Registered disability saving plan (rdsp)

An RDSP permits parents to contribute funds to a plan to provide for the future expenses of disabled children, and allows the older disabled and their families (and other) to contribute to a plan for later years. Contributions to the plan are not deductible, but income earned in the plan is not taxed while in the plan. Plan investments are, in effect, governed by RRSP investment rules, with certain exceptions. Plan contributions are subject to a lifetime limit o $200,000. Plan contributions are, to some extent, matched by government contributions, and, in addition, the government makes continuing for low- income families.

Individuals for whom a disability certificate has been accepted for a particular year are eligible in a year of disability covered by the certificate to establish a Registered Disability Saving Plan (RDSP), of which the individual is the beneficiary. The plan must be established by the disabled person, unless that person I under 18 or is not legally competent, in which case a parent or legal representative may establish the plan. The 2012 Budget, which was passed into law in June 29, 2012, added to this provision to allow certain family members to become the plan holder in circumstances where the disabled person does not have the capacity to become the plan holder. The spouse, common – law partner or a parent of the individual will be considered a qualifying family member for of this purpose. This provision applies from June 29, 2012 until December 31, 2016. Any qualifying family member who becomes a plan holder during this period may remain as the plan holder after that date. As with an RESP or RRSP. The plan itself is a trust established with an "issuer" authorized to carry on the business of offering trust services in Canada. The person who establishes the plan becomes a "director" and has certain duties and obligations. There can be only one plan per beneficiary. The beneficiary must be resident in Canada when the plan is established.

Contributions can be made by anyone. Typically, they will be made by parents or other family member, but there is no limitation other than that the plan directors must approve the contributions. (This permits them to maximize government contributions.) Contributions to the plan are not deductible, but they are matched to some degree by government contributions, called Canada Disability Savings Grants (CDSGs). As well, the government adds certain amounts for low – income families, regardless of their contributions (Canada Disability Savings Bonds (CDSBs). The grants and bonds can continue up to the end of the year in which the disabled person reaches the age of 49.

Private contributions (i.e., excluding government contributions) to a plan cannot exceed $200,000, and cannot be made after the year in which the beneficiary turn’s 59.private contributions are not refundable; they must be used for the beneficiary or, on death, they go to the beneficiary’s estate.

Parents and grandparents can roll their RRSPs and RRIFs into an RDSP of a financially dependent child or grandchild with a disability on a tax – deferred basis.

The advantage of the rollover is twofold. Because the RRSPs and RRIFs are collapsed at death, the entire amount becomes taxable income in one year. This often results in substantial tax payable. When the funds are passed into an RDSP, no tax is payable. When the funds are withdrawn from the RDSP, they are taxable in the hands of the beneficiary. In most case they will be withdrawn over many years, taxed at the beneficiary’s tax rate.

The rollover is available to people who qualify for RDSPs. In addition, the beneficiary must be financially dependent. Beneficiaries are normally considered financially dependent if their income is below $18,904 (for 2013) for the year preceding the year of death. The amount that can be rolled over is limited to the contribution space remaining in a beneficiary’s RDSP.

The 2012 Budget allowed RESP income to be transferred to an RDSP on a tax – free basis, provided that the beneficiaries of the two plans are the same person and certain other conditions are met. This measure will apply to rollovers of RESPinvestment income made after 2013.

Matching contributions (CDSGs) are calculated as follows.

For families with net incomes equal to or less than the third marginal tax bracket threshold (for 2014, $87,907), the government provides:

$3 for every $1 on the $500 of contributions; and

$2 for every $1 on the next $1,000 of contributions.

Thus, the maximum grant is $3,500, reached on a contribution of $1,500.

For families with net income above the third bracket threshold of (for 2014) $87,907, the grant is:

$1 for every $1 on the first $1,000 of contributions.

Grants are subject to a lifetime limit of $70,000 and are not paid after the end of the year in which the beneficiary reaches the age of 49.

Government contributions (CDSBs, as opposed to matching grants) of up to $1,000 per year, to a cumulative maximum of $20,000 may also be paid into the plan. The annual maximum of $1,000 is paid where income of the beneficiary does not exceed the threshold at which the National Child Benefit Supplement begins to phase out ($25,584 in 2014). If income that threshold, the $1,000 is reduced by a formula under which it expires at the lowest marginal rate threshold ($43,953 in 2014). Essentially, the $1,000 is reduced by $1,000, minus income over the $25,356 threshold, divided by the difference between the two thresholds. No more than $20,000 may be paid under this program during the lifetime of the beneficiary.

Income is measured under the GST Credit rule for January payments. This means that income determinations look back to the second preceding year. Although, income determinations look back to the second preceding year, although income thresholds look at the current year. That is, if there were grants or bonds payable in respect of 2014, income would be measured for 2012, although 2014 thresholds would be used. Where the beneficiary is a" qualified dependant" for GSTpurposes,i.e., he or she has not turned 18 by the end of the year in question, income is the "adjusted net income" of the parent or guardian on whom the child is dependent and the cohabiting spouse or common – law partner of that parent or guardian, as calculated for GST purposes, Essentially, this is the income at line 236 of each return, not counting the universal child care benefit and the capital gain on property reacquired by the parents on foreclosure. Where the beneficiary is 18 or older at the end of the year, income is the adjusted net income for GST purposes of the beneficiary and his/her spouse or common – law partner, if any. A child for whom benefits are paid under the Children’s Special Allowances Act the high rates of matching grants and full $1,000 bond amount for that year, regardless of income consideration.

The plans are intended to provide for those with long – term disabilities. Accordingly, there is a provision that government contributions and their associated earnings are subject to a 10 – year "holdback", during which they cannot be distributed from the plan and must be paid back to the government if the beneficiary withdraws any funds from the plan (including normal annual amounts), loses eligibility for the disability tax credit, or dies. Thus, I money is withdrawn from an RDSP, any bond or grant (andassociated investment income) received in the past 10 years must be repaid.

Normal payments ("lifetime disability assistance payments") from the plan can commence at any time, but as discussed above, payments which commence within 10 years of a government contribution will trigger recapture of that contribution. Normal payments, once commenced, must be made at least annually. Payments must commence no later than the year in which the beneficiary turns 60. It appears that they can commence at anytime, provided plan assets will not fall below the holdback level. Normal payments are closely defined, and generally speaking limited to plan assets divided by life expectancy plus three. Life expectancy is statistically determined, unless there is a medical certificate setting out a life expectancy for the particular beneficiary, in which case the certificate governs.

The government contribution elements and all investment earnings in the plan are not taxable in the plan. Payments from the plan to the disabled beneficiary are taxable in part. Generally speaking, the non – taxable portion of any payment is the proportion of contributions remaining in the plan divided by the plan divided by total plan assets, not counting the holdback amount. The plan must be terminated if the disability ceases, and the remaining amounts are then paid to the beneficiary, subject, as always, to the holdback requirements. The termination payment is, as with ordinary payments, a blended payment, only part of which is taxable. The rules contemplate that the plans will be established by private trust companies, as with RRSPs andRESPs.

Payments from an RDSP are not counted in means – tested government programs, that is, they are not included in income reducing GST or Child Tax Benefits. As well, they are not taken into account to reduce Old Age Security or Employment Insurance benefits. www.insuranceplancanada.com

Amounts in addition to normal payments may be withdrawn from the plan for the beneficiary, subject to two limitations.

First, withdrawals trigger the holdback rule, requiring repayment of government contributions and associated earnings of the past 10 years. Rules, effective June 26, 2011, add more flexibility for beneficiaries with shortened life expectancies to withdraw their RDSP assts without requiring the repayment of CDSGs and CDSBs. The rules require a medical doctor to certify in writing that the beneficiary has a life expectancy of five years or les. If a plan holder decided to take advantage of this measure, the plan holder will be required to elect to do in a prescribed form and submit the election with the medical certification to the RDSP issuer.

Second, where the total of government grants and bonds exceeds private contributions to the plan at the end of a particular year, only normal lifetime disability assistance payments may be withdrawn for the following year.

If the beneficiary ceases to be eligible for the disability credit, the balance in thefund becomes immediately payable to the beneficiary. The payment will be a blended payment; that is, the portion attributable to private contributions will not be taxed. www.insuranceplancanada.com

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