Optimal RDSP Funding
A little planning can go a long way
For many individuals and their families, the generous potential government assistance available to registered disability savings plans (RDSPs), which first came to market in December 2008, may be the primary reason for setting up an RDSP in the first place.
The assistance comes in two forms: an income-tested matching grant, known as the Canada Disability Savings Grant (CDSG), and the income-tested bond, which is independent of any contributions, known as the Canada Disability Savings Bond (CDSB).
CDSGs and CDSBs can be paid into an RDSP up until the end of the year in which the beneficiary turns 49.
Canada Disability Savings Grant (CDSG)
The amount of the CDSG depends on “family income,” which differs based on the age of the disabled beneficiary. While the RDSP beneficiary is a child (i.e., until the end of the year in which the beneficiary turns 18), the family income of the beneficiary’s parents or legal guardian is used to determine whether the beneficiary would be eligible for the bond and matching grant amounts.
If the child is in the care of an agency that receives an amount for the child under the Children’s Special Allowances Act (Canada), then “family income” of the beneficiary is not considered and the beneficiary would be eligible for the maximum level of grants and bonds.
After reaching age 18, the family income of the beneficiary would be used, even if the beneficiary continues to reside with his or her parents or legal guardian. The family income used to calculate eligibility for the CDSGs and CDSBs for a particular year is actually the family income for the second preceding year. For example, eligibility for the 2008 CDSG and CDSB was based on the 2006 family income.
This makes it critically important to file tax returns for the previous two years. For example, to get the 2009 CDSGs (and CDSBs), both the 2008 and 2007 tax returns must have been filed to establish an income basis. Failure to file these returns will prevent Human Resources and Skills Development Canada from having the income information necessary to ensure that the beneficiary can get maximum CDSGs and (possibly CDSBs) and may limit the CDSG match to 100 per cent and preclude the CDSB altogether.
The amount of the CDSG payable when family income is under $75,769 (2008 level, to be indexed annually to inflation) is 300 per cent on the first $500 of contributions and 200 per cent on the next $1,000 of contributions.
For example, if contributions for a year were $500, a 300 per cent CDSG amounting to $1,500 would be paid into the RDSP. If an additional $1,000 of annual contributions were made, the total CDSG for the year would be $3,500, equal to 300 per cent of the first $500 ($1,500) plus 200 per cent of the next $1,000 ($2,000). Thus, a contribution of $1,500 annually will yield $3,500 of CDSGs for a total of $5,000 paid into the RDSP annually.
If the family income is over $75,769, then the CDSG is equal to 100 per cent of the total contributions up to a maximum of $1,000. The maximum amount of CDSGs payable to a beneficiary’s RDSP during his or her lifetime is $70,000.
Canada Disability Savings Bond (CDSB)
The CDSB is equal to $1,000 per year when family income is below $21,287 (2008 figure, to be indexed annually to inflation). No contributions are required to receive the CDSB. The CDSB is phased out, pro-rata, based on family income between $21,287 and $37,885 (2008 figures, to be indexed in future years.)
A maximum of $20,000 of CDSBs can be paid to an RDSP over a beneficiary’s lifetime. Sometimes, a calculation will need to be done to determine the optimal RDSP funding pattern that will maximize CDGS and CDSBs, as the example below suggests.
Bob and Jane have a disabled daughter, age 10, for whom they would like to start an RDSP. Due to her disability, their daughter will never have an annual income. Bob and Jane, however, are quite well off: they have an annual family income of $400,000 and can easily afford to contribute the $200,000 in one lump sum to the RDSP in 2009. Should they?
The problem with contributing the entire $200,000 in one lump sum is that they will only be able to collect one year’s worth of CDSGs for their daughter, which, due to their family income, would be limited to $1,000. By saving at least enough contributions for future years, they could maximize the CDGSs and CDSBs, especially once their daughter turns 19, at which point her income can be used in the CDSG/CDSB income-tested calculation.
The optimal contribution can be determined by looking at the following chart and basically working backwards to determine how much money in contributions needs to be saved for future years’ CDSG maximization, subtracting that from the lifetime RDSP contribution limit of $200,000 and contributing the difference in the first year, as follows:
*At age 36, CDSG limited to $1,500 due to lifetime maximum.