CRA explains the Registered Disability Savings Plan

Joeita Gupta:
I am Joeita Gupta, and this is The Pulse.
It has long been recognized that people with disabilities are economically vulnerable. High unemployment or underemployment, coupled with larger expenses and reduced savings means that this population is often living paycheck to paycheck, with few, if any options to save for the future. In recognition of this reality, in 2008, the government of Canada introduced the RDSP, or the Registered Disability Savings Plan. It is a tool which allows Canadians with disabilities and their families to achieve greater financial security and independence by saving for the future. And though the program has received a lot of positive publicity over the years, according to Statistics Canada, only about a third of eligible Canadians had a RDSP in 2020. Today we discuss the Registered Disability Savings Plan. It's time to put your finger on The Pulse.
Hello and welcome to The Pulse on AMI Audio. I'm Joeita Gupta. I'm joining you from Accessible Media Inc. in Toronto, and I'm wearing a Green V-neck sweater, which I've actually wanted to wear on the show for a very long time, and my hair is tied back in a bun. I'm wearing my usual black headphones. I find this is the most comfortable way to set myself up because I have the guest in my headphones, and I have a microphone in front of me. So what happened last week was I had with me on the show, and you heard the interview with Gurpreet Plaha from the Canada Revenue Agency, and I was very ambitious with that interview saying we're going to talk about the disability tax credit, we'll talk about all these other credits available to people with disabilities, and we'll talk about the RDSP.
And as you heard, we didn't get to the RDSP, so Gurpreet from the CRA was generous enough to come back and do a deep dive into the RDSP. I know with tax season being right now, a lot of you have questions about the RDSP, and I'm really delighted that Gurpreet was kind enough to come back and give us another half an hour of her time to go in-depth into the RDSP.
Gurpreet, hello and welcome back to the show. Thank you so much for doing back-to-back episodes for us.

Gurpreet Plaha:
Hi Joeita, and thank you for having me again. It's a real pleasure to come back and talk about very important subject, which you had a very great introduction to, so I'm excited for today.

Joeita Gupta:
Yes, it's great. Let's jump right into this. So what is the RDSP, for those who don't know?

Gurpreet Plaha:
So you did explain a really good job done on explaining what RDSP is. The RDSP is short for Registered Disability Plan. It is a savings plan designed to help Canadians that are eligible for disability tax credit and their families to save for a long-term financial security for their loved ones.

Joeita Gupta:
And why would you say, I mean you've kind of talked about the importance of saving for their loved ones and of providing financial security, but what other benefits are there to having an RDSP?

Gurpreet Plaha:
So right off the bat, the RDSP does allow you to save you for your future, and you don't need to pay taxes on the earnings that you make on the savings as long as they stay in your account. The government also does contribute generously, so depending on your income, every dollar you save the government will match up to $3 in the form of a Canada Savings Grant. And then if you have low income, you could also qualify for Canada Savings Bonds as well, which will be the investment of a thousand dollars per year for the next 20 years. So that is something that you really have nothing to lose and everything to gain, and your money can grow like tax- free in that account.

Joeita Gupta:
We'll get into the specifics a bit more, but just off the top, can you think of a situation where the RDSP may not be the best option for a person with a disability?

Gurpreet Plaha:
So RDSP is a really powerful tool to save for a future. But in some cases when your eligibility for disability stops, comes to my mind that the RDSP will terminate in the year and then all the grants or the bonds that you receive from the government would have to be paid back or refunded to the government. Now, so talking to your financial advisor would be a great way to explore maybe other options that are actually perfect for your situation to achieve your financial goals.

Joeita Gupta:
And also, not that any of us likes to think about this, but if your disability is such that you're not expected to live past a certain age, then maybe the RDSP isn't the best option for you. If your life expectancy is supposed to be 45 to 50 years, then you might contribute but not really be in a position to make use of those contributions in later life.

Gurpreet Plaha:
There are some rules when it comes to extenuating circumstances like that. These rules are relaxed when you are making a early withdrawal. If your doctor or your nurse or practitioner that you are seeing certifies in writing that your life expectancy is shorter than five years or so, so these rules are relaxed, but you need to have that in writing. And you also need to consult with your financial advisor to how does that impact you financially from tax perspective and your finances as well.

Joeita Gupta:
So who is eligible for the RDSP?

Gurpreet Plaha:
To open up the RDSP plan, you need to meet certain criteria. So you need to be a resident of Canada and file your taxes here. You need a valid SIN number and you need to be younger than 59 years, or turning 59 in the calendar year that you are thinking of opening the RDSP account. You also should be approved for or already receiving disability tax credit. So these are the criteria that you need to be eligible to open an RDSP account.

Joeita Gupta:
And just so I'm clear on this, when we say that you're eligible, it means that you are eligible to be the beneficiary of an RDSP, but you could have a situation where someone's parent or a spouse or another family member opens up an RDSP and contributes to it on behalf of a beneficiary who meets all of the criteria that you talked about.

Gurpreet Plaha:
That is correct. At this point, let's get these two key turns actually clarified. So beneficiary is a person who the account is for, who is going to benefit from the savings at a certain point in time. Now, there's also another term which is important, it's called the plan holder. Those plan holders could be people that are actually managing the plans for you, and very well, as you said, they could be your parents, they could be our legal representatives, a lawyer or anyone that you appoint to act on your behalf as well.

Joeita Gupta:
And with the beneficiary, once you designate a beneficiary, is that done forever? Because I can think about a parent saying I can see myself providing for my child for the rest of my life and for the rest of their life, but if you're a someone's spouse and your marriage breaks down, you may not want to continue to contribute to an RDSP. How does that work?

Gurpreet Plaha:
So you can continue saving for your future or you can plan to as much as you actually want to. You don't really have to contribute anything to get the government bonds, but the other grants that you could receive, they need to be matched with the contributions that you make. So those are the consequences that you might face, but as long as the money is sitting in the account and you're not making any contributions, you could still invest that money and keep on earning some kind of investment income throughout the time that you actually need that money.

Joeita Gupta:
Great. And so, tell us a little bit about the application process. You mentioned that the beneficiary has to be eligible for the disability tax credit. What sort of an application process exists above and over applying for and receiving the disability tax credit?

Gurpreet Plaha:
So the disability tax credit application that you apply through, it's a separate form, it's called T2201 that you send it to us as soon as you figured out that you're eligible for claiming the disability tax credit. It does take about eight weeks for us to process your application, and if you send it with your income tax return we will process your disability tax credit first and approve it first before we process your return.
Now, once you have that, you will go to any financial institution of your choice to open up the RDSP account. In terms of documentation or what you need, is make sure that the name, the social insurance number and the date of birth that you provide to open the RDSP account matches with the information that CRA has so that there is no delay, or there's no complications in opening up the account. So your financial institution will take care of that.

Joeita Gupta:
Now, you mentioned this earlier, but I just wanted to clarify. Once you've opened up your RDSP and you start to put money in there and you start to get the government grants put in there and maybe the Canada disability savings bond is coming in there, if you decide to invest some of that money and have it grow that way, what happens to the investment income so generated? Is that taxable?

Gurpreet Plaha:
So the contributions in the RDSP account could be your personal contributions, your grants, your bonds, and the investment income that you may earn through those savings account. Now personal contributions are considered after tax dollars, so there's no tax when you withdraw them. However, the grant bonds or any other investment income that you could receive would be taxed, and only taxed when you withdraw that amount.

Joeita Gupta:
Okay, great. So again, just break it down for us. How exactly does the RDSP work? So, you kind of alluded to it, the basic idea being that you put money in and the government matches it, but maybe you could get into that in a little more detail and explain exactly how much the government contributes and when they're likely to make that contribution.

Gurpreet Plaha:
So contributions to an RDSP are not tax-deductible and can be made until the end of the year the beneficiary turns 59. Now your personal contributions are withdrawn, are not included in the income of the beneficiary, but however, the grants, the savings grants and the bonds and investment income would be included in the income for the tax purposes of the beneficiary. Now to get a little bit of deep dive on how much you're going to get, it actually does depend on your family's net income. So let's say if your family's net income is below $98,000, this is just a ballpark, and then for every $1 you put into your RDSP account, the federal government will match it up to $3.
So that is through the Canada Disability Savings Grant. Now for the bonds, people with low income, I think the amount less than $32,000 for the year, the federal government will invest thousand dollars each year for 20 years.

Joeita Gupta:
On your behalf?

Gurpreet Plaha:
That's right.

Joeita Gupta:
Just so I understand, even if someone is on social assistance and they don't have a lot of money and they can't make a contribution themselves, they just cannot put in anything into their RDSP? If they open it up, then they'll get the thousand-dollar savings bond from the government regardless, even if they themselves aren't able to put a single dollar into the RDSP in a given year?

Gurpreet Plaha:
That is correct. There are no contributions required to be made in order to get the bonds. To qualify for the bond though, all you have to do is file your income tax return and benefits return because we need past two years of your income to calculate how much you are entitled to get, because it does depend on your income. The amount of the bond is based on the adjusted family net income, so no bond is paid if you make over a certain threshold.

Joeita Gupta:
And so is there ever a situation where the government may stop contributing to someone's RDSP, or would contribute less?

Gurpreet Plaha:
So, a situation would be when the beneficiary turned 49. Now there is a requirement, so when the government stops paying any grants or bonds the year in which beneficiary turns 49. So that would be one situation. If you make more income, if you are making above the threshold that are set for those grants and bonds, that is a situation where the contributions or matchup could be less, or there could be no investment from the government's perspective. So once you pass the 49 years of age and these contributions stop, or maybe if you lose your disability status, that could be one of the situation where these payments can stop as well.

Joeita Gupta:
So a couple of weeks back, we just had the deadline to contribute to the RSP. The RSP season can get very busy if you work in a bank, and a lot of people will go and put money into their RSPs saying this is a way that I can pay less income tax. If you make a contribution to an RDSP, can you also use that contribution to the RDSP to reduce your income tax burden in the same way as you might be able to deduct a bit of your income tax based on how much you contribute to a regular RSP?

Gurpreet Plaha:
So both of these RSPs and RDSP are the accounts to help you for your retirement years. But for the contributions that are made into the RDSP are not tax deductible, similar to RSP. So that's the big distinction. However, when you withdraw the money, there would be tax consequences on the withdrawals.

Joeita Gupta:
Right. Is there a limit on how, because with an RSP you have a certain amount of contribution room and you shouldn't exceed that contribution room if you can help it, and a lot of people don't actually. But with the RDSP, is there a similar limit on how much someone can actually contribute in a given year, or over the course of their lifetime?

Gurpreet Plaha:
So there is no annual limit on how much you can contribute into the RDSP, however, there is a lifetime limit. So you cannot exceed $200,000 until the beneficiary turns 59. So that is the limit. So it doesn't matter, you can deposit $200,000 in one shot, but you cannot increase that amount.

Joeita Gupta:
All right, so $200,000 is where we got to put the brakes on. I mean for a lot of people though, $200,000 is still a lot of money, and a number of people with disabilities being on social assistance. I'm wondering if the RDSP is considered an asset for the purposes of provincial social assistance programs, or if the fact that you have an RDSP might in any way adversely impact your eligibility for a provincial social assistance program.

Gurpreet Plaha:
So federally, there is no impact on programs like Old Age Security or CPP, or guaranteed income supplements, because these programs are income tested. However, some provinces actually do put some restrictions on considering it as an asset or an income. Quebec, New Brunswick and PI have a different set of rules when it's come to calculating the eligibility for some provincial assistance program. So I think it'll be best to contact the provincial government that you are residing in to get more information on the claw-backs or any kind of restrictions or limitations on the other programs.

Joeita Gupta:
You mentioned that over the course of someone's lifetime they can contribute $200,000 to an RDSP. Could someone have a scenario where they contribute $200,000 of their own money, they're the person with a disability and they're the beneficiary of their own RDSP, but they get a second RDSP where their mom or somebody else is putting in money for them as well? Can you actually get away with having two, or is it just the one for everybody?

Gurpreet Plaha:
It is. I wish there were two, but currently a beneficiary can only have one RDSP. You can have several plan holders like your mom and dad or your lawyers or your grandparents, whoever you authorize to manage that account, but the beneficiary can only have one account.

Joeita Gupta:
You did touch on this a bit earlier, but just in the interest of greater clarity, is there ever a situation where the person who has the RDSP, or the beneficiary, needs to pay back the government's contribution?

Gurpreet Plaha:
So situations like when you stop being eligible for disability tax credit or when you make an early withdrawal, could trigger a payback. Now, there is a proportional repayment rule, which means that for each $1 you withdraw from an RDSP, you'll lose $3 of any grants or bonds into a plan in the previous 10 years, as they will need to be repaid back to the government. So there's a little bit of a rule that you really have to watch out for that. And so all personal contributions and interests earned are considered the property of the beneficiary, so they never need to be paid back to anyone.

Joeita Gupta:
Now, you mentioned that you have to stop contributing to the RDSP by the age of 49, but when can you actually start withdrawing from the RDSP and are there rules about how much you can take out of your RDSP in a given year?

Gurpreet Plaha:
So just to correct, you need to stop contributing until the age of 59.

Joeita Gupta:
Oh, 50.

Gurpreet Plaha:
Yes. 49 is the maximum when you get the grants and the bonds from the government, so there is a little bit of a numbers game there. But other than that, when you turn 60 would be the ideal age to start withdrawing money, because it's actually essentially a plan for a long-term future to help you in your retirement years. So that is the goal of this plan. So that is when you can start withdrawing the money. But having said that, there would be certain circumstances where you need to withdraw money and you could do that as well.

Joeita Gupta:
And so how does the withdrawal work? Do you withdraw it all in one shot? Do you set it up so you are getting paid out a certain amount annually? What are the rules around withdrawing from your RDSP?

Gurpreet Plaha:
So, once you reach the age 60, there is the long-term disability assistance plan, which you can continuously withdraw money depending on the income tax credits that you might be eligible for. So that is something that you would probably speak to your financial advisor to see. So basically you will be eligible to claim a basic personal amount and a disability tax credit on your income tax return. So those are the two threshold. So each come to about ballpark $23,000. So if you plan it accordingly, you would probably never end up paying taxes on the withdrawals. So you can start withdrawing that way. But if we talked about earlier, when you start withdrawing a little bit earlier than that because you need it for whatever reason, there could be penalties involved in those withdrawals.
So like I said earlier, 10 years rule apply with the grants and bonds. So if they have been sitting in the account for more than 10 years, then you don't have to pay them back. But if that's not the case, then you might have to pay those back as well. And that's where these penalties come from.

Joeita Gupta:
But you can plan it out so that you are not getting penalized, especially if you withdraw after the age of 60. How does it impact getting your CPP and OAS? Are those things at all impacted when you start to withdraw from your RDSP?

Gurpreet Plaha:
No. So the payments to CPP and OAS are income tested program. So they don't get impacted by these withdrawals from the RDSP.

Joeita Gupta:
Nice. Okay, good to know. So some years back when I bought my first home, I was able to go into my RSPs and I was able to take some money out of my RSPs under the home buyer's plan to buy a house. So could I take the money from my RDSP out under similar circumstances, let's say to buy a house?

Gurpreet Plaha:
You can actually spend the RDSP withdrawal however way you wish. You can decide where and when to spend them and you can put these withdrawals towards the non-disability related expenses. So this means that the funds from RDSP can be put towards a down payment or even for recurring mortgage payments as well, but there is no certain tax advantage of doing that.

Joeita Gupta:
Yeah, I mean the reason I asked about the home buyers plan is because you have to put the money back into your RSP when you withdraw it on the base of the home buyers plan, then you pay it back in instalments until you've made yourself whole again, basically, I guess, is the colloquial way of saying it. Does the RDSP work in the same way where you would take a certain amount of money from your RDSP to put down a down payment with the expectation that in the next 15 years or so, you'd have to put it back into the RDSP?

Gurpreet Plaha:
So again, it comes with the timing and it comes with how much money you have in terms of grants and bonds, and if they're going to be penalties involved, the 10-year rules come into play as well. So it's always a good idea to speak to the financial institution that you have the RDSP account with and see if these are the consequences or what you have to pay back, because amount will differ based on the situation you are in.

Joeita Gupta:
A lot of people with disabilities have these extra expenses, not just after the age of 60, but over the course of their lifetimes, buying specialized equipment, maybe getting home care, maybe doing home renovations, all kinds of other things come up for a person with a disability over the course of their lifetime. Can they dip into their RDSP to pay for some of these things without incurring a penalty?

Gurpreet Plaha:
Yeah, so like I said, withdrawals from the RDSP can be spent however way you choose to. If you do choose to renovate your house so that it's more accessible to you, you can absolutely do so. However, again, it comes with the consequences of early withdrawals and what kind of financial predicament it puts you into. So the option is there for you to withdraw money before 60, but it could just come with certain penalties depending on how long the grants and the bonds have been sitting into the account.

Joeita Gupta:
And Gurpreet, if someone has extenuating medical circumstances, like you said earlier in our conversation, if they only expected to live for another five years or so, is there some flexibility to change some of the rules and not to penalize somebody in case they have an extenuating medical circumstance, which is why they're dipping into their RDSPs early, overdrawing from them early?

Gurpreet Plaha:
Yes. So again, the early withdrawal rules that we've talked earlier are relaxed when the life expectancy of a individual is shortened and it's less than five years or so. In that case, what happens is the plan is actually changed into SDSP, which is a Specified Disability Plan. In that case, the withdrawals from the SDSP will not trigger repayment of assistance holdback amount as long as the taxable portion of all the withdrawal made stay below 10 grand. So once the plan is designated as an SDSP, you cannot make any more contributions, they are they're not allowed, and then except for any rollovers from the other investments that you may have.
So again, talk to your financial professional who you are dealing with when you are contemplating the withdrawals from the RDSP.

Joeita Gupta:
Not that I like to think about it, but what happens when the beneficiary of an RDSP dies? What happens to the money that still remains in the RDSP, both the contributions made by the person and their family as well as all the government grants and bonds that we've been talking about today?

Gurpreet Plaha:
So when that happens, the RDSP must be closed and all amounts in the plan must be paid out to the beneficiary's estate by the December 31st of the following year when the death occurs. So any funds that are remaining in the RDSP after any required payment to the government, if we needed to pay back some grants or bonds, they will be paid to the estate itself. Now, if there were some withdrawals that were made in the year when the beneficiary dies, there might be some tax consequences as well, so they would have to be included in their income as well.

Joeita Gupta:
Just a quick question. If somebody starts an RDSP for their child and the child turns 18, what happens to that RDSP?

Gurpreet Plaha:
So there are two situations. The RDSP still stays there, but when beneficiary has reached the age of 18 and they're actually contractually competent to enter into the agreement for that RDSP, they own the RDSP and they can manage the RDSP the way they want to. In the other situation where beneficiary has reached the age of majority but is not confident to enter into a contract like a legally binding contract, then the qualifying family members can maintain that account for them, or their legal representatives, whatever the situation may be.

Joeita Gupta:
I asked you about this with respect to the disability tax credit. What if someone was eligible in the last 10 years but they didn't get the disability tax credit and you said they can try to apply to get it retroactively. Can you also get the, at least the government grants and bonds retroactively for the last 10 years if you can prove that you were eligible for them, even if you didn't open an RDSP?

Gurpreet Plaha:
Yes you can. So when you establish an RDSP, the grant is paid on unused entitlement for proceeding 10 years. So the annual maximum is still $10,500 in that case. However, you cannot receive the retroactive grants if you are after the age of 49. So that will be the catch in there. And when you eventually file your tax return, you'll be able to receive the bond retroactively as well.

Joeita Gupta:
Okay, great. Well, in about 30 seconds, where can we get more info about the RDSP? I seem to remember that there was also a dedicated phone line that you could call. I don't know if that's still operational, but where can we get more information about this?

Gurpreet Plaha:
So again, our website is an excellent source of information on this topic. We do have a detailed guide that just deals with the RDSP, with some great examples to explore more tax perspective, and how does that impact your tax situation. We have these publications available in braille, large print, E-text, and also MP3 and MP format as well. You can call us to order these for you and we will send it your way. If you are calling our general inquiries line, just tell the agent that you are calling regarding disability tax credit or RDSP, and they'll transfer to the appropriate agent.

Joeita Gupta:
Very nice. Okay Gurpreet, thank you very much for chatting with us about the RDSP today. It's flown by, but you packed a lot of information in there, so thank you very much.

Gurpreet Plaha:
My pleasure, Joeita. Thank you.

Joeita Gupta:
Gurpreet Plaha is a spokesperson for the Canada Revenue Agency, and of course you can go back and listen to our conversation. I'll put the link to the RDSP guide in the description for you and you're also welcome to go back and listen to the previous episode where we talk about the disability tax credit.
Our Videographer today has been Ted Cooper. Marc Aflalo is our Technical Producer. Ryan Delehanty is the Coordinator for Podcast at AMI-audio. And Andy Frank is the Manager here at AMI-audio. And I've been your host, Joeita Gupta. Thanks so much for listening. If you have any feedback, you can write to us at feedback@ami.ca. You can give us a call at 1-866-509-4545. 1-866-509-4545. And don't forget to leave your permission to play the audio on the program. And of course you can also send us an email. Write to feedback@ami.ca.
It's been a pleasure talking to you about all things tax related and I hope you find this information useful and we would love to hear from you. Thanks for listening.