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moneysense.ca, 2/01/08
Registered Disability Savings Plan
Parents of disabled children carry the added burden of saving for their child’s future. A friend recently mentioned her fears for her disabled daughter and I vaguely recalled reading about helping parents of disabled children in the Budget 2007 document. In its last budget, the Federal Government unveiled a plan to create the Registered Disability Savings Plan (RDSP) this year. Modelled on the RESP, contributions to the RDSP are not tax deductible but attract matching grants in the form of a Canada Disability Savings Grant (CDSG). The growth of investments within the RDSP is not taxed but when withdrawn, the grants and investment gains within the plan are taxed in the hands of the beneficiary.
The CDSG matches the RDSP contribution at 100%, 200% or 300% depending on the family’s net income (i.e. gross income less RRSP contributions, child-care expenses etc.) and the amount contributed for a maximum of $3,500 per year. For example, a family with a net household income of about $75,000 can contribute $1,500 to their child’s RDSP and get the maximum CDSG of $3,500. Families with net income above this threshold can get a matching of 100% when contributing up to $1,000.
Low-income families can establish a RDSP and receive a Canada Disability Savings Bond (CDSB) of $500 or $1,000 per year, even if no contributions are made. There are lifetime limits to how much can be contributed to the RDSP and how much can be received from the CDSG and CDSB.
You can learn more about this program in last year’s Budget document. The CRA website mentions that the plan would come into effect “as soon as possible in 2008″.
moneysense.ca, 2/01/08
The problem with these kind of plans is that they are so income dependent. If someone who makes good money has a disabled child they can get some big grants which is fine, but what about lower income families who can’t save easily for a contribution? – especially families where one of the parents has quit work to look after the disabled child? Similar to the RESP they can get a small grant but it’s much less than the grant that the higher income family will receive.
I suppose there are other programs and tax breaks available which might level the playing field for low income families with a disabled child but the RDSP is definitely geared towards higher income families (like the RESP).
I’m not a socialist by nature but the fact is that we live in a socialist country and if I have to pay the taxes, then I would like to see the money go to the people who need it.
Great post idea by the way..
Mike
I echo Mike’s sentiment – excellent post idea.
Another strategy to look at is the use of Henson trusts for those who have disabled children. It allows for monies to be transferred into a trust for the purpose of income splitting of sorts. So any disability benefits or program eligibility will not be impacted upon the death of the caregivers and resulting transfer of estate.
If the assets of the estate pass directly to the disabled person – they can become ineligible for payments and programs. Having the assets pass to the Henson trust circumvents this – a trustee is designated to act on behalf of the beneficiary.
This trust can be set up as inter-vivos – there is no requirement that I’m aware of to set it up as a testamentary provision.
Mike: I think this savings plan is a great idea because even a medium-income family can get a grant of $1,500 on just a $500 contribution. A low-income family can establish the plan and get the CDSB even without any contribution. Families making more than $75K in net income get a 100% match for the first $1,000. It seems to me that the plan is set up such that lower-income families benefit much more.
Preet: I am not aware of Henson trusts. Maybe you should write a post on it
The plan is not a bad one but like the RESP, it’s only in theory that lower income families can benefit more. Low income families would have a hard time coming up with any significant contributions.
There are other programs and tax breaks as well which I don’t know anything about but would enter into the equation of how well a low income family would cope financially.
Mike
Post has been written on Henson trusts! Thanks for the idea.
[...] of this financial burden, there are some Canadian programs that you can take advantage of. Canadian Capitalist writes about the Registered Disability Savings Plan (RDSP) and WhereDoesAllMyMoneyGo writes [...]
The problem with this plan is that it discriminates against people with disabilities by only allowing contributions up to the age of 49. What makes the disabled so different from everyone else who can put money in until their late 60s? It particularly discriminates against older disabled people who will not have time to put enough money into the plan to have enough to get by when their parents die.
We’re lookin’ at civil rights lawsuits here! More cost to the taxpayer!
[...] Jackson Citizen Patriot wrote an interesting post today onHere’s a quick excerptThe problem with this plan is that it discriminates against people with disabilities by only allowing contributions up to the age of 49. What makes the disabled so different from everyone else who can put money in until their late 60s? … [...]
This is in reply to your post Jennie.
Private contributions can continue up till the end of the year the beneficiary turns 59. It is the government grants and bonds which are no longer available after the year in which the beneficiary turns 49.
The reason for this is the 10 year holdback provision and the requirement that normal payments must start before the end of the year the beneficiary turns 60.
So, as long as the beneficiary does not withdrawal funds prior to the year in which they turn 60, the government should not be able to take back the grants and bonds and the associated earnings on those grants and bonds due to the 10 year holdback on funds.
The really sad part about this program is that most financial institutions have decided NOT to provide this plan because they do not belive it will be profitable for them.
BTW I do know of one low income family that pooled their resorces from grandparents, parents, siblings & other parties to come up with the $1,500 so they could qualify for the $3,500 grant.
[...] – Canadian Capitalist discusses the introduction of RDSP accounts by two major [...]
thank you for this information
[...] 31, 2009: Last day to make a contribution to the Registered Disability Savings Plan and receive the disability savings [...]
[...] of children with disabilities can carry forward the Registered Disability Savings Plan (RDSP) grants and bonds for 10 years. (Page [...]
I have a friend who has a disabled child. I have done some investigation on her behalf. I believe that one of the unfortunate things is, at present, the funds can be placed in: a savings account, GIC’s, or mutual funds(and it seems the financial institutions are really pushing managed mutuals which charge even higher expenses). Over the long term the growth of the funds in the plan could be dramatically increased if the plan could own stocks or bonds or any of the presently offered instruments. Some quick calculations lead me to believe the finacial institutions could end up generating far more earnings on these plans than the owner of the plan.
RDSP Math 101 Has anyone out there done the math for a RDSP?
As a parent contributing to a RDSP, I will not be in the picture when the payments start to come out of a RDSP. In order to serve the needs of the beneficiary of a RDSP, it is important that any financial assistance (RDSP, Trusts, Estate, Insurance policies, etc) be spread out as even as possible over their lifetime. That means now at 25, at 50, at 65, at 71, at 100. Therefore rough calculations are needed for a balanced plan.
We are basically funding the plan using most of our RRSP.
Should I continue depositing into the RDSP or should I be doing something different?
Of all the information sources I have contacted to sort out the fine print of RDSP’s, none of them have ever looked at the end product. This includes: Bank, Service Canada, Human Resources, Canada Revenue Agency and Old Age Security (Guaranteed Income Supplement). When I informed them of the main aspects of my calculations, most of them were surprised and a few of them thought it was a shame. Even the agencies that work for the benefit of persons with disabilities and promote RDSP’s at seminars, etc, have not done the math.
I have no experience in accounting, financial management, etc but I have a very basic knowledge of using a spreadsheet. The data consisted of:
• Deposits of $500.00 per year for 18 years starting at age 22-39
• 10 year Claw-back period after the last deposit at age 40-49
• Payments (LDAP) out of the plan to start at age 50
• Interest Rate used was 2% for the entire life of the plan. Up to death of the beneficiary.
Results
• At age 50 the total assets of the RDSP is $78,300.00 (Deposits, Grants, Bonds, all interest)
• Payments out of RDSP (LDAP) were calculated to be $2420.00 per year which are paid out till the death of the beneficiary
Problems
1. Although the plan makes the calculation for Life Expectancy for the age of 83, the plan actually is 100% self sufficient even if everyone having a plan lives to be as least 100 years old. At the age of 100 the balance in the RDSP is $3700.00 Fact: Statistics Canada lists the Life Expectancy for Males at age 71 and Females at age 77. Statistics Canada also lists the Life Expectancy for those with disabilities as being 10-15 years less.
2. The Guaranteed Income Supplement does not exempt RDSP payments as income. The result is that the GIS amount is reduced approximately $1.00 for ever $2.00 of RDSP payment. Fact: If the person lives to be age 100, a person’s GIS total income is reduced $43,300.00. This is the same effect as reducing the LDAP from $2420.00/yr to $1210.00/yr starting at age 65 or taking $43,300.00 out of the RDSP.
Fact: Any other source of financial assistance after age 65 will reduce GIS in the same manner.
3. The Interest paid into the RDSP using 2% up to age 100 is $73,200.00
Fact: The Bank profit for the stockholders up to age 100 is approximately $366,300.00
4. Death at 71.
Fact: Balance left in RDSP is $55,000.00
Fact: Grant and Bond Total was $45,000.00
5. In New Brunswick, if a person at 65 is entitled to Guaranteed Income Supplement their Total Income including OAS (not including RDSP) is $15,269.76/yr. Before the age of 65, if a person is receiving benefits from Social Development, their Total Income (not including RDSP) is about $8400.00/yr
Fact: At age 65, a person’s yearly income increases by $6870.00 (not including RDSP)
Fact: This indicates that the main emphasis for financial assistance is for the period from NOW till the age of 65.
6. Are their any factors that disqualify persons with disabilities from receiving the Guaranteed Income Supplement when compared to other low income Canadians?
Type of accommodations, subsidized rent, etc
Conclusion
I now have severe reservations about low level of financial benefits out of the plan when compared to the input into the plan.
The main solution is quite obvious, and easy to do.
I am not an arsonist, but believe a few fires must be set to correct the problems. I am 63 and perhaps can still set a fire, but I am not sure how long I can keep it burning.
Looking forward to hearing from others to find out if I passed my Math Exam. Please include corrections.
Robert Boulter
E-mail: lobou@nb.sympatico.ca
Phone: 506-388-5922