Tax Implications of a Registered Disability Savings Plan

Contributions to an RDSP are not considered tax-deductible from income when preparing an annual income tax return, so when  contributions are eventually withdrawn they are not taxable.

However, any gains from those contributions will be taxable. As well, government contributions by way of grants and bonds are taxable, plus any of their gains. So, on withdrawals there could be a taxable and non-taxable portion.

The main advantage is that contributions grow on a tax-deferred basis, only taxable on withdrawal from the RDSP. And, the gains are taxed in the hands of the beneficiary, who is likely not earning a high taxable income.

Other Tax Credits and Deductions for Persons Living with a Disability

The Disability Tax Credit (DTC)

Qualifying for the DTC is mandatory to open a Registered Disability Savings Plan. The tax credit itself is non-refundable, reducing the amount of tax that a person with a disability has to pay. It’s possible, quite likely in fact, that the person with a disability may not need the credit to reduce their own taxes, in which case it’s possible to have the tax credit (or part thereof) transferred to a family member.  The family member would have to be someone who assisted in financially supporting the individual by helping supply some of the basic necessities of life (shelter, food or clothing for example). This requires a T2201 Disability Tax Credit application form, available from the Canada Revenue Agency (CRA) website.

Retroactive Tax Credit refunds: It’s quite possible because of the situation described above to reclaim taxes that never should have been paid. It’s very simple to do and I’ve helped dozens of families to do precisely that – with cost or charge.

Beware of Fees: This is an area in the financial services industry that most disturbs me. Many organizations and individuals will charge a fee (up to 30% or more) of the money you may receive by using their services. That’s outrageous in my mind, and I really don’t think it’s necessary. I might accept a cup of coffee at most, but feel free to ask me my thoughts on how you might best go about applying for the various credits and programs.

What if my child is over 49? Is there any point in pursuing an RDSP?

The estate planning and tax savings that can result from a properly structured estate withdrawal strategy for your registered assets is perhaps the most underutilized aspect of this entire plan. You’ll never leave a seminar of mine without hearing it very clearly, and certainly very loudly, that if you don’t have such an exit strategy then the government has one for you. Which one do you think would benefit your family the most? Listen to Marg’s story (see video in the Estate Planning room), perhaps it will offer some insight.

Source for contents on this page:

Canada Revenue Agency

Disability Tax Credit (CRA)

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T2201 Disability Tax Credit

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Caregiver Amount

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A tax credit for any who maintained a residence for themself and a dependent over the course of the year.

Child Disability Benefit

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A tax-free benefit for families who care for a child under age 18 who is eligible for the disability tax credit.

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