RDSP and Disability Tax Credits Common Misconceptions

A Registered Disability Savings Plan (RDSP) is a registered savings plan, similar to an RRSP; but it is intended to help parents and others to save for the long-term financial security of persons with severe or prolonged disabilities.  In order to qualify for government grants the person who is disabled must be eligible for the Disability Tax Credit, and be 49yrs or younger.

RDSPs are still relatively new and there is a lot of misinformation out there, some common misconceptions on RDSPs and other government benefits include:

You no longer qualify for the Disability Tax Credit if your adult child no longer lives with you.  Wrong.

The credit continues to apply if your adult child lives with you, and/or your child moves to assisted living as long as you continue to provide food, clothing and occasionally shelter.

In order to qualify for specific benefits, you must make meals for your adult child and charge them rent. Wrong.

Charging rent and making the meals yourself won’t meet the requirements, however if you don’t want to repay benefits, have the child plan and prepare their own meals.  If they are not capable; to ensure the rental agreement is acceptable; hire someone to help your child with food planning and preparation.

It is okay if an investment in your child’s name grows in value above $5000.  Wrong.

In Ontario, for people to qualify for support they cannot have more than $5000 in liquid assets.  To avoid disqualification of benefits, invest your child’s money through RDSPs, Segregated mutual funds or inside a Henson Trust.

The RDSP is a tremendous savings tool, although there is no annual contribution limit; there is a lifetime maximum of $200,000.  If opening a RDSP with a lump sum, make sure you leave room for an additional $1500 annual contribution for the next 20 years.  This will ensure you continue to qualify for up to $4500 per year in matching government contributions.

When the beneficiary is a minor, the parents or legal guardian can set up an RDSP and remain holders of the plan until the beneficiary turns 18.  If the beneficiary is over 18yrs and legally competent to manage property, then he/she must be the holder of the plan.  Although there can be more than one holder of the plan (both parents) there can only be one beneficiary per plan, and there can be only one RDSP per beneficiary.

In addition there are some general rules you should keep in mind; including age limits, vesting rules and competency of those over the age of 18.  For example, if the disabled person cannot sign for Powers of Attorney, a guardian would have to apply to the courts before they can sign the papers to open and/or manage a RDSP.

Not all financial institutions offer RDSPs make sure you are getting your advice from someone who deals with them on a regular basis.  If you have any questions, or want more information please don’t hesitate to give me a call, as we do offer them through Security Financial Services.

Have a great weekend,

Tracey

Sources:  Advisor.ca original article by Christopher Mason posted 03-07-14.  The Money Tree post 10-26-11