Registered Disability Savings Plan (RDSP)

3589Canadian_coinsThis morning, I attended the Registered Disability Savings Plan (RDSP) workshop and Q&A panel held by the DDA, with a representative from the Royal Bank of Canada (RBC), Ken Lagasse Chartered Accountants, and DC Complete Financial Services. For anybody who is unfamiliar with the Registered Disabilities Savings Plan, it is a new savings program designed to assist Canadians with disabilities and their families. I’ve included below some information I found quite interesting from this workshop.

Amongst some of the qualifications for the RDSP, include:

  • You must have a valid Social Insurance Number, be a Canadian Residence, be under the age of 60, and eligible for the Disability Tax Credit
  • The RDSP provides matching contributions of 100%, 200%, or 300% annually with a lifetime limit of $70,000
  • There is a 10 year claw back for the RDSP, and the money withdrawn for the RDSP must be used for the benefit of the beneficiary

Currently, only two financial institutions in BC allow you to open an RDSP account – the Bank of Montreal and RBC. Because today’s speaker was from RBC, she explained the process of opening an RDSP from an RBC perspective. To open an account, you must either:

  • Make an appointment at any RBC branch
  • Call Royal Direct 1-800-769-2511
  • Visit any RBC branch (may require wait time)

For the above, you do not need to be an existing RBC client. If you intend to make an appointment at RBC, you should confirm what you need to bring for your meeting (i.e. government issued identification, legal documents, etc). The entire setup for this will take approximately an hour, with 15 minutes for the forms and an additional 45 minutes to ensure the right options. An important note about the RDSP – disabled individuals can be the beneficiary of only one RDSP and each RDSP can only have one beneficiary.

Although the RDSP may sound like an excellent option for insuring the future of someone with a disability, it was suggested by our panel of experts that the RDSP is something that should be considered only if you have extra funds to put into a savings plan, and that it is not intended for investment purposes. The RDSP on it’s own may very likely not be enough to insure financial comfort for the life of a beneficiary. When considering open an RDSP, it is very important to speak with a financial specialist on what options may be best, and if an RDSP is something that can be integrated into the financial plan for your beneficiary.

The below are a few more quick facts about the RDSP:

  • Not any person with a disability can qualify for the RDSP, you must be eligible for the Disability Tax Credit to qualify for the RDSP
  • The RDSP is taxable
  • Withdrawals can be taken from the RDSP but with penalties – there is a 10 year claw back rule on grants and bonds for any withdrawal
  • RDSP contributions are not tax deductible

The information above is for informational purpose only, and current for this blog post. No warranty is expressed or implied. Neither myself nor the Developmental Disabilities Association is liable for any damages.

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4 Responses to Registered Disability Savings Plan (RDSP)

  1. Hi Victor,

    Glad to see that you held a panel on the new Registered Disability Savings Plan. It’s important that families and individuals know about all the various tools they need to look at when planning for their long term financial security.

    I was hoping I could just clarify a few things from your post that I think need to be highlighted about the RDSP.

    There are four financial institutions offering the RDSP. Royal Bank of Canada, Bank of Montreal, CIBC, and FMOQ. TD Canada Trust and Scotiabank will most likely be offering them by the end of this year.

    The 10 year clawback only applies in certain situations, and is based on whether you receive any federal contributions.

    I was surprised to hear that the experts on the panel suggested that the RDSP should only be opened if you have extra cash, when many people will be able to get the $1,000 Bond with no contributions necessary. As well, in most situations, people will get $3 for every $1 they put into the plan, and even for those with an income above $77,664, they still get a matching $1 for every $1 put in (up to $1,000). I think if you spoke with many financial advisors, they would probably agree that a 300% return in most cases, and a 400% (Grant and Bond) in some cases is a pretty lucrative investment.

    Would it not make sense for most people to open up a plan, put in the minimum $1,500, which in many cases will instigate a $3,500 grant? Or, if they have limited income and don’t think they will be able to contribute, open up a plan and receive the $1,000 in Bond?

    The RDSP is also not taxable. It is a tax-deferred savings vehicle, which means that money in the plan is not taxable. Payments will be partially taxed when they come out of the plan (grant, bond and growth are taxed, while personal contributions are not). Whereas the RRSP payments are fully taxable on the way out, the RDSP payments are only partially taxable. But, as you rightly point out, there is no tax-deduction for contributing to an RDSP. The real incentive is the tax-deferred growth and to instigate the grant and bond.

    The plan allows for withdrawals to be made without penalties. As I mentioned above, penalties only occur in certain situations.

    I think it is also important to point out that the BC Government has exempted the RDSP as an asset and income for determining eligibility for BC Disability Benefits. This means someone can save as much as they want, withdraw as much as they want, and spend it on whatever they want, and still receive their PWD benefits.

    I think you rightly point out that individuals and families need to look at the whole gamut of options available, not just an RDSP, but I would encourage people to take a close look at the plan, as for most people it can provide a significant benefit.

    Regards.

  2. […] Tax Credit In an earlier blog entry, I wrote about the Registered Disability Savings Plan that I learnt about during a panel hosted by the DDA, with different financial specialists. One of […]

  3. David Chen says:

    As one of the presenters at this workshop, for the benefit of those that didn’t attend and in the interest of a open exchange of ideas and opinions, I’d like to mention that the points Mr. Brodhead (Associate director of public policy for PLAN) raises were in fact brought up in the presentations and it is likely because there were so many details covered in the session that Victor may not have clearly reported on his key findings.

    During the talk both the RBC representative and myself showed the attractive grants and bonds that are offered for contributions to the RDSP for both higher and lower income families. We discussed what happens if the beneficiary is under 18 and for those over 18, that the highest grants and bonds would likely be automatically received for contributions since the beneficiary’s low yearly income would be the key criteria in judging the amount of grants and bonds received. We even pointed out that simply opening the RDSP without contributions may qualify the beneficiary to receive the bonds of $1000 per year for up to 20 years.

    We mentioned that the RDSP doesn’t disrupt BC social benefits and does not affect federal social benefits and issue that is important as seniors with disabilities transition out of persons with disability provincial benefits and move to federal retirement income benefits.

    When it comes to the “lucrative investment” it is the grants and bonds that come with very big strings. These obligations make it really important for families to carefully weigh the benefits of this one time boost to their investments (remember, once the grants and bonds are received, the investment returns after that are still limited by the investment vehicle chosen and in the case of low risk investors, it is generally Guaranteed Investment Certificates (GIC’s) that typically have a 3-5% long term rate of return and not an up to 300% return). Mr. Brodhead does mention that most of the negatives are tied to the government grants and bonds and implying correctly that if you don’t receive them then many of these problems don’t exist.

    However, when everyone only promotes the high grants and bonds, the most attractive feature of the RDSP, and basically says “why would you pass up the lucrative grants and bonds opportunity??” then how are families to avoid the negative obligations if their main reason to invest in the RDSP is to get the grants and bonds?? Without counselling on these obligations, families and beneficiaries may be surprised in the future with very undesirable outcomes caused by these obligations. The answer in my opinion lies in preparing a balanced financial portfolio so that other assets can act as a buffer and counteract these grant and bond obligations.

    With regards to the financial institutions offering it, FMOQ is only offering the RDSP to Quebec residents and since the workshop was aimed at BC residents, FMOQ’s offering of the RDSP is relatively unimportant to BC families and not mentioned. As for CIBC, they quietly rolled this out without any real press release to the financial advisors and upon calling the number listed on the website, there still is no option to find out about how to set up an RDSP so I questioned whether it is in fact offered or not and opted to report that it was not available so as not to frustrate families trying to set up the RDSP (as is commonly reported to me by parents trying to set one up through BMO’s central processing centre).

    However, to get the bottom of this, I called CIBC again this week (the phone system still did not have an RDSP option) and forced the system to get me to a live person. I did in fact find out that they offer the RDSP. However, the RDSP is offered through CIBC Securities and not CIBC bank. What this means for parents is that RDSP accounts set up with RBC or BMO can be invested in any of their offerings (mutual funds, GIC’s, high interest savings, etc.) but RDSP’s set up with CIBC cannot be invested without some level of market risk (the representative said only mutual funds are offered in CIBC RDSP’s and suggested money market as a suitable investment for low risk investors. However, money market often underperforms bank prime interest returns and in the 2008 market crash we saw for the first time a money market fund go bankrupt. Money market is meant to be a short term (6 months or less) parking spot for money and not a long term investment vehicle.)

    Since each beneficiary is only allowed one RDSP (unlike RRSP’s where a beneficiary can hold many RRSP accounts to take advantage of diversified investments and use the best services of multiple institutions) the challenge with the current list of institutions offering the RDSP is that the families may not be able to get the right mix of investments, services, and financial professionals that they feel comfortable trusting the beneficiaries future to.

    To complicate things more, RBC is the only institution that supports the RDSP at the branch level. BMO and CIBC offer it only from a central service center in eastern Canada (in my opinion CIBC does worse on the scorecard only because the call centre number doesn’t actually have an option to learn about the RDSP and would likely cause stress to families trying to set one up.) What this means for the families is that only RBC offers the ability to sit down with a financial professional and review how the RDSP should integrate into a well diversified portfolio for the beneficiary.

    This lack of support by the financial industry is demonstrated by the difficulty in finding a bank representative to talk about how to set one up. I first went through a casual family friend who works for BMO at the management level and she did not have any suggestions on who to talk to nor did she actually try to find someone to join the workshop panel. RBC on the other hand was much more willing to help (no wonder they are the number one bank in Canada) but it still remained a challenge to find a CFP or retirement specialist on staff that had the time to present at the workshop.

    The key issue really is that the RDSP is not universally offered by all financial institutions and investment companies and FMOQ is basically irrelevant to most Canadians who are looking for an RDSP for a loved one. This lack of universal support concerns me and drives my quest to get CI Investments, one of Canada’s largest national non-bank investment companies to offer the RDSP. My arguments to support the RDSP, according to the western vice president, have been presented to the top officials and the talk will be renewed upon the VP’s visit to the Toronto headquarters this week. I believe that when more and more of the financial institutions than the current offering comes on line, it will encourage all of them to come on line and it will improve the investment and service options that families can use for their RDSP.

    Because I work for myself and I am not a salaried employee of any major bank or financial institution, I don’t candy coat my views on anything. Before working with families with disabled children, I realized that when everyone in this open discussion are all gone, it is what we plan today that will make or break the children’s future. Often, there is no ability to reverse these plans and a critical analysis and careful creation of a balanced portfolio for the children is the best way to avoid unpredictable and undesirable future results.

    The panel of specialists had this goal in mind to show attendees the major positives and negatives. For example, the RBC representative pointed out that RBC does not physically check to see if beneficiaries have their disability tax credit status approved (the only qualifying criteria to open an RDSP) and that if the parents mistake DTC status with receiving provincial social benefits (a situation that happens more than we like), the account would have to be shut down when Canada Revenue Agency finds out (usually when the grants and bonds are applied for).

    The accounting specialist discussed the lengthy timelines to get the DTC application approved and the change in CRA’s criteria that they are not looking for the medical condition label anymore when it comes to approving DTC applications but instead they are looking at the degree of mental and/or physical impairment (a very subjective kind of criteria). This poses some unique problems in that applications that do not have physician’s reports that are in line with what the CRA adjudicators are looking for, then the DTC application could be denied and thus blocking families from setting up an RDSP. The accounting specialist pointed out that going to professionals in their company who are familiar with what CRA is looking for to approve a DTC application, might be the best chance families have to get the DTC status.

    As for myself, after looking at the positive aspects, I covered 6 real life concerns:
    1) While the contributions are tax free, the grants, bonds and earnings portion are taxable as income when money is withdrawn from the RDSP. Many parents mistake tax deferred (taxation only at time of withdrawal) with tax free (no taxes will ever be levied) and many parents I come across are convinced that the RDSP is completely tax free which is not the case (so the statement that the RDSP is “not taxable” is not technically true). Considering that the way most RDSP’s are structured, the majority of the account balance in the future will be grants, bonds and earnings which leaves a significant tax liability looming in the future of the beneficiary’s life.

    2) The disability assistance payment formula, an obligation tied to receiving the grants/bonds, and the lifetime disability assistance payment formula which the government admits can prevent beneficiaries from being able to use all the money within their RDSP, a situation that most parents are against when they find out about it.

    3) The amount of years required to build up enough contributions, grants and bonds to be able to leave a reasonably significant amount of monthly income for the beneficiary

    4) The 10 year clawback rule which creates a real challenge for financial planning since there is no realistic way to plan a 10 year gap between the last contribution’s grant and bond received and when the parents pass away (usually when the need to switch from parental financial subsidy to the RDSP would occur). This problem creates the need to integrate the RDSP into a balanced portfolio and not solely depend on it for financial security.

    5) Limited creditor and matrimonial divorce protection. I have come across a number of families where a less affluent family has tried to “hook up” their disabled child with the one from the more affluent family with ulterior motives in mind. While some families hope that their children can enjoy the joy and love of common law or matrimonial companionship, they certainly do not wish to have their child’s assets divided due to matrimonial divorce. As the government expressly said, the RDSP enjoys limited protection.

    6) Strained finances for tight budgets. I have a real life case where a single mother is raising 3 children (one with mental disabilities.) She is receiving no alimony or child support and has a very low yearly income. She recently lost her job and found out first hand what it is like to lock contributions up in an RDSP and when life takes a turn she cannot access this money for the family or her disabled child without losing the grants and bonds. Consider if this happened 10 years from now when there are a lot more grants and bonds at stake, should another recession occur in the economy, this parent would face an even more difficult financial decisions to withdraw her contributions which she may desperately need and lose 10 years worth of grants and bonds or face financial ruin to protect the grants and bonds. It is this real life situation that made me state that the RDSP should not be contributed to at the expense of all of the other financial concerns the family has on the table. Instead families like this might take the bonds only and if they have extra cash they can spare, then they can consider contributing. I believe this is what Victor meant to report as using “extra cash” for RDSP contributions.

    Bear in mind that most of us in this discussion make enough income and have enough assets that we will never have to face this reality, but for lower income families where the extra high grants and bonds are extremely attractive, the obligations tied to the grants and bonds can create some really problematic situations for low income families.

    I am simply cautioning families that there is no such thing as a “free lunch” when it comes to the government. While the grants and bonds may be very attractive, they are like the fable of the Midas touch, whose touch of gold turned out to be a curse that Midas wished he could reverse. Similarly, the end result of receiving the grants and bonds may not be what you bargained for. Worse, to solely rely on the RDSP for the future financial security of disabled loved ones rather than using a diversified portfolio approach, can make these end results even more undesirable.

    Therefore, I cannot stress enough how important it is to have other resources in the portfolio so that at the worst, a beneficiary could use other assets for 10 years and allow the RDSP to clear the clawback period. This multi asset approach is precisely what I put into the plans of parents where we integrate the RDSP into their portfolio.

    Ultimately, the group reminded the attendees that the best thing to do is to seek professional consultation prior to setting up an RDSP.

    This caution is also echoed by Jamie Golombeck (a well respected financial planner who used to write very technically astute articles for financial industry professionals and who now works for CIBC Private Wealth Management) who, in the last part of the article posted on the CIBC website at http://www.cibc.com/ca/pdf/cibc-rdsp-golombek-en.pdf, suggests seeking professional consultation on how to integrate it into the beneficiary’s portfolio (implying not to set this up without further research and consideration). He points out that while the grants and bonds might be very attractive and the sole reason to choose the RDSP over traditional discretionary trusts, for parents of higher wealth, the traditional discretionary trusts remains more flexible for other real life planning concerns. He believes that the RDSP will be used in conjunction with discretionary trusts instead of families solely relying on the RDSP as is often seems to be suggested by people who don’t deal directly with the intricate real life financial concerns of families of persons with disabilities.

    In my opinion, the best thing we can do as professionals is to show families where the problems are in the system, set up plans to work around the issues and to push for social change to fix the shortfalls. The key goal of the RDSP workshop that our panel held was to prepare people to use the RDSP in the best manner possible within a diversified portfolio and based on the huge amount of positive feedback we received, I believe the panellists succeeded in this task.

    David Chen
    Owner / Advisor
    DC Complete Financial

  4. Louise B says:

    I am wondering if you could clarify this statement for me or direct me to information on what you mean by disability assistance payment formula, thanks.

    2) The disability assistance payment formula, an obligation tied to receiving the grants/bonds, and the lifetime disability assistance payment formula which the government admits can prevent beneficiaries from being able to use all the money within their RDSP, a situation that most parents are against when they find out about it.

    Louise

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