Estate planning is something that everyone should do; it provides you with peace of mind, decreases disputes among your family and friends, minimizes taxes payable by your estate, and helps you ensure that your loved ones are provided for. Estate planning becomes even more important if one of your loved ones has a disability. How can you ensure your loved one will be taken care after your death, especially if they are not able to financially provide for themselves? One way is through a registered disability savings plan (RDSP).

This blog will discuss what a RDSP is, how it works, who can qualify as a beneficiary, what happens if the beneficiary predeceases you or you predecease them, and things to consider when drafting your Will.

What is a RDSP?

A registered disability savings plan (RDSP) is a registered investment plan designed to provide long-term financial security to people with disabilities by allowing the plan holder(s) to save money on their behalf. Since becoming available in 2008, over 150,000 RDSPs have been opened in Canada and an estimated 500,000 Canadians will benefit from the initiative.

Depending on the mental capacity and age of the beneficiary, the plan holder of the RDSP, or the person who is authorized to open and manage the RDSP, can be the RDSP beneficiary themselves, a parent of the beneficiary, or someone legally authorized to act on behalf of the beneficiary. The holder does not have to be a resident of Canada.

When you put money into a RDSP, the government matches your contributions. RDSPs are eligible for two main grants from the Federal Government:

The government will pay a matching grant of up to 300% of your contributions to the RDSP based on the beneficiary’s adjusted family net income and the amount contributed to the RDSP. RDSPs can get a maximum of $3,500 in matching grants per year and up to $70,000 over the lifetime of the beneficiary.

Unlike the CDSG, the CDSB is not dependent on contributions; the government will pay up to $1,000 a year into the RDSP for low-income Canadians with disabilities solely based on the beneficiary’s adjusted family net income. The lifetime maximum contribution is $20,000.

All forms of government funding end the year that the beneficiary turns 49. This is because of the 10-year repayment rule. If the RDSP is terminated, the plan ceases to be a RDSP, or if the beneficiary dies, then all government grants and bonds contributed to the plan over the past 10 years must be repaid. As contributions cannot be made after the end of the year in which the beneficiary turns 59, any government funding paid after the year in which the beneficiary turned 49 would have to be repaid. While there is no limit to the contributions that you can make to a RDSP annually, the lifetime contribution limit is $200,000.

Who Can Be a Beneficiary in a RDSP?

An individual can be designated as a beneficiary of an RDSP if they meet the following criteria:

  • They are eligible for the disability tax credit (DTC)
    • The DTC is available for individuals with a severe and prolonged impairment in their physical or mental functions. This must be certified by a medical practitioner on Form T2201, which then must be approved by the Canada Revenue Agency.
  • They have a valid social insurance number (SIN)
  • They are a resident of Canada at the time that the plan is opened and when each contribution is made
  • They are under the age of 60

A beneficiary can only have one RDSP at a time, but a RDSP can have more than one plan holder at a time and several over its existence. Anyone can contribute to a RDSP so long as they have written permission from the holder.

If a parent opens a RDSP for a minor beneficiary, and if the beneficiary is deemed to be contractually competent by a physician and the issuer of the RDSP, which is often the bank that opened the account, then the beneficiary will become the plan holder upon reaching the age of majority. If a beneficiary has someone besides their parent appointed as their guardian of property, then that person would also replace the parent as the plan holder when the beneficiary turns 18.

What Happens if the Beneficiary under the RDSP Predeceases You?

If the beneficiary of a RDSP dies, then the RDSP must be closed by December 31 of the year after the beneficiary died. Any grants or bonds paid by the government into the RDSP in the 10 years prior to the beneficiary’s death must be repaid. However, any growth on that amount does not need to be repaid. Any remaining funds in the RDSP will be paid into the beneficiary’s estate to either go out in accordance with their Will or on intestacy. They will not be repaid to the contributors.

Any growth, grants, and bonds are subject to tax from the beneficiary’s estate, but initial contributions are tax-free.

What Happens if You Predecease the Beneficiary?

Assuming that the plan holder is not also the beneficiary, then a new plan holder can be named after your death. All of the funds would remain in the RDSP and no assets from the plan will form part of your estate.

Who becomes the next plan holder depends on the situation. If the beneficiary is declared contractually competent, then they can become the plan holder after your death. If not, then the RDSP will often pass to the executor of your estate until a legal guardian of the beneficiary is added as the plan holder. If the beneficiary has no legal guardian, then the court can appoint a guardian for property to act as the plan holder.

The best practice in this situation is to anticipate that you will pre-decease the beneficiary and conduct your estate planning accordingly.

What Should I Consider When Drafting My Will with a RDSP?

There are several things you can consider incorporating into your Will and estate planning if you are a holder of a RDSP:

  • Confirm the identity of the beneficiary of the RDSP.
  • Provide for additional bequests to be paid into the RDSP if it is not fully funded at the time of your death.
  • If the beneficiary is your child, list you and your partner as joint plan holders. If you do so, the surviving spouse can become the sole plan holder when one of you passes. If you do not name your spouse as a joint plan holder, then they will not automatically become a plan holder.
  • If you are the sole plan holder, appoint a guardian who can be your successor. This will avoid issues of finding another legal guardian for the beneficiary or having the RDSP managed by a court-appointed guardian of property. You should also provide instructions on how the guardian can distribute the funds of the RDSP, such as paying the funds into a discretionary trust or distributing them directly to the beneficiary.
  • Direct that your registered assets, such as a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF), rollover and be paid into the RDSP. This will defer taxation on the funds from these assets upon your death and they will only be taxed upon withdrawal from the RDSP. The maximum amount that can be rolled over is $200,000; any existing contributions or rollovers to the RDSP will reduce this limit. The government does not match any rollover amounts.
  • If you have any questions about RDSPs or incorporating them into your estate planning, you should consult with a professional.

Contact the Toronto Estate Lawyers at Derfel Estate Law

There are several things to consider when estate planning and preparing your Will. While it may be tempting to save costs by creating a Will without the assistance of a professional, the consequences can be grave for both your beneficiaries and estate. To learn how we can assist you with your estate planning or the administration of your estate, call our office at 416-847-3850 or contact us online.

This blog was co-authored by law student, Leslie Haddock.