Help maximize RDSP carry forwards

Editor’s note: This is an updated version of a story that first ran in 2012 and that was previously updated in 2017.

Registered Disability Savings Plans (RDSPs) were first introduced in 2008 to help people with disabilities save for their long-term financial security. The RDSP was heavily modelled after the RESP, which helps parents save for their children’s education.

While these plans do resemble each other in many aspects, there are other features of the RDSP which are worlds apart from its RESP counterpart. One aspect of contrast is with respect to how individuals can access the Canada Disability Savings Grant (CDSG) and Canada Disability Savings Bond (CDSB) entitlements carried forward from previous years.

Most advisors are very familiar with the RESP carry forward rules. Under these plans, if the subscriber does not make a contribution in any one year, unused Canada Education Savings Grant (CESG) room can be carried forward for use in another year, to a maximum CESG of $1,000 per year. Therefore, regardless of how many years of CESG grant room exists, the most that can be recovered annually is two years, or $1,000, first applying for grants in the current year, and then going back to recover unused CESG.

However, what’s most exciting about the RDSP carry forward rules (and what is drastically different from RESPs) is how the government will apply the matching rates on RDSP contributions and make the best use of the carry forwards for the benefit of the RDSP beneficiary.

Primer on grants and bonds

The federal government is providing two incentives for those who establish an RDSP. First, there is the CDSG, a grant paid by the federal government based on contributions and family net income, up to a lifetime maximum of $70,000. For family net income under the 2019 threshold of $95,259, the government will pay a maximum grant of $3,500 when a contribution of $1,500 is made. This is based on a matching rate of 300% on the first $500 contributed, plus 200% on the next $1,000 contributed to the plan. For family net income over the threshold, the matching CDSG rate is 100% on the first $1,000 contributed to the RDSP. CDSGs are available annually up until the end of the calendar year in which the RDSP beneficiary turns 49 years old.

Second, the federal government may also automatically deposit a CDSB into an RDSP, which is available for low income Canadians with a disability. The CDSB is not based on contributions to the plan, but rather is based solely on family net income. If family net income is under the 2019 threshold of $31,120, the RDSP will be eligible for the maximum annual CDSB of $1,000. For family net income between $31,120 and $47,630, the RDSP is eligible for a prorated CDSB, while income in excess of $47,630 is not eligible for any current year CDSB. A lifetime limit of $20,000 in CDSBs may be paid to an RDSP up until the end of the calendar year in which the beneficiary turns 49 years old.

It is important to note that for purposes of determining grant and bond eligibility in a given year, family net income is based on the tax return of the second preceding taxation year.

RDSP carry forward rules

The 2010 Federal Budget introduced carry forward rules that nowhere near resemble RESP carry forwards. Effective for 2011, RDSP beneficiaries who were disability tax credit (DTC) eligible are entitled to previously unclaimed CDSGs and CDSBs. In addition, they will also be able to carry forward unused CDSG and CDSB entitlements for a period of up to 10 years, to an annual maximum of $10,500 for CDSGs and $11,000 for CDSBs.

For CDSBs, it’s quite simple. When an RDSP is opened, any previous years’ CDSB entitlements of up to $1,000 per year will be paid into the plan over the preceding 10 years plus the current year. Bonds are based on family net income in each of those years and will be paid if the RDSP beneficiary was otherwise eligible for the bonds for each year respectively. If, for example, an RDSP account was opened in 2019 and the RDSP beneficiary was eligible for the maximum bond entitlement over the previous 10 years, simply opening an RDSP may entitle the beneficiary to the maximum CDSB of $11,000 (for calendar years 2009 through 2018, plus the 2019 current year bond) without contributing a single dollar to the RDSP.

For CDSGs, it gets interesting. Previously unclaimed CDSG entitlements can be paid for the previous 10 years (starting with 2009) when a contribution is made into the RDSP, up to an annual maximum CDSG of $10,500. However, the government will apply the entitlements in descending order, starting with the highest available matching rate of 300%, followed by any grant entitlements at 200%, then if applicable, 100%. In addition, the CDSGs will be first applied to the oldest year, as far back as 2009 and then moving forward.

Given how these carry forward rules are designed, clients who are eligible and have yet to establish an RDSP have a tremendous opportunity to take advantage of these rules by setting up an RDSP and having the government deposit significant dollars into it, with little investment. And now that RDSPs have been in existence for over 10 years, those eligible to open an RDSP should open (and contribute) to a plan in 2019 so potential grant and bond entitlements from previous years are not lost.

Michelle’s example

Michelle is a low-income adult who has been DTC eligible for her entire life. She opens an RDSP in 2019. Let’s assume that, for each calendar year since 2009 (the preceding 10 years), she would have been eligible for the maximum CDSG at matching rates of 300% and 200%, respectively, and $1,000 in CDSBs for each calendar year. To maximize the RDSP carry forwards, Michelle (or anyone else) could contribute $3,500 into the RDSP in 2019, $4,000 in 2020, followed by annual contributions of $5,000 for 2021 and 2022, and $4,000 for 2023. By doing so, by the end of 2023, Michelle will have caught up on most of her grant and all of her bond entitlements, accumulating $65,500 of grants and bonds in her RDSP. With $21,500 of private contributions, she will have $87,000 saved in her RDSP in five years or fewer. Here’s how.

When Michelle opens her RDSP in 2019, her plan will automatically receive the maximum $11,000 in CDSBs, which represents the previous 10 years (2009 through 2018), plus the 2019 $1,000 CDSB entitlement. A contribution of $3,500 in 2019 will attract the $10,500 annual CDSG maximum paid into the RDSP. As the table below highlights, the 300% matching rate is applied first and attracts $10,500 on the entire $3,500 contributed ($500 per year for seven years from 2009 to 2015). The remaining four years of entitlements (2016-2019) at the 300% matching rate will carry forward to 2020. Since the maximum entitlement was reached for 2019, no matching grants at 200% are paid in 2019 because the 300% matching is paid out first.

In 2020 an additional $1,000 in CDSB is automatically paid, and if Michelle contributes $4,000 into the RDSP, another $10,500 in grants are paid into it. This allows Michelle to catch up on all her carry forwards at the 300% rate, and begin receiving grants at the 200% matching rate. As the table below highlights, the first $2,500 contribution attracts $7,500 at the 300% matching rate, representing the previous four years of grant entitlements, plus the current year 2020 CDSG. The remaining $1,500 in private contributions will attract grants at the 200% matching rate, beginning with the 10^th preceding year from 2020 (2010). The grant entitlement at the 200% matching rate is $3,000, collecting on the grant entitlements for 2010 and part of 2011, providing the maximum grant of $10,500 (7,500 + 3,000) for the year. Unfortunately, since grants can only be obtained from the preceding 10 years, the 200% matching grant from the 2009 calendar year is no longer available to Michelle.

Following this pattern, annual contributions are scheduled for the remaining calendar years from 2021 through 2023 (see table below for details), and are designed to maximize the annual $10,500 grant, based on the grant entitlements Michelle still has available. Therefore, it will take Michelle about five years to finally catch up on her grant entitlements. Once she is done, she will have an RDSP that will have amassed $87,000 in contributions, grants and bonds, not including potential investment growth—a great start to securing her financial future.

Michelle’s grant and bond entitlements

One final point about the RDSP carry forward rules: grants and bonds are paid only if the RDSP is opened and contributions are made on or before December 31 of the year in which the beneficiary turns 49. The carry forward entitlements do not carry forward past December 31 of the year in which the beneficiary turns 49. So, if your client turns 50 this year and decides to open an RDSP, they will not be eligible for any grants or bonds, regardless of the fact that they accumulated grant and bond carry forward up to age 49. They will lose entitlement to these bonds and grants if they wait until the year they turn 50 to establish and make a contribution to the RDSP. Therefore, for older clients with disabilities who are approaching age 49, it will be important to strategize to maximize grants and bonds before they lose them.

RDSPs provide a great solution for clients who have a disability, or have a family member with a disability. Don’t make the mistake to think that RDSP carry forward rules resemble those of the RESP. They are drastically different. As advisors, you play a key role in helping clients make the right decisions to get the most out of RDSPs.

Frank Di Pietro, CFA, CFP, is assistant vice-president of tax and estate planning at Mackenzie Investments. He can be reached at fdipietr@mackenzieinvestments.com.

Frank Di Pietro

Tax & Estate

Frank Di Pietro, CFA, CFP, is assistant vice-president of tax and estate planning at Mackenzie Investments. He can be reached at fdipietr@mackenzieinvestments.com.