RDSP – Registered Disability Savings Plan

Tax-sheltering disability savings, with a government boost

The Registered Disability Savings Plan (RDSP) is a long-term savings tool for a person who is eligible for the disability tax credit (DTC). It has three main financial benefits:

    1. Government money added to personal contributions
    2. Tax-sheltered growth of personal and government money in the plan
    3. Tax eventually borne by the plan beneficiary, not the contributors

Who qualifies to use a RDSP?

A RDSP may be opened by a person up to age 59 who qualifies for the disability tax credit, and is a Canadian resident with a valid Social Insurance Number (SIN). If the application is made (on the beneficiary’s behalf) by someone other than the DTC-qualified person, that applicant must also have a valid SIN. If at a later time the beneficiary no longer qualifies for the DTC, the plan may remain open but no further contributions are allowed.

There can only be one RDSP for a given beneficiary, and only one beneficiary for each RDSP.

How do you set one up?

Application is made to a RDSP issuer, which is a financial institution registered with the government to open plans, receive government bonds and grants, and invest funds as directed by the plan holder.

The plan holder will generally be a parent or guardian if the beneficiary is a minor. An adult beneficiary must be his/her own holder, unless he/she is not contractually competent, in which case it may be a parent, spouse or common law partner, qualifying family member or designated legal representative.

Allowable contributions and their tax treatment

The lifetime contribution limit is $200,000, but there is no annual limit. However, there are annual limits to the amount of government assistance (see CDSB and CDSG below), which could influence contribution timing.

Contributions are after-tax, meaning there is no tax deduction when contributing. Government assistance is not taxable when credited to a plan. While in the plan, there is no tax on income earned on either personal or government contributions.

RRSP rollovers

RDSP contributions may also be by a tax-deferred rollover from a deceased’s registered retirement savings plan (RRSP) or registered retirement income fund (RRIF). The beneficiary must be a child or grandchild who was, at the time of the deceased’s death, financially dependent on the deceased for support by reason of an impairment in physical or mental functions. These contributions are included in the $200,000 lifetime contribution limit but do not attract any matching grants, and will be included in the taxable portion of future RDSP withdrawals.

RESP rollovers

Funds in a registered education savings plan (RESP) may also be rolled over to a RDSP on a tax-deferred basis. The same person must be the beneficiary of the RESP and RDSP. This is an option under RESP rules, where an accumulated income payment (AIP) would otherwise be taxed currently. As with RRSP/RRIFs, such contributions are included in the $200,000 lifetime contribution limit but do not attract any matching grants, and will be included in the taxable portion of future RDSP withdrawals.

Government assistance: CDSB and CDSG

Though a RDSP may receive personal contributions up to age 59, government assistance through the Canada Disability Savings Bond (CDSB/bonds) and Canada Disability Savings Grants (CDSG/grants) are only available up to the beneficiary’s age 49.

The CDSB makes an annual payment to a RDSP, regardless of personal contributions. It can be up to $1,000 annually, with a lifetime limit of $20,000. If the beneficiary qualified for a RDSP in years before the plan was opened, a one-time catch-up up to $10,000 is allowed for unclaimed bond money over the preceding 10 years.

The CDSG matches personal contributions. It can be as much as a 300% match, to a maximum of $3,500 annually, with a lifetime limit of $70,000. Like bonds, up to 10 years of catch-up is allowed, but the maximum that can be received in any one year is $10,500 (or 3X maximum), so it may take a few years to collect all the matching grants.

The amount available under these programs is determined according to family net income (FNI) thresholds two years preceding the program year, as shown in the table below. When a beneficiary is under 19, FNI is the combined net income of the beneficiary’s parents. Thereafter, it is the beneficiary’s own net income (even if continuing to live with parents), or if the beneficiary is cohabiting with a spouse or common-law partner then that couple’s combined net income.

There are three FNI thresholds used to determine the annual assistance amount:

  • Phase-out income – The income level above which the annual amount of CDSB payable begins to decrease.
  • First threshold – The income level that, when reached or exceeded, the annual amount of CDSB payable is nil.
  • Second threshold – The income level that, when below or equal to, the matching grant will be 300% of the first $500 in contributions and 200% of the next $1,000 in contributions. When income is above this level, the matching grant will be 100% of the first $1,000 in contributions.

Effect on other public support

Having a RDSP will not affect eligibility for federal programs such as the Canada Child Benefit, GST/HST credit, Old Age Security or Employment Insurance, nor limit access to provincial disability support programs.

Withdrawing funds from the plan

Withdrawals are formally called disability assistance payments (DAPs), and may be taken periodically, or as annual recurring payments. Recurring payments are called lifetime disability assistance payments (LDAPs). LDAP payments must begin by the end of the calendar year that the beneficiary turns 60.

When a withdrawal is taken and CDSB and CDSG have been received in the preceding 10 years, a portion of those bonds and grants may be repayable. Repayment may also apply if the beneficiary is no longer qualified for the DTC and takes a withdrawal while under age 60.

There is no repayment of grant or bond money if the beneficiary has turned 60, if the last bond and grant money was received more than 10 years ago, or if reduced life expectancy is five years or less.

When assistance is paid to the beneficiary – who does not have to be a Canadian resident at the time – each payment is a proportion of personal contributions, investment earnings, CDSB and CDSG. The beneficiary is taxed on the payment except for the portion that represents the return of personal contributions.

Disability public assistance – Ontario ODSP

Ontario Disability Support Program

Living with a disability can pose personal and emotional challenges. As well, there are often direct financial costs and economic challenges, both for the individual and surrounding family.

For Ontarians, the Ontario Disability Support Program (ODSP) is the anchor program assisting individuals and their families managing with disability needs. While it has many components, at its core ODSP delivers financial assistance for essential living expenses, provides a number of health care benefits, and offers help in finding employment and advancing a person’s career.

Here is an overview of the key features of ODSP.

Your rights and your responsibility

As an Ontarian 18 years or older with a disability, you have the right to apply for ODSP support. A caseworker reviewing your application is guided by policy directives intended to assure consistent service across the province, balanced with the discretion to cater to individual needs and circumstances.

At the same time, be aware that as a large public program, ODSP has plenty of administrative structure and financial oversight, with practical implications for the path that lies ahead for you. This includes detailed initial financial disclosure, regular caseworker reviews, and your continuing obligation to report and make first use of your own financial resources, supplemented by this public support program.

What is a “disability” for ODSP purposes?

The disability must be a substantial mental or physical impairment that is continuous or recurring, lasting for a year or longer. It has to be shown that it substantially affects your ability to work, to care for yourself or to participate in the community. This must be verified by a health care professional.

For those who meet the criteria for certain other government programs – the most familiar being the Canada Pension Plan (CPP) disability pension – no further medical evidence of disability is required. However, you must still apply and meet ODSP financial eligibility requirements in order to receive income support.

Two components of income support: Basic needs & shelter allowance

There are two core components of ODSP:

    • Basic needs income support – To help cover food, clothing and necessary personal items
    • Shelter allowance – To help cover rent/mortgage, utilities and other direct housing carrying costs

Note in both cases that it is “to help cover”, which is not an assurance of full coverage.

To show financial need, your household basic living expenses must be more than your income and assets. As ODSP income support is meant to supplement other income, you must seek out any financial resources you or your family may be entitled to receive. This is determined in consultation with a caseworker.

Once available resources are ascertained, attention turns to the number and age of those in the family, and whether your spouse has a disability. With so many variables, a full review is generally necessary to estimate the income support amount in a particular case. For general reference, the table on the following page shows the maximum support amounts available, using some examples of who might be in the household.

Working income affecting income support

You are entitled and encouraged to work. In fact, ODSP Employment Supports offers many resources to help with training, tools, assistive devices and even business start-up mentoring.

If you are indeed working, once your monthly income exceeds $200, 50% of your earnings is deducted from your income support payment. For this purpose, monthly earnings is the net you receive after mandatory payroll deductions like income tax, CPP and employment insurance premiums. The reduction may be offset by the $100 ‘Work-Related Benefit’ paid for each month you are working.

Treatment of income generally

Beyond employment, again all available income sources must be disclosed, including spousal support, business profits, Old Age Security, CPP benefits, and potentially even loans you receive. As with work income, these will reduce ODSP income support.

However, some sources are exempt from that reduction, such as child tax benefits, child support payments and amounts drawn from a registered disability savings plan (RDSP).

Receiving gifts

Each family member in the ODSP recipient’s household may receive up to $10,000 in gifts annually, with any excess treated as income. This dollar limit excludes gifts that go toward a disability related device or service, or into an exempt asset. (See “Asset limits” below.)

Health care benefits

Once you are entitled to income support, there are a number of health care benefits that come with that.

ODSP recipients are eligible for prescription drugs listed in the Ontario Drug Benefit Formulary. For adults there are basic dental services, and children under 18 are automatically enrolled in Healthy Smiles Ontario. If you don’t have eye care under the Ontario Health Insurance Plan (OHIP), ODSP covers routine eye examinations, major examinations for those with a medical condition or infection, and periodic eyeglass prescriptions and repairs.

Asset limits, and loss of income support

You will not be entitled to income support if the value of your assets exceeds a certain level. The limit is $40,000 for a single person or $50,000 for a couple, plus $500 for each dependant other than a spouse. This includes cash, banking and investment accounts, registered retirement savings plans (RRSPs) and tax-free saving accounts (TFSAs), secondary/rental properties and even valuable collectibles (eg., stamps, hockey cards).

Fortunately, there are many items that are exempt. This list includes the home you live in, personal clothing and furniture, your primary vehicle, and funds in registered education savings plans (RESPs) and RDSPs. Also excluded are amounts in life insurance cash values and trusts from gifts/inheritances, together totaling up to $100,000.

Preserving ODSP with a discretionary ‘Henson’ trust

That mentioned $100,000 limit for trust-held funds and insurance may not be adequate where there are significantly more assets that would otherwise be available to the ODSP recipient. In that case, in order to better preserve ODSP support, a more sophisticated trust arrangement might be considered.

A fully discretionary trust allows a trustee alone to decide the amount and timing of payments to a trust beneficiary who has a disability. Because the beneficiary has no legal right to force the trustee’s hand, ODSP does not include any such property in asset limits. This is commonly known as a “Henson trust” for the 1989 Ontario case that challenged the predecessor Ontario support program.

Even though the trust capital is not considered an asset for ODSP purposes, payments from the trust may be considered income that could affect ODSP support. Payments will generally be considered exempt as income, for example, if used for:

  • approved disability related items, services, education or training expenses that are not reimbursable
  • the purchase of a principal residence or an exempt vehicle;
  • first and last month’s rent necessary to secure accommodation; or
  • any purpose up to $10,000 maximum in a 12-month period.

The use of a trust in this way should not be taken lightly, as it places a very high degree of power and responsibility in the trustee. A qualified trust lawyer familiar with disability issues can advise on whether and how to proceed, taking a view of the totality of circumstances.

Alter ego and joint partner trusts

Privacy, probate minimization and more for those 65+

In estate planning, your Will is the central document for controlling what happens with your property at death. It could be argued though that having a Will alone could, in a sense, be too much management held in one place.

As odd as that may sound, a Will is a product – albeit a very important one – of you thinking through your own needs and those of the important people around you, and deciding how best to take care of them. That’s the estate planning process, and your Will’s role is to set out who is to receive the property you own when you die.

However, sometimes it may make sense to make changes so that select property does not flow through your Will, and therefore is not part of your formal estate. That is where alter ego and joint partner trusts can offer greater flexibility and control.

Mechanics of alter ego & joint partner trusts

Alter ego and joint partner trusts are inter vivos trusts, meaning they are set up while you are living. 

You must be at least age 65 to set one up, with an alter ego trust for one person and a joint partner trust for a couple. 

Commonly you will be both trustee and beneficiary, though you can also include one or more others as trustees with you. That will provide some flexibility should you become incapacitated while living, as discussed further on. Trustees have all the legal powers to buy, sell and manage the property that you have decided to transfer into the trust. As the beneficiary, during your life you are entitled (and actually required) to receive any income, and you have full use and enjoyment of the capital, just as you did before the trust was created.

You can name one or more residual beneficiaries. If it is an alter ego trust for yourself then those residual beneficiary rights will arise on your death. In the case of a joint partner trust, the survivor of the two of you will continue on as beneficiary on a first death, and then the entitlement of those residual beneficiaries will take effect on the survivor’s death. Commonly the residue would be paid out upon death of the primary beneficiary/ies, but it is also possible to draft it so that the trust will continue on for a period of time if you wish. 

Income tax issues

These trusts may be used with any property you may own, but most often the focus is on real estate and non-registered investment accounts. With the exception of your principal residence, a property transfer usually triggers a taxation disposition. 

Fortunately, you may roll capital property into these trusts at their cost base. Thereafter, income and capital gains realized in the trust are taxable to you (or both of you for a joint partner trust), in proportion to the assets you contributed.

At death, in the case of an alter ego trust (or at the second death with a joint partner trust), all remaining property is deemed to be disposed, with any resulting capital gain/loss is reported on the trust’s tax return. The trust’s capital gain/loss cannot be netted against capital gains/losses realized on your death by you personally. For this reason, you must carefully consider what initially goes into the trust and what you will continue to own personally, and carefully monitor all pending tax liabilities.

As an incapacity substitute, and for continuity of management

You should still have powers of attorney (POAs) for property and personal care drawn up in case you become incapable in future. Bear in mind though, that POAs can only deal with property that you own yourself, meaning that the named attorneys would not have legal power over the trust property. 

With this in mind, whether it’s an alter ego or joint partner trust, you can name one or more co-trustees who can act with you now, act for your benefit later, and continue to act after your death as trustees for your residual beneficiaries. It is possible and common to name the same people as trustees and attorneys, or you may prefer to name different people as a way to spread out responsibility and oversight. 

Estate liquidity, and time & cost savings of avoiding probate

On your death, the continuing trustees will have control of the trust assets without having to wait for a probate application. Not all provinces levy probate tax, and should not be a driving concern in your estate planning anyway. However, if the other features of these trusts serve your needs, then this cost saving is a bonus.

Privacy and insulation against estate litigation

Unlike a probated Will that can become part of a court file, trusts of this sort do not have to be made public. Apart from maintaining your privacy, this can be especially important if you or your beneficiaries are concerned about creditors. And even if those creditors pursue their claims, there are narrower means to attack a trust than may be available with a Will challenge.

AvisoWealth2603