Case study: Planning for the future of a disabled child

Bringing a newborn home is one of the happiest and most emotional moments in a couple’s life. When the newborn has a disability, one of the parents’ primary concerns may be the child’s long-term financial resources.

The purpose of the Registered Disability Savings Plan (RDSP) is to help save for the financial security of a person with a severe and prolonged impairment. Implemented in 2008, it’s one of the most generous government programs but also one of the most complex: the plan has existed for nearly 10 years, yet most people know very little about it.

Here is a case study to help explain how the program works.

Meet Martin

Martin’s year of birth: 2008 Level of disability: eligible for the DTC since birth (no chance of improvement) 2015 family income: $200,000 Martin’s income: $0 for life Year the RDSP was started: 2017 Eligible savings amount, as of 2017, $40,750

Overview of RDSP incentives

The RDSP offers two kinds of incentives: the Canada Disability Savings Grant (CDSG) and the Canada Disability Savings Bond (CDSB), both of which can be received until the end of the year in which the beneficiary turns 49.

The table below shows the CDSG amounts that can be paid based on contributions to the plan and family income (Note from the author: The 2018 family income threshold is based on the year 2017 with inflation of 1.5%. The threshold for 2017 was $91,831. Therefore, for 2018, it will be $93,208. For reference, it is always the second tax bracket each year. Click here for more information.)

It’s possible to carry forward unused entitlements for the previous 10 years, up to an annual maximum of $10,500 and a cumulative maximum of $70,000 per beneficiary.

Maximum federal CDSG contribution

For families earning less than $45,915, or low-income families, the CDSB is paid into the RDSP regardless of the amount contributed per year (see table below). Furthermore, for these families, it’s possible to claim up to $11,000 per year and a cumulative maximum of $20,000 per beneficiary.

Maximum federal CDSB contribution

Filing Martin’s income tax return

The CDSG and the CDSB are based on the family income declared two years earlier. If the beneficiary is under the age of 18 on Jan. 1, the grant and bond will be calculated based on the parents’ family income.If the beneficiary is 18 or older on Jan. 1, the grant and bond will be based on his own income. If no income tax return has been filed, the government will assume income is at the higher threshold, the grant will be calculated at 100% (not 300%) and no bond will be paid.

It’s therefore important to start filing income tax returns by age 16 to prevent Martin from being penalized at the age of 18. If no information is available to determine the income, CRA will deem the family income to be at the highest threshold. Consequently, the available grant match would only be 100% (rather than 300%) at that point and no bond would be paid.

In our example, given that Martin is nine, the grants and bonds would be calculated based on his parents’ family income from two years earlier (i.e., 100% for the CDSG and no CDSB). However, it’s a good idea to file Martin’s income tax return the year when he turns 16 (even if he has no income) because these returns will determine the CDSG and the CDSB when he turns 18.

The added value of an RDSP for a minor

In most cases it’s recommended that parents start contributing to a child’s RDSP as early as possible, even if grants are calculated at 100%. Regardless of the contribution rate, the CDSG maximum for a beneficiary is $70,000 and, by contributing early, you can benefit from tax-sheltered returns—the effect of which is exponential. Less contribution effort is needed with a rate of 300%.

The graph below shows the value of a RDSP at age 49, based on the person’s age when the plan was opened and the contributions needed to obtain the maximum CDSG and CDSB.

In Martin’s case, the value of the RDSP at age 49 is approximately $57,000 more if his parents open the plan now, when he’s nine, than if they wait until he turns 18, even if the contributions result in grant rights of only 100%.

¹ Return based on 4.00% ² Optimization of annual contributions to obtain the full grant with retroactive CDSG entitlements. The unused contributions grow outside the plan, are taxable annually and the accumulated revenue is paid into the plan as a non-subsidized contribution.

*In a previous version of this story, the Maximum Federal CDSB Contribution chart stated that the 2018 family income threshold brackets were “Up to $27, 134” and “27,134 to $46,604.” Return to the corrected chart.

David Truong

Tax & Estate

David Truong, Pl.fin, CFP, CIWM, M.Fisc, works as a senior consultant, expertise centre, at National Bank Private Banking 1859. He also teaches at McGill University.