More on RDSP’s

I have worked with Ottawa lawyer Ken Pope on cases where pecial planning is done for estates involving a disabled person. Ken is a specialist in this area and the following is reprinted from one of his newsletter, with his permission.

The recent addition of the Registered Disability Savings Plan (RDSP) requires that any new plan beneficiary already qualify for the Disability Tax Credit (DTC), so the DTC application being accepted is critical to the set-up of the RDSP for special needs clients. Only one RDSP account may be set up per qualifying individual, and only that beneficiary is entitled to any payments, unlike other registered plans such as the Registered Education Savings Plan (RESP), where you can have multiple plans per person and where effectively tax-free returns of contributions are allowed.

This new type of registered savings plan will help friends and families build financial security for the special needs person in their lives. This is not an alternative to setting up a trust for a person with disabilities, but should be used in conjunction with other vehicles, such as Henson trusts, insurance products, segregated funds and LifeTime Benefit Trust (LBTs) to build a solid financial plan.

Similar to the RESP, contributions are not tax-deductible, and earnings and growth accrue on a tax-deferred basis.

Anyone can contribute to an RDSP; you do not need to be related in any way. The contributions grow tax-free until withdrawn, at which time a proportion of the plan (earnings and growth received) is taxable and will need to be declared as income in the hands of the beneficiary at that time. Persons receiving provincial disability benefits can set up an RDSP, without going through an asset-test and without it affecting provincial disability benefits, where applicable. Unlike RRSPs, there are no maximum annual contribution restrictions. There is a maximum of $200,000 that may be contributed to any one RDSP over the course of its lifetime, and all contributions must be made before the beneficiary’s 60th birthday.

People with disabilities receive approximately $12,000 in untaxed social benefits each year in most provinces, or less. If they also work, employment income will offset provincial benefits to varying degrees. In my experience, it is unusual to find a disability benefit recipient who nets more than $21,287 per annum from both sources. Children under 18 do not receive disability benefits.

If the beneficiary’s income level is less than $21,287 (if under 18, use family’s net income level, and if over 18, use the beneficiary’s net income only), the beneficiary should receive annual Government of Canada Disability Savings Bonds, to a lifetime maximum of $20,000 per RDSP. Add to this the Canada Disability Savings Grant, if the beneficiary’s income is $75,769 or less, for an additional $3,500 per year, to a lifetime maximum of $70,000.

Simply put, if the beneficiary over the age of 18 meets the appropriate income levels, an initial contribution of $1,500 can result in $4,500 in matching government funds. However, with every plan there are pitfalls to note. Be aware that there are complex rules governing the withdrawal of funds from RDSPs that could potentially see the beneficiary having to repay government grant and bond moneys if withdrawals are made before the funds have vested for a period of ten years. Beneficiaries will only receive grant and bond moneys up until the year in which they turn 49 years old.

If maximum matching contributions have been made since the child turned 18, then when he or she turns 38, there will be no further federal contributions available. The total of $90,000 grants and bonds available will already have been maximized. If the plan is set up for a child at a young age, the end of contributions will be earlier, but the growth on the total contributed will presumably be larger than if the plan is set up at a later age.

Maximize the sources of contributions to an RDSP. Ask your client for a list of potential contributors and send them a letter informing them that an RDSP has been set up for the special needs person in their life and show them how to contribute and what it could mean for the intended beneficiary’s quality of life. Some clients may only be able to provide a limited amount of contributions and you want to try to maximize contributions so that matching government contributions are received annually, for the potential maximum of 20 years, allowing room before the $200,000 lifetime limit is reached.

The governing legislation and regulations outline the two forms of payments allowed under the RDSP: Lifetime Disability Assistance Payments (LDAPs); and Disability Assistance Payments (DAPs). LDAPs are mandatory payments in the year the beneficiary turns 60 years of age, calculated by a legislated formula as follows:

FMV of the RDSP / 3 + (life expectancy – age)

DAPs, however, must be specified at the time the plan is set up. Whoever is responsible for setting up the plan will need to mention this and check the bank account agreement regarding lump-sum withdrawals. RDSP payments are “blended” on a pro-rata basis, since the contributions were made with after-tax dollars, while the grants and bonds, as well as interest/earnings on the whole plan, are taxable.

As beneficiaries of RDSPs near their retirement years, they can find comfort in knowing that RDSP income will not affect their entitlement to: Old Age Security (OAS) payments, GST credits and the Guaranteed Income Supplement (GIS).

In the event of the RDSP beneficiary’s death, the plan’s value is paid out to the beneficiary’s estate, subject to the ten-year-assistance holdback rule (note: all RDSP beneficiaries should have a current will reflecting the inclusion of the RDSP otherwise the RDSP will likely have to be disbursed according to the relevant provincial rules of intestacy, in other words, as if they had died without a will).

Currently, we have encountered a hiccup in the administration of the RDSP, specifically regarding the difficulties of parents of special needs children who are over the age of 18 and lack the requisite competency to sign Continuing Powers of Attorney for Property. In early 2009, organizations such as PLAN went back to the government, asking for a loosening of the rules governing the opening of RDSPs. Parents of special needs children who are over the age of 18 and lack the necessary competency to sign powers of attorney have been turned away from financial institutions until they provide proof of formal guardianship standing. While some provinces such as British Columbia and Manitoba already have alternative arrangements such as Representation Agreements in place, others like Ontario do not, and are currently requiring parents to seek formal guardianship status, which is a lengthy  as well as costly process to embark upon.

Since discussions with the relevant government authorities are still under way, it remains to be seen how flexible the provinces will make the currently complex and rigid rules. Unfortunately, there is a real disconnect between the goals of the program and the rules and regulations governing its administration. This is often the result of policymakers drafting in isolation of their intended audience. Further consultations with leading organizations such as PLAN Canada should help policy writers understand how to tweak what is working and discard what is unnecessarily complicated and arguably overly onerous for families already coping with life’s own complications.