More money for those with special needs - Registered Disability Savings Plan is very important
Providing financial assistance to people with disabilities has traditionally been the responsibility of the provincial government and our social welfare system. That changed three years ago, when the federal government made a specific revision to the Income Tax Act. Starting in 2008, new tax-reducing programs and cash incentives were created to put more money directly into the hands of those with special needs.
“The Registered Disability Savings Plan (RDSP) was introduced to assist parents and others in saving for the long-term care of children with severe disabilities,” says Chartered Accountant Audra Haber, Senior Tax Manager with BDO Canada LLP in Toronto.
“If the beneficiary is a minor or not contractually competent, the plan can be set up by a parent, legal guardian or other party authorized to act on his or her behalf,” explains Chartered Accountant Stella Gasparro, Tax Partner with Meyers Norris Penny LLP in Markham. “Once it’s established, written permission can be provided for anyone to contribute.”
The rules and stipulations can be complicated, and not every applicant will be able to claim all of the benefits. But if you’re a parent or family member of someone with severe physical or mental challenges, you owe it to them – and to your own peace of mind – to get all of the help you can. Here are Haber’s and Gasparro’s tips for making the most of RDSPs.
Be sure you are eligible – To be an RDSP beneficiary, the individual must have a Social Insurance Number and qualify for the Disability Tax Credit. Contributions can only be made if the beneficiary is a resident of Canada and is less than 60 years of age. (See “Paperwork” below.)
If eligibility ceases, so does the plan – Funds from grants and bonds in the plan are subject to a 10-year holdback, during which any payout to the beneficiary will trigger a payback to the government. A change in the beneficiary’s circumstances or eligibility can also close down the plan and initiate a repayment of any government contributions and associated earnings. The Canada Revenue Agency (CRA) will keep a running tally of contributions and payouts for the 10-year period, and you can expect to have to pay back any grant or bond amount for which the terms of eligibility are not satisfied. The proposals of the March 22, 2011 federal budget would provide some relief from the 10- year holdback period for beneficiaries with a shortened life expectancy.
Do the paperwork – To apply, a qualified practitioner must complete Form T2201, the Disability Tax Credit Certificate, available from the CRA website (www.cra-arc.gc.ca). Essentially, it states that the individual has a severe and prolonged physical or mental impairment that limits the activities of daily living. RDSPs can be set up at banks or financial institutions, which often will provide the proper forms, as well.
Start contributing early – Contributions are made with after-tax dollars, and can continue until the end of the year in which the beneficiary turns 59 years of age. Earnings grow tax-free in the plan until the beneficiary withdraws the amounts, which they must begin to do no later than the year in which they turn 60. So the earlier contributions start, the more time they have to grow.
Apply for the federal government enhancements – Through the Canada Disability Savings Grant (CDSG), the government matches contributions you make to an RDSP by as much as 300 per cent – depending on the family’s income and the amount the family contributes to the fund – until the beneficiary reaches age 49. A second program, the Canada Disability Savings Bond (CDSB), provides even more financial help to people with disabilities from low-income families. Qualified beneficiaries can claim an additional $1,000 per year until age 49, regardless of whether RDSP contributions are made, to a lifetime maximum of $20,000.
Don’t overlook other possibilities – The RDSP and its associated grants and bonds will not impact GST or Child Tax benefits, nor will they reduce Old Age Security or Employment Insurance benefits. But the size of the government contributions is tied to family income, and can be cut back if it is too high.
What goes in…must come out – Withdrawals from the RDSP and its associated government top-ups can begin any time after the 10-year holdback period, subject to certain limitations. Recurring, annual payments can be arranged, but once they begin, they must continue until the plan ends or the beneficiary dies. Remember that while the funds remain non-taxable inside the plan, any money that comes from the CDSG, CDSB or earnings on these or other deposits will be taxable to the beneficiary when withdrawn. The beneficiary can also request a lump-sum Disability Assistance Payment between the ages of 27 and 58, provided the total of grants and bonds are greater than other contributions to the account.
Get professional help – Rules governing RDSPs and the government fund-matching plans can be complex, but the possibilities for returns make them worth investigating. Professional advice from a Chartered Accountant will help ensure that you get all of the financial help to which you and your special-needs family member are entitled.
Courtesy of: The Institute of Chartered Accountants of Ontario