Families who care for disabled relatives frequently find themselves hard-pressed to come up with funding, but the upcoming registered disability savings plan may offer relief.
The RDSP, expected to debut next year, will be open to anyone who qualifies for the Disability Tax Credit. That potentially covers some 742,000 Canadians, according to Statistics Canada.
Those who qualify for the tax credit, or their parents or legal guardians, will be able to establish an RDSP; they will also be eligible for the new Canada Disability Savings Grant.
The CDSG will work in a similar fashion to the Canada Education Savings Grant in an RESP, with the government offering funding to top-up individual contributions. Those with low and modest incomes would also be eligible for Canada Disability Savings Bonds of $1,000 a year for 20 years.
While RDSPs are a positive development for the industry, the rules can be complicated, says Jamie Golombek, vice-president of taxation and estate planning for AIM Trimark.
The RDSP works as follows: If a disabled person is under 18, the family income is defined as the parents’ income. As soon as the disabled person reaches 18, his or her own family income is used. If that person (and his or her family) earns less than $74,357 a year, that person is eligible for the maximum federal government matching grant — which equals 300% on the first $500 and 200% on the next $1,000 of annual contributions. That equates to a personal contribution of $1,500, with the government contributing an additional $3,500 for a total of $5,000 a year. This matching grant is available for 20 years to a lifetime limit of $70,000.
The lifetime limit for RDSP contributions will be $200,000. To maximize the compounding of investment income, a family could deposit $200,000 right at the start of 2008. While there is no tax deduction for contributions by the disabled individual, neither is the original capital taxed on withdrawal. However, the CDSG, CDSB and investment income will be taxable.
To obtain the maximum $3,500 annual matching CDSG, investors could deposit an initial maximum of $171,500, leaving room to make 19 additional annual deposits of $1,500 per year. Golombek explains that, a 6% growth rate assumed, the initial deposit of $171,500 would qualify for the maximum matching grant of $3,500. This would result in an RDSP end-of-year balance of $185,500. A deposit of $1,500 combined with the matching grants would result in an RDSP end-of-year balance of $374,302 by the 10th year and $740,177 by the 20th year (the maximum number of years for matching grants).
“There are big assets [in these plans],” notes Golombek. “There’s $200,000 in contributions, $70,000 in grants and $20,000 in bonds. That’s $290,000 before any type of growth or earnings. These are great vehicles for people with disabled children or disabled relatives who want to save for their future.”
Janet Freedman, a fee-only advisor at Toronto-based Finance Matters, is pleased with the introduction of an RDSP, but she foresees problems with the proposed model.
“The original proposal was for an RRSP model,” she notes. “In an RRSP model, there are no matching grants, no bonds, but any contribution is deductible. Instead, the government opted for an RESP model.”
If the RDSP had followed an RRSP model, anyone would be able contribute (child, parent, extended family or friends) and receive a tax deduction, says Freedman. This could have been an incentive for those who are not already financially constrained with looking after a disabled relative.
“If you have very low income, you won’t have any money to take advantage of the RDSP — even with all the grants and bonds,” Freedman says. “And let’s face it: if you have a child with a severe disability and family income under $74,357, that’s not a lot. Parents with children with severe autism, for example, need special schooling that costs $25,000 to $30,000 a year. That’s their first concern — they can’t even think about the long-term at this point, and that includes any financial savings through RDSP.”
There are other problems. With an RRSP model, the RDSP beneficiary could also use a Home Buyers’ Plan provision and take out money temporarily for immediate needs. However, under the current proposal, the RDSP could be used only for regular income instalments and could not be used (as principal or as collateral) for larger purchases such as accommodation or accessible vehicles.
Despite these limitations, Freedman believes parents with children under 10 have a huge potential to build up savings. These parents can take advantage of long-term investment growth on both their contributions and the matching grants.
But it’s a different story for family members who have disabled relatives in their 40s or 50s, as matching grants and bonds are available only until the beneficiary turns 49. So, a parent who has a 40-year-old disabled child has only nine years to participate in the RDSP program and to take advantage of the grants.
Another issue is whether the provinces will exempt RDSP as an asset when calculating provincial disability benefits. “Until provinces sign on, [this plan] is dead in the water — particularly for low income families,” says Freedman. “The RDSP will not generate enough income so that these [low income] families won’t need government help. There must be an incentive to make it worthwhile.”
The whole purpose of the new federal RDSP is to give families a way to provide monetary support on top of provincial social assistance. Accordingly, only the wealthiest Canadians would likely ever use RDSPs if such savings totally disqualify the disabled beneficiary from receiving provincial social assistance, explains Freedman.
In fact, the RDSP could potentially benefit people who are in the workforce but who have never applied for the disability tax credit, says Terry McBride, president of the North Central Saskatchewan chapter of Advocis and financial planner at Raymond James Ltd. For example, McBride currently advises a client — an architect with a moderate income — who has a disability but has never applied the credit, and now he may. The reason: the $70,000 in matching grants. “He’s getting involved because there is a serious amount of money involved,” explains McBride. “The matching grant, combined with the tax deferral, is a pretty attractive package and offers him a much better deal than a simple RRSP.”
According to Statistics Canada, McBride’s client isn’t alone. In 2005, more than 49% of people with registered disabilities were in the workforce.
Then there’s the matter of whether the provinces will exempt the RDSP from matrimonial property. In addition, it’s not clear how the registered plan will be treated if a person loses his or her disability status.
“I work with a person whose disability is commonly referred to as a deaf–mute,” explains Freedman. “Every two years, the CRA asks for new Disability Tax Credit information. Why? The client is close to 60 and has lived with this disability all his life and yet is required to provide documentation on a disability that will probably not change. Perhaps if the person was two years old and, with the potential of medical advancements, but, then, I must ask, how will [RDSP administrators] handle this situation?”
Originally published in Advisor’s Edge Report in October 2007