What’s the Catch?
Unfortunately, there is a catch to the RDSP: a person must continue to have a qualifying disability and be eligible for the disability tax credit throughout the lifetime of the RDSP. Therefore, any ineligibility as a result of recovery or death would result in a forced closure of the Plan.
The financial implications of becoming ineligible before age 60 are potentially huge. The RDSP will terminate in the year that eligibility ceases and all grants and bonds that were not in the plan for 10 or more years will need to be refunded to the government.
Another mild “catch” is that the CDSG and CDSB are only available for years up to age 49. This means that in order to be eligible for the maximum government subsidies, one must first qualify by age 30.
When you exclude disabled persons who: 1) are not going to remain disabled over a prolonged period, 2) have a high incidence of mortality as a result of their disability, and 3) are age 50 or older at onset of qualifying, you are removing a large segment of the very population that the RDSP could benefit.
The RDSP therefore has a certain amount of risk, assuming that one would be better off saving in a TFSA or RRSP if it were known in advance that the grants and bonds would inevitably be refunded. However, since grants and bonds are repaid without repaying the investment earnings, the Plan may still have been well worth it. On the flip side, investment losses come off the amount of grants and bonds that need to be returned to the government.
The age restriction on grants and bonds in combination with the strict qualifying rules that would even exclude many employees on Long-Term Disability (LTD) would significantly reduce any potential demand for employer sponsored “Group RDSPs”.
Program with promise
The RDSP is a powerful way for families of disabled persons to save for the future of their disabled love one, or for a disabled person to save for themselves. Employers of disabled employees can also play a role in education of the program when dealing with employees on LTD who may qualify.
There is a further potential for companies to assist in establishing individual plans and making contributions to RDSPs on behalf of qualifying employees. By simply directing $1,500 in LTD benefits, an employer could help their disabled employee establish significant replacement income which can begin around the time that their LTD benefits expire.
As the RDSP gains in popularity, I suspect that the Canada Revenue Agency will see more applicants for the disability tax credit now that the incentives have been significantly increased. A 30-year old disabled person could have a RDSP balance of $280,000 at age 60 financed entirely by the annual $1,500 disability tax credit, government grants, and investment returns of only 4% per year.
However, it appears that the savings plan is in its initial stages and has its share of glitches. The RDSP is designed to promote long-term savings. So while it is understandable to penalize someone for voluntarily accessing funds before the designed maturity date of the RDSP, it seems overly harsh to penalize someone with a disability for recovering or even worse for dying. Removing up to nine years of grants and bonds is a severe penalty for what is an involuntary event. The forfeit of these supplements would be a significant loss to one’s RDSP savings potential.
Although the 2008 budget did not make any changes to the RDSP, it did promise to review the RDSP every three years to ensure that the Plan continues to meet the needs of Canadians with disabilities. I believe that in these reviews, the government needs to come up with a more reasonable way to deal with some of the above-mentioned delicate situations. The RDSP has a lot of promise and should be a program that someone with a qualifying disability should be able to count on no matter what the future holds.
Darren Klorfine, MA, is an associate actuarial consultant with Buck Consultants, an ACS company.
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