People with disabilities and medical conditions receive income from a variety of sources: employment, long term disability plans, legal settlements, trusts, Canada Pension Plan – Disability, provincial income benefits for people with disabilities and Old Age Security and Guaranteed Income Supplement. When it comes to receiving income from or saving in an RDSP, most people’s main concern lies with how their provincial income benefits and, then later, their federal seniors benefits will be affected.
a) Provincial Disability Income Programs
Saving in an RDSP doesn’t affect provincial disability income benefits, no matter what province or territory that you live in.
Each province provides income benefits for people with disabilities (e.g. BC Disability Benefits, Ontario Disability Support Program, Assured Income for the Severely Handicapped – Alberta). These programs are generally considered “payers of last resort”. In other words, if people have other income sources they must utilize that income first.
Because these programs are the primary income sources for many people with disabilities, knowing that an RDSP will not reduce their benefits is of critical importance.
Receiving income from an RDSP has been deemed exempt by disability income programs in MOST provinces.
In those provinces where it is exempt, the Beneficiary can receive any amount from their RDSP, and use it in any way they like, without reducing their income or benefits.
Quebec, New Brunswick and Prince Edward Island have said that benefits won’t be affected until monthly income exceeds a certain amount. (In New Brunswick, it is $800 per month; in Quebec, $300 per month; and in PEI, it is an amount that brings the Beneficiary’s income to the low income levels as defined by the National Council of Welfare.)
Remember that when a person turns 65, they go off of provincial disability benefits and on to the federal government programs for seniors: Old Age Security and Guaranteed Income Supplement.
b) Federal Implications
Once a beneficiary turns 65, they will cease to be eligible for provincial disability income benefits and will become eligible to receive the federal senior’s benefits: Old Age Security, Guaranteed Income Supplement, and/or the Canadian Pension Plan.
People are required to repay Old Age Security once their taxable income reaches $66,335. They must repay an amount equal to 15% of taxable income above $66,335.
People can have an RDSP and receive funds from an RDSP without reducing their Guaranteed Income Supplement. This is particularly significant for GIS, where income is normally deducted at 50% until the GIS benefit is zero.
None of people’s Canada Pension Plan, Canada Pension Plan – Disability and GST/PST benefits are reduced by having or receiving funds from an RDSP.
c) Taxation of Payments
All payments from RDSPs are made up of three parts: personal contributions, investment income and government contributions. When a Beneficiary withdraws a payment from an RDSP, the portion which consists of personal contributions will not be taxed (excepting for contributions through an RRSP/RRIF Rollover), but the portions which are made up of federal contributions (Grant and Bond), investment income and any rollover amounts will be taxed in the hands of the Beneficiary. The amount of tax payable will vary depending on the Beneficiary’s income.