Top 10 Improvements to the RDSP

While preparing for the federal government RDSP Consultations currently underway, I have formulated my top 10 list of reforms to improve the Registered Disability Savings Plan to make it more useful for Canadians.

10.  The RDSP should be exempted so that income earned in RDSPs and income received from RDSPs is not taxable in the United States for American RDSP beneficiaries living in Canada.

Technically, this is not a reform that the Government of Canada can undertake, therefore the RDSP should be added to the agenda the next time the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital is reviewed.

9.  Make the RDSP creditor proof

This may be a request of the provinces as the jurisdiction resides substantially in the provinces.  It is important for numerous reasons but, because the RDSP is very similar to a pension, it should be similarly treated.  Creditors should not be able to access it, thus sacrificing a person’s future financial security.

This provision is somewhat complex, however, and I will post more soon.

8. Enable the rollover of an RESP to a RDSP

Families and individuals have been asking about the possibility of this from day one.  I’m not 100% sure that it is necessary as currently funds can be withdrawn with the loss of the Canada Education Savings Grant and Bond but with access to the much more valuable Canada Disability Savings Grant and Bond.  I am still thinking out how the rules accompanying this rollover could work.  Look for a post in the near future.

7. Eliminate the provision which prohibits financial institutions and other bodies such as public guardians and trustees from charging a fee on the holdback amount.

This provision is problematic because it reduces many of the incentives for the financial sector, especially for financial planners and investment advisors, to promote the RDSP.  A change would unleash the motivation of the financial sector to use its resources to promote the RDSP.

6. Enable a one-time emergency withdrawal from an RDSP of up to 25% of the value of the RDSP excluding the holdback amount.

Many people are concerned about tying up much or all of their assets in a plan that they might not have access to for ten years (or more) without facing a penalty. There are numerous implications in permitting this and a set of rules that will need to accompany it.  Look for a post on it in the near future.

5. Permit a one-time withdrawal from an RDSP of up to 50% of the value of the RDSP, excluding the holdback amount for the purchase of a home by the beneficiary.

Many people with disabilities, supported by their families, would like to be able to own their own home.  Owning one’s own home has numerous advantages (See www.plan.ca and Safe and Secure, by Al Etmanski, which is available in BC and Alberta, through London Drugs, and Ontario, through PLAN Toronto).

In the years to come, many people will reach middle age with significant assets in an RDSP.  Many might like to use some of those assets to purchase a home.  Details to come.

4. Create a RRSP rollover provision that would enable an individual to roll a personal RRSP into a RDSP.

People who become disabled later in life often have assets in RRSPs.  If they are eligible to open an RDSP, rolling their RRSP into their RDSP may have some advantages.  The rules for this provision could mirror the current RRSP/RRIF rollovers:

• The rollover would result in taxable income but would be tax neutral to the plan holder as a result of an offsetting tax deduction
• The rollover would count as contribution and be limited by contribution limits, but would not result  in the payment of Canada Disability Savings Grant
• The rollover would be part of the taxable portion of a future RDSP withdrawal.

Not losing eligibility for provincial disability benefits would be the greatest benefit of this provision.   I’ll post more a more detailed analysis in the near future.

3.  Implement a federal solution so that people who are deemed not to have contractual capacity are not denied access to the RDSP without an adult guardianship order.

2.  Do not collapse the RDSPs of people who lose their eligibility for the disability tax credit.

Many people are concerned with the implications of losing their disability tax credit eligibility, either for a short period or for the rest of their lives.  People with mental health issues, for example may recover from their health issue for a short or long period.  Recovery is seldom complete but it may be sufficient to lose the disability tax credit.  In either case, people who lose their eligibility as a result of an improvement in their condition were still earning disadvantaged in the past and may continue to be so in the future.

They shouldn’t be eligible for the Canada Disability Savings (Grant and Bond) program, but being able to maintain an RDSP to support their future financial security, irrespective of their disability tax credit status, would greatly benefit them and should remove some of the disincentive to opening RDSPs that they currently experience.

1.  Compress the timelines in the current design of the current plan

Many people have indicated that the plan is too extended for an average person with disabilities.  Using a life expectancy of 83 is unrealistic – the life expectancy of a person with (lifelong or adult onset) disabilities is well below 83.    Many people have also indicated that a 30 year savings plan, which results from the 10 year holdback period, is a psychological and sometime real life (for people with serious medical conditions) deterrent.

I would recommend the following.

• Reduce the life expectancy used in the LDAP formula to 65
• Reduce the holdback period to 5 years
• Require payments to begin at age 55.

There are numerous implications in doing this.  I will post more on it in the near future.

Bonus:

That the federal government enable authorized entities, such as the Public Guardian and Trustee to act as account holder of RDSPs until the age of 25 to facilitate transition planning.  Read the full report and all of the recommendations for better assisting the transition of children in care to adulthood.

As I put my brief to the federal government together I will add to this – note one area that I have omitted is a change in the withdrawal rules – I really haven’t thought it through yet.

If you have thoughts – please feel free to post them as a comment.

If you want to submit your comments directly, please forward them to:

Attn: RDSP Review, Department of Finance

Email: RDSP-REEI@fin.gc.ca or to the following address:

Mail:

L’Esplanade Laurier, 16th Floor, East Tower
140 O’Connor Street, Ottawa, Ontario  K1A 0G5

Fax: 613-943-5597

The closing date for comments is December 16, 2011.