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When looking at the RDSP we have found it helpful to compare it to the Registered Retirement Savings Plan (RRSP) and Registered Education Savings Plan (RESP). As the RRSP and RESP have been around for a long time, people can relate a lot more easily to the RDSP when we examine the incentives, treatment of income, and withdrawals from all three.

I think the first question that most people ask when looking at the RDSP is: what is the incentive to contribute into the RDSP other than helping your family member or friend with a disability? I think the RRSP is the main reason this question pops up so often and has conditioned us to look for a return on this type of plan. So what are the incentives for all three plans?

With the RRSP the incentive is a tax deduction. If you contribute into an RRSP you receive a tax deduction from the government based on the value of the contribution and depending on your income. As you pay more tax on higher incomes, the more income you have the larger your tax deduction.

With the RESP the Canadian Government provides incentive to contribute into the plan through the Canada Education Savings Grant. The CESG will contribute up to $200 on the first $500 you save annually in your child’s RESP, and up to $400 on the next $2,000. Unlike the RRSP, the RESP does not provide a tax deduction.

The RDSP is very much like the RESP in terms of incentives as it provides the Canada Disability Savings Grant that matches contributions into the plan. For someone with an income below or equal to $74,357 they can leverage $1500 for the first $500 contributed into the plan, and $2000 for the next $1000, up to $70,000 over 20 years. For someone with an income above $74,357 they can receive a matching grant of $1000 on the first $1000 contributed, up to a maximum of $20,000 over 20 years.

The similarity of the plans also extends to the treatment of income within each plan. When individuals receive contributions into the plan, those funds then become “sheltered” from any taxation while they are in the plan. This means that for the RRSP, RESP, and RDSP, you can receive contributions into the plans but will only be taxed on withdrawals.

Another difference between the plans is the withdrawals. With the RRSP, withdrawals made from the plan are fully taxable, but the expectation is that you will be older and therefore in a lower tax bracket. With the RESP and RDSP withdrawals made from the plan are only partly taxable. In the case of the RDSP, this means that the portion of the plan that is made up of contributions is non-taxable, but the portion of the plan which is grant and/or bond, and income is taxable. The important thing to remember in the case of the RDSP is that it will be taxed in the hands of the beneficiary, and therefore more likely to receive significantly lower taxation.

The well-being of vulnerable people stands on two pillars: social and financial well-being. We’ve always known this at PLAN and you can get lots of information from our websites: www.plan.ca and www.planinstitute.ca.

Working around financial well-being reinforces the importance of having genuine, caring and long-lasting relationships with unpaid people (a social network). To execute a will, you need an executor. To manage a trust, you need trustees. To maintain an RDSP, you need “holders” of the plan. This is all obvious.

How will the RDSP work for isolated people who do okay surviving, or maybe live in a staffed service but who won’t be deemed to have capacity under the law to “hold” an RDSP an who don’t have someone to “hold” an RDSP for them? If no one takes responsbility to assist them, nothing drastic is likely to happen, but they may lose out on an opportunity to improve their lives.

People who have social networks that will assist them in opening a plan will receive the Canada Disability Savings Bond ($1,000 per year for up to 20 years). The importance of social networks couldn’t be clearer. Social isolation perpetuates financial poverty.

Good news!  We have been in the process of developing an RDSP calculator and are close to launching it on our blog.  This calculator will allow people to see exactly what kind of growth and payments they will see in an RDSP over their lifetime.  The calculator will allow you to see:

– the annual amount of Disability Savings Grant you will receive;

– the annual amount of Disability Savings Bond you will receive;

– the total yearly government contribution;

– the annual contributions of family and friends;

– the total annual value of the RDSP over its lifetime;

– the age at which you can begin to withdraw without penalty;

– if you withdraw within 10 years of receiving the grant and bond, how much it will impact your plan value;

– the impact of your provincial benefits on the RDSP;

– the annual disability payments you would receive;

This calculator will let you run through different scenarios so that you can understand how much potential growth there is within the RDSP.  By choosing different options, such as:

– whether you want to invest the RDSP very conservatively, conservatively or more moderate;

– whether there will be potential lump sum contributions;

– whether you foresee family and friends contributing on an annual basis;

– when you will begin the plan;

-when you want to start receiving payments from the plan;

– what is your taxable income;

you will be able to gage how the RDSP will work for you.  As you can probably tell, we are very excited that we are going to be able to provide you with this tool.  We are expecting to launch this calculator by the end of this month.  We have been running tests on it to ensure it’s accuracy (with the help of financial planners) and are in the process of making it “web-ready”.

If you get a chance, make sure to check this blog in the upcoming weeks and try out our calculator when it becomes available.

The Canadian Revenue Agency (CRA) has created a webpage in their site that outlines the RDSP and goes through some “Frequently Asked Questions (FAQs)”.  It is definetely worth taking a look at as it goes into some interesting questions like:

Can the holder of the plan be changed?

How does an issuer set up a disability savings plan specimen?

How does an issuer amend an approved specimen plan?

When is an RDSP no longer considered registered?

You can also download disability related forms from this site, such as the Disability Tax Credit and the Medical and Disability Related Information pamphlet which outlines most of the services and programs available for people with disabilities.

To access this site click on the link below:

http://www.cra-arc.gc.ca/tax/registered/rdsp/menu-e.html

Currently BC, Alberta, Newfoundland, Saskatchewan, Manitoba, Ontario, Nova Scotia, NWT and Yukon have exempted the RDSP as an asset and/or income. Quebec and New Brunswick have exempted the RDSP as an asset but are capping the amount of income that you are allowed to withdraw from the plan (QB $305 exempt monhtly and NB $800 exempt monthly). Prince Edward Island has announced that they will exempt the RDSP as an asset and income up until the low income threshold (see http://www.rdsp.com for more details), and Nunavut has currently not indicated how they will treat the RDSP.

We will be updating this blog consistently and letting you know as soon as the provinces announce their intentions.

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