A Registered Disability Savings Plan benefits from special tax rules and is set up as a fund for the benefit of someone with a disability. The Canada Revenue Agency has indicated that people are eligible to be a beneficiary of an RDSP if they are eligible for the Disability Tax Credit under the Income Tax Act.
An RDSP is essentially an investment account and can be set up at many traditional financial institutions. The account can be opened by the beneficiary if he is over the age of 18 or by a parent, guardian, or legal tutor. The beneficiary must be a resident of Canada when the plan is created and under the age of 60. Once set up, the plan can include investments in stocks, bonds, and mutual funds or other types of investments. Anyone can contribute to the plan as long as the beneficiary gives written permission.
While the contributions to the plan are not tax-deductible, the income generated by the investments is not taxed until it is paid out to the beneficiary. If the beneficiary is very young, this can be a substantial advantage. Deferring the taxes over time allows the invested amount to grow faster, much like with the better-known Registered Education Savings Plan.
Another important advantage is the taxation of the withdrawals from the plan. The capital that was contributed can be withdrawn tax-free, and the income that is withdrawn is taxed in the hands of the beneficiary. If the beneficiary has a lower tax rate than the contributor, which is likely for those with severe disabilities, there is a direct tax savings. As an accountant, you play a crucial role in explaining the tax advantages of an RDSP to your clients.