An overview of the Registered Disability Savings Plan

The Registered Disability Savings Plan shelters what you save and can also bring federal money into the account. Contribute, and in most cases the federal government adds a matching grant. Report a low household income, and it adds a bond whether you contribute or not.

That generosity comes with rules that are unusually strict about timing. Grants and bonds paid in during the previous 10 years generally have to be repaid when money comes out early, and three separate age deadlines govern what the account can still do. This page walks through the whole life of a plan, from opening to final payout.

What is a Registered Disability Savings Plan?

An RDSP is a long term savings plan for people approved for the disability tax credit. Investments inside it grow tax sheltered, and the federal government may add a Canada Disability Savings Grant and a Canada Disability Savings Bond. It is designed for long horizon savings rather than short term access.

Employment and Social Development Canada describes it on its RDSP overview as a plan to help people approved for the DTC save for the future. The Canada Revenue Agency frames the same account through its tax treatment, noting that contributions are not deductible but that grants, bonds and investment income are taxable to the beneficiary when they come out.

Two people define every plan. The beneficiary is the person approved for the DTC who eventually receives the money. The holder is the person or organization that opens and runs the account. They are often the same person, and often not. Our page on RDSP eligibility requirements covers who can take each role.

Who is the plan for?

The beneficiary must be approved for the disability tax credit, hold a valid social insurance number, be a resident of Canada when the plan is opened, and be no older than 59 at the end of the year the plan is entered into. All four have to be true at once. There is one plan per beneficiary.

The DTC condition is the one that decides everything else. Without CRA approval there is no plan, no grant and no bond, which is why the credit application is usually the first step rather than a formality handled later. ESDC sets out the same list on its page about who can open a plan and apply. One exception exists. When a new plan is opened by direct transfer from the beneficiary's former RDSP, the age limit does not apply and DTC approval is not re-tested.

How much can go into an RDSP?

There is no annual contribution limit. The ceiling is $200,000 over the beneficiary's lifetime, and that figure includes rollovers from retirement and education savings plans. Grants, bonds and investment growth do not count toward it. Contributions are allowed until the end of the year the beneficiary turns 59.

Anyone can contribute with the written permission of the plan holder, which makes the account useful for grandparents and extended family. The CRA confirms in its guidance on RDSP limits, transfers and rollovers that a direct transfer from one RDSP to another for the same beneficiary does not consume any of the $200,000.

Contributing more than the amount that attracts the maximum grant in a given year is allowed, but the excess earns nothing from the government. ESDC calls these unassisted contributions. Taking money out does not repay the contribution itself. What a withdrawal or a plan closure can trigger is repayment of grants and bonds paid into the plan in the previous 10 years, under the rules attached to those payments. The practical planning question is covered in our page on RDSP contribution limits.

The plan can also receive rollovers rather than fresh cash. Proceeds from a deceased parent or grandparent's RRSP, RRIF, RPP, PRPP or SPP can move into the RDSP of a financially dependent child or grandchild, and accumulated income in an RESP can move across in defined situations. ESDC sets the shared conditions on its page about making contributions. In both cases the beneficiary generally has to be DTC approved, resident in Canada, and 59 or younger on December 31 of the year of the rollover. A retirement plan rollover remains possible before the end of the fifth taxation year throughout which the beneficiary is not DTC approved. Rolled over money counts against the $200,000 limit and attracts no grant.

How do grants and bonds work?

The grant matches contributions at 300, 200 or 100 percent depending on family income, up to $3,500 a year. The bond pays up to $1,000 a year to lower income beneficiaries with no contribution required. Both are calculated on the family income reported two years earlier and both stop after the year the beneficiary turns 49.

Whose income counts changes with age. Until December 31 of the year the beneficiary turns 18, ESDC uses the combined income of the parents or guardians. From the year the beneficiary turns 19, it uses the beneficiary's own income plus a spouse's. That switch is why ESDC tells beneficiaries to start filing personal tax returns in the year they turn 17, and why a missed return can quietly cost a year of entitlement.

Matching grant lands in the plan within six to eight weeks of an eligible contribution. Money transferred in from another retirement or education plan is never matched. The full mechanics, including worked examples at each income band, sit on the ESDC page about how much you could get in grants and bonds, and our own walkthrough of accessing government grants and bonds covers the application side.

Can you catch up on missed years?

Yes. Unused grant and bond entitlement from the past 10 DTC approved years stays available, which matters for anyone who was approved for the credit long before they opened a plan. Catch up grant is capped at $10,500 in a single year. Catch up bond can reach $11,000 when a plan is first opened.

Bond carry forward is automatic once the plan is open and the bond is applied for. Grant carry forward is not. It only arrives in response to contributions, and each dollar is matched at the highest rate still available, taking the oldest outstanding entitlement within that rate first. The CRA explains the underlying entitlement rules in its page on the Canada disability savings grant and bond.

The window moves. Because carry forward looks back only 10 years from the year a contribution is made, someone approved for the DTC for a full decade before opening a plan may never collect every dollar. Years drop off the back of the window as later contributions are made. Holders receive a Statement of Entitlement each February up to and including the year the beneficiary turns 49, showing exactly how much to contribute to capture the available grant.

When can money come out of an RDSP?

Money can be withdrawn at any time, but timing decides the cost. Any grant or bond paid into the plan in the previous 10 years must be repaid at a rate of $3 for every $1 withdrawn, up to the total of those recent government payments. Recurring withdrawals must begin by the end of the year the beneficiary turns 60.

This is the rule people call the 10 year rule, and it is the single biggest constraint on using an RDSP for anything other than long term savings. Repayment is not triggered once the last grant or bond is more than 10 years old, once the beneficiary has turned 60, or where a medical attestation of a life expectancy of five years or less has been filed. In that last case, up to $10,000 a year can be withdrawn subject to conditions. Our page on the 10 year rule for RDSP withdrawals works through the arithmetic.

How is an RDSP withdrawal taxed?

An RDSP payment may include private contributions, government assistance and investment income. Rollover proceeds can also form part of the plan balance. Private contributions come out tax free because they were never deducted going in. Government assistance, investment income and applicable rollover amounts are taxable to the beneficiary when paid. The financial organization calculates the taxable portions.

Because the taxable share is income to the beneficiary rather than the contributor, the tax owing depends on the beneficiary's total income and credits for that year, and can be little or nothing. Provincial benefits are a separate question. ESDC states that opening and contributing to a plan does not affect other federal or provincial benefits anywhere in Canada, but that withdrawals may affect provincial benefit amounts in Quebec, New Brunswick and Prince Edward Island. Its page on withdrawing money from your plan advises contacting the provincial government directly. Our page on the tax implications of RDSP withdrawals goes further into the calculation.

What happens at the end of the plan?

Two events close an RDSP. If the beneficiary loses DTC approval, the holder chooses whether to close the plan or keep it open with contributions frozen. If the beneficiary dies, the plan must be closed and paid to the estate by December 31 of the year following the death, after any required repayment.

Losing DTC approval does not by itself force repayment of grants and bonds already received. What it stops is new money. Contributions, grants and bonds all halt, though a rollover from a deceased parent or grandparent's retirement plan is still possible before the end of the fifth taxation year throughout which the beneficiary is not approved. If approval returns, the plan simply resumes, as the CRA sets out in its page on cessation of disability or death of a beneficiary.

On death, grant and bond amounts paid into the plan within the 10 years before the death must be repaid to the government. What remains goes to the estate. Rollovers into an RDSP work in the other direction as well, and our guide to transferring funds from an RESP to an RDSP covers the conditions attached to education savings.

Putting the pieces together

The pattern behind all of these rules is the same. The federal government pays generously early and expects the money to stay put, which makes the RDSP powerful for a beneficiary in their twenties and much thinner for one approaching 50. Anyone building a plan should work backwards from the year the beneficiary turns 49 and check carry forward entitlement before anything else.

Terry builds tools for people managing an RDSP who want the entitlement math done before they talk to a financial organization. The CRA page on registered disability savings plan rules remains the authority on the tax side. This page is general information and does not replace advice from a financial or tax professional.