Gift that keeps giving

Imagine a gift this holiday season that could one day be worth hundreds of thousands of dollars. And it would all start with the impetus to contribute to a little-known registered savings plan.

It’s fairly common for grandparents to contribute to their grandkids’ Registered Education Savings Plans (RESPs), helping the children and their parents, who are increasingly cash-strapped with a myriad of other costs, save for post-secondary education.

But contributing to a Registered Disability Savings Plan (RDSP) can be even more life-changing.

“You’re giving somebody something that could potentially be worth hundreds of thousands of dollars over time,” says Alyssa Mitha, director of tax and estate planning at Mackenzie Investments.

Designed to be a long-term savings vehicle for Canadians with disabilities, the RDSP is a tax-sheltered account. Contributions can be invested for the long-term, growing tax-free. Then, ideally decades later, the money is withdrawn similar to a RESP, where contribution money isn’t taxed.

Just the grants, bonds and investment growth are taxable.

Those grants, and bonds for low-income families, are the RDSP’s most advantageous characteristic.

The lifetime maximum grant is $70,000 per individual, and the bond — which requires no contributions, worth $1,000 per year — has a lifetime maximum of $20,000.

The grant money does require contributions — a maximum of $1,500 annually ($125 a month) to attract $3,500 in grants. (The grants are reduced $1,000 annually for higher income households.)

“The RDSP is the first of its kind in the world, and the most advantageous of all savings programs because of the grants and bonds,” says Liss Cairns, program manager at the Plan Institute in Vancouver.

“It can be really game-changing for someone.”

The Plan Institute is a non-profit providing support for RDSPs and the Disability Tax Credit (DTC), which is required to be eligible for the RDSP, and it advocated for its eventual creation in 2008.

Cairns notes grandparents are indeed increasingly contributing to a grandchild’s RDSP, but they cannot generally open the RDSP for them.

The disabled person — being an adult — can open a plan for themselves, “or what we call a ‘qualified family member’” on behalf of a minor, Cairns says. “Currently, that’s just parents, spouses, common-law partners or adult siblings.”

Grandparents can only start an RDSP for a grandchild if they are the legal guardian.

That can be a bit of snag for the holiday gift idea, notes Ryan Chin, an adviser with Sun Life, but the season is also an ideal time to bring up the idea. “It’s super important to talk with your adult kids before going ahead with this.”

If the grandchild does not yet have an RDSP, the next line of inquiry would be if the parents have applied for and received the Disability Tax Credit for their child, which is required to open the RDSP.

If the RDSP is already open, grandparents — and pretty much anyone else — can contribute to the plan.

All that is required is a letter of permission from the subscriber, often the parents, for the financial institution where the RDSP is held.

Getting the tax credit and RDSP can take time, so it might not be set up in time for Christmas, for example.

Yet Chin says a conversation today could kick-start a journey worth taking.

One of the other key benefits of the RDSP is its assets and withdrawals — which can only be made 10 years after receiving the last grant or bond payment — do not affect income-tested benefits like Manitoba Employment and Income Assistance, Chin says. “Another benefit is it can be used as an estate planning tool.”

As Chin explains, a parent or grandparent can elect to have their Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) roll over in the estate tax-free, provided room remains in the RDSP, which has a lifetime maximum contribution of $200,000.

Chin cites as an example that a disabled person with an RDSP can make maximum contributions for 20 years to get the maximum grant money, which requires $30,000 in contributions, leaving room for a $170,000 gift from the estate.

Another advantage of having this conversation is it raises awareness about eligibility.

Take-up of the RDSP is about 35 per cent of eligible Canadians, so potentially hundreds of thousands are missing out, Mitha says. “Let’s say they did qualify for Disability Tax Credit, and they have for the past five years, but they just haven’t opened up the RDSP account, they can go back and claim previously unclaimed grants and bonds.”

Both the DTC and RDSP can be claimed retroactively as far as 10 years.

Retroactively qualifying for an RDSP a decade back can result in as much as $10,500 in grant money annually until an individual is caught up, Cairns says. As well, the credit comes with tax savings resulting in a sizable refund for parents, or the adult beneficiary.

That said, the RDSP has age limits. The last contribution can be made the year the beneficiary turns age 59, and the last grant or bond can be received the year the beneficiary turns 49.

Mitha adds many Canadians have disabilities and yet, they do not know they qualify.

“If you have an impairment of functioning due to a mental illness, for example, and it affects your daily living, you could qualify,” she says, adding individuals with Type 1 diabetes now automatically qualify.

Its benefits aside, the RDSP is more complicated than other registered plans.

“There’s just so many rules,” Mitha adds.

Your financial institution can help navigate applying for the credit and opening the RDSP. As well, for-profit agencies exist to help with applications for the credit for a flat fee, and non-profits like the Plan Institute also offer assistance for the credit and the RDSP.

For grandparents with the ability to make contributions, it’s likely time, effort and money well spent, given disabled individuals generally face higher costs — about 40 per cent higher — which affects saving for retirement, Cairns says.

“In that respect, the RDSP provides financial empowerment, offering the chance to one day retire comfortably.”

Joel Schlesinger is a Winnipeg-based freelance journalist.

joelschles@gmail.com