What is a Registered Disability Savings Plan (RDSP)?

By Randall Orser | Personal Income Tax

Happy cartoon smiling blonde girl in magenta wheelchair moving fLately there has been talk about something called a Registered Disability Savings Plan, or RDSP for short. An RDSP is a savings plan to help parents and others save for the long-term financial security of a person who is eligible for the disability tax credit; this person would be the beneficiary of the RDSP.

Contributions to an RDSP are not tax deductible and can be made until the end of the year in which the beneficiary turns 59. Contributions that are withdrawn are not included in income for the beneficiary when they are paid out of an RDSP. However, the Canada disability savings grant, the Canada disability savings bond, and investment income earned in the plan are included in the beneficiary’s income for tax purposes when they are paid out of the RDSP. Of course, the idea being that they are in a lower income tax bracket so won’t get taxed as high as the contributor.

Who can become a beneficiary of an RDSP?

You can designate an individual as beneficiary if the individual:

  • Is eligible for the disability amount;
  • Has a valid social insurance number (SIN);
  • Is a resident in Canada when the plan is entered into; and
  • Is under the age of 60. The age limit does not apply when a beneficiary’s RDSP is opened as a result of a transfer from the beneficiary’s former RDSP.

A beneficiary can only have one RDSP at any given time, although this RDSP can have several plan holders throughout its existence, and it can have more than one plan holder at any given time. Anyone can contribute to an RDSP with the written permission of the plan holder.

How do you open an RDSP?

To open an RDSP, a person who qualifies to be a holder of the plan must contact a participating financial institution that offers RDSPs. These financial institutions are known as issuers. The plan holder is the person who opens the RDSP and makes or authorizes contributions on behalf of the beneficiary.

Who can open an RDSP?

If the beneficiary has reached the age of majority and is legally able to enter into a contract, then an RDSP can be established for such a beneficiary by the beneficiary and/or the legal parent who is, at the time the plan is established, a holder of a pre-existing RDSP of the beneficiary.

Another qualified person can open an RDSP for the individual and become a holder. Another qualified person is: a guardian, tutor, or curator of the beneficiary, or an individual who is legally authorized to act for the beneficiary; or a public department, agency, or institution that is legally authorized to act for the beneficiary.

In addition, an individual who is eligible to be a beneficiary of an RDSP, (but for whom a plan has not yet been established) may have reached the age of majority but may not be legally able to enter into a contract.

If, after reasonable inquiry, it is the opinion of a financial institution that offers RDSPs (RDSP issuer), that an individual’s ability to enter into a contract is in doubt because of a mental impairment a “qualifying family member” can become a holder. A qualifying family member includes a spouse, common-law partner, or parent of an individual. The spouse or common-law partner is not eligible for this measure if they are living apart from the beneficiary due to a breakdown in their marriage or partnership.

What types of payments are made from an RDSP?

Only the beneficiary or the beneficiary’s legal representative (on his or her behalf) will be permitted to receive payments from the RDSP.

There are three types of payments that can be made from an RDSP:

  • Payments referred to as disability assistance payments (DAPs);
  • Repayments of grants and bonds to the Government; and
  • Transfers of all property from the beneficiary’s current RDSP to a new RDSP of the beneficiary.

Of these three types of payments, only the DAPs are taxable. Disability assistance payments (DAPs) are any payments made from the plan to the beneficiary or to the beneficiary’s estate.

How are payments from an RDSP reported?

The grants, bonds and investment income earned in the plan are included in the beneficiary’s income for tax purposes when they are paid out of the RDSP. RDSP issuers report the taxable part of the payments from the plan in box 131, located in the “Other information” area of a T4A slip and send two copies of the slip to the beneficiary or the beneficiary’s legal representative. The beneficiary has to include this amount as income on line 125 of his or her tax return for the year in which he or she receives it.

What happens if the beneficiary dies?

The RDSP must be closed and all amounts remaining in the plan must be paid out to the beneficiary’s estate and the plan terminated, by December 31 following the calendar year in which the beneficiary dies. Any funds remaining in the RDSP, after any required repayment of government grants and bonds will be paid to the estate. If a DAP had been made and the beneficiary is deceased, the taxable part of the DAP must be included in the income of the beneficiary’s estate in the tax year in which the payment is made.

Registered Disability Savings Plan (RDSP) is a great way to save for the future of someone who is severely physically or mentally challenged. It allows the holder (parents usually) to be able to save for the future of their child, and knowing that after their passing the funds will be there to look after the child.

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