RDSP Grants & Bonds

Government help: Taking advantage of grants and bonds

To assist in saving, the federal government offers Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs).

> Canada Disability Savings Grants (CDSGs)
> RDSP lump sum or annual contributions: an example
> Canada Disability Savings Bonds (CDSBs)
> Repayment of CDSGs and CDSBs

 

Canada Disability Savings Grants (CDSGs)

CDSGs are matching grants that the Government will deposit into a beneficiary’s RDSP to help accumulate savings. The Government provides matching grants of up to 300%, depending on the amount contributed and family net income

The chart below outlines 2011 CDSG matching rates:

Family net income* CDSG matching rates Maximum annual CDSG Up to or equal to $83,088 300% on first $500 200% on next $1,000 $3,500 Over $83,088 100% on first $1,000 $1,000

* 2011 rates. For a minor beneficiary, the family net income is that of his or her parents. Where the beneficiary is over the age of majority, the family net income is that of the beneficiary and his or her spouse, if applicable. The income threshold is indexed annually to inflation.

Maximum grant CDSGs are subject to a lifetime limit of $70,000 per beneficiary, and are payable until the end of the year in which the beneficiary reaches age 49 if the beneficiary remains a resident of Canada.   Unused grants Beginning in 2011, you are allowed to carry forward unused grant and bond entitlements for a 10-year period (starting from 2008, the year RDSPs became available).

As part of a birthday gift, Meg and Allen agree to contribute $2,000 for each of the next five years to an RDSP for their disabled adult nephew, Tony. Because Tony is age of majority, his family income is used for CDSG purposes. Tony’s family net income and grant allocation for the next five years is as follows:

Family Net Income Contribution CDSG Year 1 $44,500 $2,000 $3,500 Year 2 $48,350 $2,000 $3,500 Year 3 $50,000 $2,000 $3,500 Year 4 $75,000 $2,000 $3,500 Year 5 $84,000 $2,000 $1,000 Total – $10,000 $15,000

Since there are no annual contribution limits for RDSPs, contributions of up to $200,000 can be made in any given year. However, where a lump sum $200,000 contribution is made, no CDSG would be paid after the initial year. RDSP contributors should work with a financial advisor to determine whether lump sum or periodic contributions are the better option. Depending on expected rates of return, age of the RDSP beneficiary and cash flow needs, smaller annual contributions may be more suitable. Lump sum contributions would provide a longer period of tax deferred growth, whereas annual contributions would maximize CDSGs.

 

RDSP lump sum or annual contributions: an example

Kevin, age 45, has $10,000 to contribute to his RDSP. He has a decision to make – contribute the full $10,000 up front to maximize tax-deferred growth, or, because of annual cash flow needs, contribute $2,000 for each of the next five years. Kevin speaks to his financial advisor, and the following potential outcomes are discussed (assuming a 6% rate of return and family net income of less than $83,088): Option 1 Contribute $10,000 up front Total contribution – $10,000 CDSG – $3,500 RDSP value after five years – $18,066 Option 2 Contribute $2,000 per year for five years Total contribution – $10,000 CDSG – $17,500 RDSP value after five years – $32,864 Kevin elects for Option 2 as it is expected to provide a greater return and flexibility for annual cash flow needs. Also, his overall return may be enhanced if the excess amount each year (the amount that exceeds $2,000) is invested in a non-registered account   Kim, age 45, receives an inheritance of $200,000. She, like Kevin, has a decision to make. Should she contribute the full $200,000 up front, or contribute $40,000 each year for five years to allow cash flow flexibility. Kim speaks to her financial advisor and the following outcomes are discussed (assuming a 6% rate of return and family net income of less than $83,088): Option 1 Contribute $200,000 as a lump sum Total contribution – $200,000 CDSG – $3,500 RDSP value after five years – $272,329 Option 2 Contribute $40,000 per year for five years Total contribution – $200,000 CDSG – $17,500 RDSP value after five years – $259,926 Unlike Kevin, Kim opts for Option 1. For her, a lump sum RDSP contribution will likely produce a better return despite forfeited grants. As well, if Kim chooses Option 2, deposits $40,000 to her RDSP and invests the remaining $160,000, she could lose part or all of her disability tax credit, as the value of tax credits decreases when income (from investments, employment, etc.) reaches a specified level. Kim contributes the full $200,000 up front and considers other options for her annual cash flow needs. In addition, if Kim is receiving provincial disability support, there are limitations as to assets inherited as well as income that may negatively impact Kim’s support unless the entire inheritance is contributed to her RDSP.

 

Canada Disability Savings Bonds (CDSBs)

In addition to CDSGs, lower income families have access to Canada Disability Savings Bonds (CDSBs). The Government may deposit up to $1,000 a year to the RDSP of a low income beneficiary, even if no contributions are made into the RDSP. Lower income families may qualify for up to a lifetime maximum of $20,000 from the Canada Disability Savings Bond (CDSB) program.

Family net income* Maximum annual CDSB Up to or equal to $24,183 $1,000 Between $24,183 and $41,544 $1,000 is reduced on a prorated basis (based on the formula in the Canada Disability Savings Act) Over $41,544 No bond is paid

* 2011 rates. For a minor beneficiary, the family net income is that of his or her parents. Where the beneficiary is over the age of majority, the family net income is that of the beneficiary and his or her spouse, if applicable.

CDSB payments are subject to a lifetime limit of $20,000 per beneficiary, and are payable until the end of the year in which the beneficiary reaches age 49 (if the beneficiary remains a resident of Canada). Starting in 2011, you may carry forward unused grant and bond entitlement to future years. The carry forward period can only start after 2007 and is for a period of 10 years.

Note: The Province of British Columbia also provides a one-time Disability Bond amount of $150 from the Endowment 150 Fund.

 

Repayment of CDSGs and CDSBs

When withdrawing funds from an RDSP, it is important to be aware of the 10-year rule. CDSGs and CDSBs received in the 10-year period prior to a disability assistance payment must be repaid to the government. This repayment is known as the Assistance Holdback Amount. The purpose of the Assistance Holdback Amount is to ensure that RDSPs are used for long-term savings, and also to ensure that government funds contributed are not withdrawn and used as leverage for matching grants in future years. The same rule applies to grants and bonds received in the 10-year period before death or the cessation of a disability. Grants and bonds received before the 10-year period do not have to be repaid. Because of the repayment provisions, an RDSP might not be the best option for short-term expenses. The scenario below illustrates this.

Arnold, 35 and disabled, has an RDSP that his family has been contributing to for the past 20 years. Arnold wishes to withdraw $10,000 from his RDSP to purchase a car. Details of his plans are as follows: Plan value: $194,963 CDSGs (last 10 years): $35,000 CDSBs (family income exceeds threshold): $0 Arnold’s $10,000 redemption will result in repayment of $35,000 for CDSG for the 10-year period before the withdrawal. CDSGs received prior to the 10-year period are not subject to repayment.

It is possible to not request grants or bonds for a period if there is a likelihood a Disability Assistance Payment will be required. Grants and bonds can be restarted after the payment.

The 10-year rule
Once a withdrawal of any amount is made, all federal grants and bonds paid into the RDSP in the previous 10 years have to be repaid to the federal government.