Planning director outlines advantages for Canadians with disabilities, or their families, in advisors optimizing use of RDSPs
According to Statistics Canada, nearly one third of the total Canadian population has a disability. Even when we bucket out younger demographics, the numbers are staggering. 24 per cent of working age adults had a disability in 2022, and 20 per cent of youth were also living with disabilities. Those numbers had risen significantly in the five years since the survey was last completed. Despite a large and growing proportion of the Canadian population living with disabilities, one of the most important financial tools available to this population is being underutilized.
Registered Disability Savings Plans (RDSPs) are available to anybody who qualifies for the Disability Tax Credit (DTC), yet for myriad reasons only around 36 per cent of those who qualify for these plans have opened them. Sara Kinnear, Director of Tax & Estate Planning at IG Wealth Management explained why the uptake is so low, what advantages RDSPs can give to Canadians with disabilities, and how advisors can best optimize their usage for eligible clients.
“It's basically an awareness issue, I think it's hard to identify the pool of people, people who are eligible. But again, from an advisor point of view, if you you’re looking at a client's tax return and you see that they're claiming a disability tax credit, either for themselves or for dependents, then that's a trigger. You should be asking if that person has an RDSP and if they don't, should we think about setting one up.”
Kinnear outlined an admittedly byzantine process that Canadians with disabilities have to go through to be eligible for the DTC and, therefore, the RDSP. Many may not be aware of the DTC, or they may not be paying federal income tax anyways and therefore wouldn’t bother signing up for this non-refundable tax credit. Eligibility requires a form from a qualified medical professional who has to submit the form to the CRA on the disabled person’s behalf, which might involve fees, rejections, and an administrative burden that puts people off. If the CRA denies the credit, there’s an appeals process that can be taxing and costly.
Even those who have the DTC may not have opened an RDSP, or understand some of its key advantages. Kinnear explains that some of the CRA’s automatic notifications go out to eligible Canadians over a certain age bracket, when some of the advantages of long-term savings have already been missed. Some think that they need to be contributing to RDSPs themselves, while they could actually receive RDSP contributions from friends and family. RDSPs can also hold funds from the Canada Disability Savings Bond for eligible individuals. Disability grants, too, can flow into the account and accumulate there to provide the disabled person with future income. Given those advantages, Kinnear sees familiarity with RDSPs as a useful tool for advisors.
That is not to say setting up RDSPs is always a simple process for advisors. In cases of disabled adults with mental capacity, the identification of an eligible holder is straightforward. For those who are either minors or lack full mental capacity, there are more complex considerations. Some may have court-appointed financial guardians who can hold the plan, but others may not. That could mean the advisor has to engage in the process of finding a financial guardian or determining who can hold the RDSP for the disabled person.
RDSPs can be especially helpful when established early in the life of a child with a disability. Advisors’ clients who have children with disabilities may not be aware of RDSPs and their advantages. Kinnear notes the opportunity for advisors to set these up, and even to extend the parental control of the plan until that child reaches a later age — provided they have mental capacity.
As the number of Canadians with disabilities continues to rise, and as families enter the intergenerational wealth transfer, Kinnear argues that there is a litany of reasons for advisors to be introducing these plans and accounts to their clients.
“This is a significant portion of the population, and we have to address their needs, that's our job as financial advisors, is to address the needs of all of our clients,” Kinnear says. “You can accumulate significant wealth in an RDSP with not a lot of money down, simply by maximizing grants and bonds over time. So it is a very useful tool to plan for the long-term security of a person with disabilities, and you shouldn't leave it off the table.”
