People with disabilities and the families who support them are often faced with financial challenges. One concern relates to how federal benefits are calculated and clawed back when income increases. Fortunately, the 2007 Federal Budget has proposed one solution to help with this concern. Details regarding the Registered Disability Savings Plan (RDSP) are expected to be introduced sometime in 2008. Persons eligible for the Disability Tax Credit (or their parent or legal representative) will be eligible to establish an RDSP. To open an RDSP the beneficiary must have a social insurance number. Contributions will be permitted until the end of the year in which the beneficiary attains 59 years of age and will be limited to a lifetime maximum of $200,000, with no annual limit. Contributions are not deductible, but the income earned on amounts inside the plan will accrue tax-deferred. Income earned in the plan will be included in the beneficiary’s income for tax purposes when paid out of the RDSP. Canada Disability Savings Grants (CDSGs) will be paid as matching amounts to RDSP contributions made in the year. For families with net income up to $74,357 the proposed matching amount will be 300 per cent on the first $500 in RDSP contributions and 200 per cent on the next $1,000. For families with income over $74,357 the matching amount is 100 per cent on the first $1,000 in RDSP contributions. While the beneficiary is under 18 years of age family net income will generally be the disabled child’s family. When the child (beneficiary) turns 18 the definition of “family net income” will generally be the disabled beneficiary and spouse’s (if applicable) combined net income. It is important to note that although contributions are permitted until the beneficiary reaches 59 the matching CDSG portion is only paid until the end of the year in which the beneficiary turns 49. Also important to note is that the maximum CDSG paid to any one beneficiary is $70,000.
Illustration No. 1:
The Rogers family has a disabled child and has expected annual net income below $74,357. They have planned to make annual contributions of $1,500 to utilize the matching grant components. The expected grant portion on this contribution is 300 per cent on the first $500 plus 200 per cent on the next $1,000. In total the grant component would be $3,500. Combined the Roger’s RDSP may plan for a combined annual contribution / CDSG equaling $5,000. The Rogers family may utilize the maximum CDSG grant by making $1,500 contributions over the next 20 years.
Illustration No. 2:
The Foster family has a disabled infant and has expected annual net income above $74,357. They have planned to make annual contributions of $1,000 to utilize the matching grant component. They expect the grant portion on this contribution to be 100 per cent on the first $1,000. In total the grant component is planned at $1,000. Combined the Foster’s RDSP may plan for a combined annual contribution / CDSG equaling $2,000.
Illustration No. 3:
The Bailey family has an adult son who is disabled and married. Combined their son and his spouse have annual net income that exceeds $74,357. The parents plan to contribute a one-time payment of $200,000 into the RDSP. Although the son will only receive a CDSG of $1,000 they are benefiting from the huge contribution limit and the fact that the contributions grow tax deferred. The grant calculation gives one more component for parents and legal representatives to consider when making decisions that may impact their total net income. Planning for 2007 may allow some parents and legal representatives to estimate family net income. Those who have some flexibility may want to consider all factors prior to making any decisions. Contributions may be made into the RDSP until the end of year the beneficiary turns 59. Payments from the RDSP begin when the beneficiary turns 60. The annual withdrawal amounts are based on the market value of the RDSP and the beneficiary’s life expectancy. One aspect to this proposal that we like is that the amounts paid out of the RDSP to the beneficiary are not expected to affect the calculation of other “income-tested” benefits. For many disabled people this is very significant. Canada Disability Savings Bonds (CDSB) of up to $1,000 will be paid annually to an RDSP where family net income does not exceed $20,833. There will be a lifetime limit of $20,000 on CDSBs paid in respect of an RDSP beneficiary. Families with incomes not exceeding $20,833 should establish an RDSP to obtain the $1,000 annual CDSB. No contribution is required by families to receive this amount. The government’s announcement will assist individuals and families in saving for the long-term financial security of children with disabilities. These proposals provide a relatively simple opportunity to plan for individuals and families of all income levels that should not be overlooked.