Many taxpayers with disabilities are entitled to $20,000 of government grants
Steve Bennett
Senior Tax Professional
H&R Block
Smiths Falls, ON
Last month, I discussed the Disability Tax Credit certificate at CRA and briefly mentioned that there are many tax breaks available to taxpayers with disabilities. I wanted to expand on one important program that is not very well advertised: the Registered Disability Savings Plan (RDSP). This account assists Canadians with disabilities with long-term savings.
For those of you who are familiar with Registered Education Savings Plans (RESP), you will see a lot of similarities in the administration and government financial support. It works in a very similar fashion, but the government subsidies are higher and there are fewer restrictions on withdrawals.
From an income tax perspective, the account functions exactly like an RESP. A contributor deposits money into the account on behalf of a beneficiary. The deposits are not tax deductible, but the funds grow tax-free. When a withdrawal is made by the beneficiary, the investment income and any government subsidies are taxed in the hands of the beneficiary. In Ontario, withdrawals from the plan will not affect social assistance payments.
To open an account, beneficiaries must be a Canadian resident under 60 years of age and have a disability tax credit on file with CRA – the disability tax credit was discussed at length in last month’s column. To be eligible for the grants and bonds discussed below, the beneficiary must be under 50 years of age. An RDSP can be set up on behalf of a beneficiary at any major financial institution – generally done by the taxpayer, a guardian, or a family member.
The most exciting part of the RDSP is the government support. The government matches deposits with the Canada Disability Savings Grant. The amount of the grant is determined by the family net income of the beneficiary. For income up to $87,123, the grant will be 300% of the first $500 and 200% of the next $1,000. A contribution of $1,500 will give the beneficiary a total of $5,000 in their account!
In addition to the grant, the government also provides a Canada Disability Savings Bond for lower income families. To receive the bond, an RDSP just needs to be open – no contributions are required. The bond is $1,000 for family income under $25,356 and is gradually phased out as income rises to $43,561. Grants and bonds will still be paid retroactively back to 2008, but there are maximum lifetime limits of $70,000 and $20,000, respectively.
If a beneficiary opens an RDSP when they are 25 and their only source of income is the Ontario Disability Support Program (ODSP), then they will get $20,000 of bonds over 20 years. Assuming they make no withdrawals and earn a 5% return, they will have over $70,000 saved by the time they turn 60 – without making a single contribution themselves!
Withdrawals can be made at any time and used for any purpose, but there are some annual restrictions determined by the amount of government assistance. In addition, a portion or all of the grant and bond money that has been in the RDSP for less than ten years will have to be repaid. Due to these restrictions, the RDSP is really geared towards long-term savings.
This article provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this bulletin can be accepted by Steve Bennett or H&R Block Canada, Inc.
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Many taxpayers with disabilities are entitled to $20,000 of government grants
Steve Bennett
Senior Tax Professional
H&R Block
Smiths Falls, ON
Last month, I discussed the Disability Tax Credit certificate at CRA and briefly mentioned that there are many tax breaks available to taxpayers with disabilities. I wanted to expand on one important program that is not very well advertised: the Registered Disability Savings Plan (RDSP). This account assists Canadians with disabilities with long-term savings.
For those of you who are familiar with Registered Education Savings Plans (RESP), you will see a lot of similarities in the administration and government financial support. It works in a very similar fashion, but the government subsidies are higher and there are fewer restrictions on withdrawals.
From an income tax perspective, the account functions exactly like an RESP. A contributor deposits money into the account on behalf of a beneficiary. The deposits are not tax deductible, but the funds grow tax-free. When a withdrawal is made by the beneficiary, the investment income and any government subsidies are taxed in the hands of the beneficiary. In Ontario, withdrawals from the plan will not affect social assistance payments.
To open an account, beneficiaries must be a Canadian resident under 60 years of age and have a disability tax credit on file with CRA – the disability tax credit was discussed at length in last month’s column. To be eligible for the grants and bonds discussed below, the beneficiary must be under 50 years of age. An RDSP can be set up on behalf of a beneficiary at any major financial institution – generally done by the taxpayer, a guardian, or a family member.
The most exciting part of the RDSP is the government support. The government matches deposits with the Canada Disability Savings Grant. The amount of the grant is determined by the family net income of the beneficiary. For income up to $87,123, the grant will be 300% of the first $500 and 200% of the next $1,000. A contribution of $1,500 will give the beneficiary a total of $5,000 in their account!
In addition to the grant, the government also provides a Canada Disability Savings Bond for lower income families. To receive the bond, an RDSP just needs to be open – no contributions are required. The bond is $1,000 for family income under $25,356 and is gradually phased out as income rises to $43,561. Grants and bonds will still be paid retroactively back to 2008, but there are maximum lifetime limits of $70,000 and $20,000, respectively.
If a beneficiary opens an RDSP when they are 25 and their only source of income is the Ontario Disability Support Program (ODSP), then they will get $20,000 of bonds over 20 years. Assuming they make no withdrawals and earn a 5% return, they will have over $70,000 saved by the time they turn 60 – without making a single contribution themselves!
Withdrawals can be made at any time and used for any purpose, but there are some annual restrictions determined by the amount of government assistance. In addition, a portion or all of the grant and bond money that has been in the RDSP for less than ten years will have to be repaid. Due to these restrictions, the RDSP is really geared towards long-term savings.
This article provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this bulletin can be accepted by Steve Bennett or H&R Block Canada, Inc.
