DISABILITY & Estate Planning

RDSP (Registered Disability Savings Plan)

The Registered Disability Savings Plan (RDSP) is a powerful long-term savings plan designed to help Canadians with disabilities and their families save for the future. The eligibility criteria are very specific and are set by the Canada Revenue Agency (CRA).

To be eligible to be the beneficiary of an RDSP, an individual must meet all of the following criteria:

Be eligible for the Disability Tax Credit (DTC). This is the most crucial requirement. The DTC is a non-refundable tax credit that recognizes the additional costs of living with a severe and prolonged impairment. You must have an approved Form T2201, Disability Tax Credit Certificate, on file with the CRA.
Have a Social Insurance Number (SIN).
Be a resident of Canada when the plan is opened.
Be under the age of 60. The plan must be opened before the end of the calendar year in which the beneficiary turns 59.

Key Points About Eligibility

Disability Tax Credit (DTC) is the Gateway: Without an approved DTC application, you cannot open an RDSP. The DTC application must be completed by a medical practitioner and submitted to the CRA for approval.
Age Matters for Government Contributions: While you can open an RDSP until you're 59, the federal government's generous matching contributions—the Canada Disability Savings Grant (CDSG) and the Canada Disability Savings Bond (CDSB)—are only available until the end of the year the beneficiary turns 49.
Who can be a Plan Holder? The "plan holder" is the person who opens and manages the RDSP.
- If the beneficiary is an adult and has the capacity to enter into a contract, they can be their own plan holder.
- If the beneficiary is a minor, the plan holder is typically a legal parent or guardian.
- If an adult beneficiary lacks contractual capacity, a legal representative, a parent, a spouse, a common-law partner, or a qualifying family member may be able to open and manage the plan on their behalf.

Summary of RDSP Benefits

The reason RDSP eligibility is so sought after is because of the significant government incentives:

Canada Disability Savings Grant (CDSG): This is a matching grant where the government contributes to the plan based on the amount of personal contributions and family income. It can be up to $3,500 per year, with a lifetime maximum of $70,000.
Canada Disability Savings Bond (CDSB): This is a grant for low- and modest-income individuals that is paid into the RDSP without any personal contributions being required. It can be up to $1,000 per year, with a lifetime maximum of $20,000.

For a person with a disability, a properly used RDSP can dramatically increase their long-term financial security, making it a critical program to understand and utilize if eligible.

Henson Trust

While both an RDSP and a Henson trust are powerful tools, they serve different, complementary purposes. The ideal strategy for many families is to set up both a Henson trust and an RDSP.

Here's a breakdown of why you would set up a Henson trust even if a person has an RDSP:

1. The RDSP Has a Lifetime Contribution Limit

The RDSP has a lifetime contribution limit of $200,000. While this is a significant amount, a family might want to leave a larger inheritance to a disabled family member.

Complementary Use: If a family's estate is large and they wish to leave more than $200,000 for their disabled loved one, the excess amount can be left to a Henson trust. This ensures that the entire inheritance is managed for the beneficiary's benefit without affecting their eligibility for government assistance programs.
Larger Inheritance: An inheritance from an RRSP, RRIF, or other assets that exceeds the $200,000 RDSP limit can be transferred to the trust, allowing the assets to be fully invested without disqualifying the beneficiary from provincial disability benefits.

2. The Henson Trust Protects Government Benefits from the Beneficiary's Other Assets

The core purpose of a Henson trust is to protect the beneficiary's eligibility for provincial disability benefits, such as the Ontario Disability Support Program (ODSP) or its equivalent in other provinces. These programs have strict asset limits.

How it Works: In a Henson trust, the beneficiary has no legal claim to the assets. The trustee has "absolute discretion" to distribute funds for the beneficiary's benefit. Because the assets are not considered to be "owned" by the beneficiary, they do not count against the asset limits of provincial assistance programs.
The RDSP is also exempt, but the Henson Trust provides flexibility: While the assets in an RDSP are generally exempt from provincial asset tests, a Henson trust provides an additional layer of protection and control for assets that would not otherwise qualify for the RDSP's tax-advantaged status.

3. A Henson Trust Offers Flexibility and Control

The RDSP is a highly regulated plan with specific rules regarding withdrawals, especially concerning the government grants and bonds.

Withdrawal Rules: If a withdrawal is made from an RDSP within 10 years of receiving government grants or bonds, a portion of those funds must be repaid. This "assistance holdback amount" can make the RDSP unsuitable for short-term or emergency financial needs.
Short-Term Needs: A Henson trust can be used to provide for a disabled person's short-term needs without triggering the clawback rules of the RDSP. The trustee can make payments for things like vacations, medical expenses not covered by government programs, or other quality-of-life improvements. While these distributions may be considered income and impact income-tested benefits, the trustee has the discretion to manage the distributions strategically.

4. Estate Planning and Post-Mortem Control

A Henson trust provides greater flexibility in estate planning after the beneficiary's death.

Residual Beneficiaries: In a will, a Henson trust can specify who receives any remaining assets after the disabled beneficiary has passed away. This is crucial for beneficiaries who are not mentally capable of writing a will.
RDSP Assets: In contrast, assets remaining in an RDSP after the beneficiary's death become part of their estate and will be distributed according to their will or, if they have no will, by provincial intestacy laws. This may not align with the family's wishes for where the remaining funds should go.

In conclusion, an RDSP is an excellent vehicle for taking advantage of powerful government grants to build a retirement nest egg. A Henson trust is an essential estate planning tool for protecting larger inheritances and assets to ensure that a person with a disability continues to be eligible for crucial provincial assistance programs. For comprehensive financial security, using both is often the best strategy.

The Ideal Scenario: A Testamentary Henson Trust

The most straightforward and effective way to use a Henson trust is for the person leaving the inheritance (the testator) to include a provision in their will that directs the assets to a Henson trust upon their death.

Beneficiary has no claim: In this scenario, the disabled person never legally receives the assets. The inheritance goes directly into the trust, and the trustee has absolute discretion over its use. Since the beneficiary has no "entitlement" or legal claim to the assets, they do not count against the asset limits of provincial disability programs like ODSP. This is the "pure" form of a Henson trust.

The Problem with Post-Inheritance Trusts

If a person receives an inheritance directly into their bank account or name, the funds become their personal asset. At that point, the provincial government may count those funds against the asset limits for disability benefits.

The "Self-Settled" Trust Problem: A trust set up by the beneficiary with their own money is called a "self-settled trust." In most jurisdictions and for most government programs, assets in a self-settled trust are still considered to be owned by the beneficiary. Therefore, this type of trust would not protect the funds from the asset test.

The "After-the-Fact" Solution: The Special-Purpose Trust

Fortunately, some provinces have specific provisions that allow for a limited amount of an inheritance to be placed into a special-purpose trust after it has been received, to protect a person's eligibility.

Ontario Example (ODSP): In Ontario, a recipient of the Ontario Disability Support Program (ODSP) can place up to $100,000 from a direct inheritance or life insurance payout into a trust that they themselves establish.
- Time Limit: There is a specific time limit to do this, usually within six months of receiving the inheritance.
- Limit: The $100,000 limit is a total limit and also includes the cash surrender value of any life insurance policies they own.
- Conditions: The beneficiary must be mentally capable of setting up the trust, or have a legal substitute decision-maker (e.g., a power of attorney) who can do so on their behalf.

Important Caveats:

Limited Amount: This after-the-fact trust is capped at a specific amount ($100,000 in Ontario), which may be insufficient if the inheritance is larger. Any amount over this limit would count against the asset test and could cause the beneficiary to lose their benefits.
Provincial Specificity: The rules for these types of trusts vary by province. What is allowed in Ontario may not be allowed in another province.
The "Pure" Henson Trust is Better: An after-the-fact trust is a band-aid solution. It is far better to have a well-drafted Henson trust in a will to begin with. This ensures that the entire inheritance, no matter how large, is protected and there is no risk of the beneficiary's benefits being interrupted.

Summary

While it is possible to set up a trust after an inheritance has been received, it is a much more complex process with significant limitations. It is always recommended that an individual with a disability who is receiving or may receive provincial benefits should have a testamentary Henson trust set up in a loved one's will to ensure the full inheritance is protected and their benefits remain secure.

Does a disabled person need to be registered with the Disability Tax Credit (DTC) for a family member to set up a Henson Trust?

A person with a disability does not need to be registered with the Disability Tax Credit (DTC) for a family member to set up a Henson Trust.

Here is a breakdown of the key points:

Purpose of a Henson Trust: The primary purpose of a Henson Trust is to hold assets for a person with a disability without jeopardizing their eligibility for provincial government disability benefits, such as the Ontario Disability Support Program (ODSP). These benefits are typically "asset-tested," and a direct inheritance or gift could make the person ineligible. A properly structured Henson Trust ensures that the trust assets are not considered the beneficiary's personal assets.
DTC and Henson Trusts: The Disability Tax Credit (DTC) is a separate federal tax credit. While being eligible for the DTC is not a requirement to set up a Henson Trust, it can offer significant tax advantages to the trust.
Qualified Disability Trust (QDT): A Henson Trust can be structured to qualify as a "Qualified Disability Trust" (QDT), which allows the trust's income to be taxed at lower, graduated tax rates instead of the highest marginal rate. To be a QDT, a Henson Trust must meet certain criteria, and one of the key requirements is that the beneficiary must be eligible for the DTC.

In summary, a family member can set up a Henson Trust for a disabled person regardless of their DTC status. However, if the beneficiary is eligible for the DTC, the family can choose to have the trust also be a Qualified Disability Trust to benefit from tax savings.

When a disabled person is registered for the Disability Tax Credit (DTC), a Henson Trust can be structured to qualify as a Qualified Disability Trust (QDT).

This provides significant tax advantages that would not be available otherwise.

Here are the key tax advantages:

1. Graduated Tax Rates

This is the most important advantage. While most trusts in Canada are taxed at the highest marginal tax rate (regardless of the amount of income), a QDT is an exception. It is taxed at the same graduated personal income tax rates as an individual.

Standard Trust Taxation: A typical trust pays a flat tax at the highest federal and provincial rate, which can be over 50%.
QDT Taxation: A QDT benefits from the lower tax brackets, just like a person with a low to moderate income. This means a much smaller portion of the trust's income is paid in taxes, allowing the assets to grow more quickly and providing more financial support for the disabled beneficiary.

This is particularly beneficial for income that the trustee chooses to retain within the trust rather than distributing to the beneficiary.

2. Income Splitting Opportunities

The QDT status allows for a degree of income splitting. The trustee can strategically decide whether to pay out income to the beneficiary or retain it within the trust.

If the beneficiary has a low income: The trustee can pay out income from the trust to the beneficiary. This income will be taxed in the beneficiary's hands, likely at a very low or zero tax rate, as they can use their own personal tax credits and exemptions.
If the beneficiary has other sources of income: The trustee can retain the income within the trust. Because the QDT is taxed at graduated rates, this income will be taxed at a lower rate than if the trust were subject to the highest marginal rate. This provides the trustee with the flexibility to manage the trust's income in the most tax-efficient way possible.

Important Conditions to Qualify as a QDT

For a Henson Trust to be a QDT and receive these tax benefits, it must meet specific criteria:

Testamentary Trust: It must be a testamentary trust, meaning it was created through a will and arose as a result of a person's death. Trusts created during the person's lifetime (inter vivos trusts) do not qualify.
DTC Eligibility: The beneficiary must be eligible for the Disability Tax Credit.
Joint Election: The trust and the beneficiary must make a joint election with the Canada Revenue Agency (CRA) on the trust's annual tax return (Form T3QDT) to designate it as a QDT.
One QDT per Beneficiary: A person with a disability can only be the beneficiary of one QDT at a time. If multiple family members set up trusts for the same person in their wills, only one of them can be elected as the QDT.

The "Recovery Tax"

It is important to note that a "recovery tax" may be applied to a QDT if certain conditions are no longer met. This is essentially a claw-back of the tax savings. The recovery tax can be triggered if:

A capital distribution is made to a beneficiary who is not an electing beneficiary of the QDT.
The trust ceases to be a resident of Canada.
The beneficiary is no longer DTC-eligible.

For these reasons, proper legal and financial advice is crucial when setting up and administering a Henson Trust that is also a QDT.

Servicing clients in the areas of wealth, estate, retirement, and tax strategies in the following cities:

Disability & Estate Planning in Fort Erie, Ontario

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To discuss further or for questions of clarification please contact Mark Albert, CEA, EPC at either:

416-659-6655 or markalbertpfs@gmail.com.

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What is an RDSP?

A Registered Disability Savings Plan (RDSP) is a long-term savings plan in Canada designed to help individuals who are eligible for the Disability Tax Credit (DTC) save for their future financial security.

The plan offers unique tax advantages and is supplemented by generous government grants and bonds.

1. Taxation on Contributions

Not Tax-Deductible: This is a key point of difference from an RRSP. Contributions made to an RDSP by the beneficiary, family, or friends are NOT tax-deductible. You use after-tax dollars to contribute.
No Annual Limit, but a Lifetime Limit: There is no annual contribution limit, but there is a lifetime contribution limit of $200,000. This limit does not include government grants and bonds or investment growth.
Tax-Free Upon Withdrawal: The original contributions you made to the RDSP are not taxed when they are eventually withdrawn by the beneficiary.

2. Taxation on Investment Growth

Tax-Deferred Growth: This is a major benefit of the RDSP. Any investment income, including interest, dividends, and capital gains, grows on a tax-deferred basis while the money remains in the plan. This allows your investments to compound faster without being reduced by annual taxes.

3. Taxation on Withdrawals (Payments)

This is the most complex part of RDSP taxation. When the beneficiary takes money out of the plan (called a Disability Assistance Payment or DAP), a portion of the withdrawal may be taxable.

The withdrawal is composed of different parts, each with its own tax treatment:

Contributions: The original contributions are not taxable.
Grants and Bonds: The Canada Disability Savings Grants (CDSG) and Canada Disability Savings Bonds (CDSB) are fully taxable as income for the beneficiary when withdrawn.
Investment Earnings: The investment income that has accumulated in the plan is also fully taxable as income for the beneficiary when withdrawn.

Your financial institution will automatically calculate and withhold tax on the taxable portion of the withdrawal before giving you the funds. The beneficiary will receive a T4A slip to report this income on their tax return. The actual amount of tax owed will depend on the beneficiary's personal tax situation and available tax credits.

4. The 10-Year Repayment Rule

A crucial rule to understand is the "Proportional Repayment Rule" (also known as the 10-Year Rule). The RDSP is intended for long-term savings. If you make a withdrawal from the plan, or if the plan is terminated for any reason, a portion of the grants and bonds received in the 10 years prior to the withdrawal must be repaid to the government.

The Rule: For every $1 withdrawn from the plan, $3 of grants and bonds paid in the last 10 years must be repaid, up to the total amount of the grants and bonds paid in that period.
Exceptions: This rule is in place until the beneficiary is 60 years old. There are exceptions, such as if a beneficiary has a shortened life expectancy.

5. Impact on Other Benefits

A significant advantage of the RDSP is that the money in the plan generally does not affect eligibility for other federal or provincial disability benefits. For example, in many provinces, the funds in an RDSP are exempt as an asset when determining a person's eligibility for social assistance. This is a major factor in making the RDSP an effective savings vehicle for people with disabilities.

Understanding the Disability Tax Credit (DTC)

The Disability Tax Credit (DTC) is a non-refundable tax credit that helps Canadians with impairments—and the family members who support them—reduce their income tax. Because it is non-refundable, it can lower your tax bill to zero, but it won't pay out a refund if you don't owe any tax.

To qualify, a medical practitioner must certify that you have a severe and prolonged impairment. This means the condition must have lasted (or be expected to last) at least 12 months and significantly restricts your ability to perform basic daily activities—such as walking, dressing, or mental functions—at least 90% of the time.

For the 2024 and 2025 tax years, the federal disability amount is approximately $10,000 for adults, with an additional supplement for children under 18. This results in a real-world federal tax reduction of about $1,500 for adults and over $2,400 for children, though the exact impact depends on your specific tax situation.

The DTC is often called a "gateway" credit because it is required to access other major benefits. Approved individuals can open a Registered Disability Savings Plan (RDSP) to receive government grants, and low-income adults may qualify for the new Canada Disability Benefit payments.

To apply, you and your doctor must complete Form T2201. If your disability has existed for several years, you can ask the CRA to back-file your application for up to 10 years, which may result in a significant refund of taxes you already paid in the past.

To discuss further or for questions of clarification please contact Mark Albert, CEA, EPC at either:

416-659-6655 or markalbertpfs@gmail.com.

For educational videos, please subscribe to MONEY with MARK ALBERT™

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