitlement ($1,000/year)||$10,000|
|2017 – Open RDSP|
|Contribute $3,500 to the RDSP|
|$500 x 7 years @300%||$10,500|
|Carry Forward to 2018|
|CDSG Entitlements @ 300%||$1,500|
|CDSG Entitlements @ 200%||$10,000|
|Contribute $4,250 to an RDSP|
|First $2,000 attracts CDSG @300%||$6,000|
|Remaining $2,250 attracts CDSG @ 200%||$4,500|
|Maximum contributions in following years to maximize annual CDSG|
|2019 – Contribute $5,000|
|2020 – Contribute $5,000|
|2021 – Contribute $3,250|
|Total Private Contributions||$21,000|
|Total Value in RDSP*||$84,000|
*excludes market value fluctuations in RDSP investments
One final point about the RDSP carry forward rules: Grants and bonds are only paid if the RDSP is opened and contributions are made on or before December 31 of the year in which the beneficiary turns 49. The carry forward entitlements do not carry forward past December 31 of the year in which the beneficiary turns 49. So, if your client turns 50 this year and decides to open an RDSP, they will not be eligible for any grants or bonds, regardless of the fact that they accumulated grant and bond carry forward up to age 49. They will lose entitlement to these bonds and grants if they wait until age 50 to establish and make a contribution to the RDSP. Therefore, for older disabled clients approaching age 49, it will be important to strategize to maximize grants and bonds before they lose them.
Also, the carry forward entitlements are only available for the previous 10 years. As we approach the 10th anniversary of the RDSP, it’s important to do the catch-up sooner rather than later, since after 2018, eligible participants will not be able to attract entitlements past the previous 10 years.
RDSPs provide a great solution for clients who have a disability, or have a family member with a disability. Don’t make the mistake to think that RDSP carry forward rules resemble those of the RESP. They are drastically different. As advisors, you play a key role in helping clients make the right decisions to get the most out of RDSPs.