Registered Disability Savings Plan (RDSP)
What are the lifetime max grants for RDSP?
The lifetime maximum amount of government grants that can be received under a Registered Disability Savings Plan (RDSP) is $70,000 through the Canada Disability Savings Grant (CDSG).
The government matches contributions to an RDSP based on the beneficiary's family income and the amount contributed. Depending on the income level, the government can contribute between 100% to 300% of the amount deposited yearly, with an annual maximum of $3,500 in CDSG. However, this is capped at the lifetime limit of $70,000.
This is separate from the Canada Disability Savings Bond (CDSB), which provides additional funds to low-income individuals without needing contributions, with a lifetime maximum of $20,000.
Is there an income limit to qualify for the RDSP grant?
There is no income limit to qualify for the Canada Disability Savings Grant (CDSG) under an RDSP. However, the amount of the government grant you receive is based on your family income.
Here's how it works:
For families with a net income of $106,717 or less (2023):
The government will match:
300% on the first $500 contributed (up to $1,500)
200% on the next $1,000 contributed (up to $2,000)
This means that if your income is within this range, you can receive a maximum of $3,500 per year in grants.
For families with net income over $106,717 (2023):
The government will match 100% on the first $1,000 contributed, providing up to $1,000 annually.
The lifetime maximum grant remains $70,000, and you can receive the grant until the year the beneficiary turns 49.
What is the maximum contribution lifetime to an RDSP?
The lifetime maximum contribution limit to a Registered Disability Savings Plan (RDSP) is $200,000.
This amount includes contributions from family members, friends, or the beneficiary. Still, it does not include the Canada Disability Savings Grant (CDSG) or the Canada Disability Savings Bond (CDSB), as these are government contributions.
There is no annual contribution limit, but you cannot exceed the lifetime cap of $200,000. Contributions can be made until the beneficiary turns 59 at the end of the year.
What are the complexities of owning an RDSP as a U.S. citizen?
Owning a Registered Disability Savings Plan (RDSP) as a U.S. citizen or U.S. person (including dual citizens or U.S. residents) introduces several complexities related to tax reporting, compliance with U.S. tax laws, and potential tax implications. Here are the key challenges:
- U.S. Tax Reporting
The U.S. requires its citizens and residents to report worldwide income, including income from foreign accounts such as RDSPs, which complicates ownership.
Unlike Canada, the U.S. government does not recognize the RDSP as a tax-deferred vehicle. Therefore, any income (interest, dividends, or capital gains) earned within the RDSP is considered taxable annually in the U.S., even though it may grow tax-free in Canada.
You may need to file the following forms:
Form 3520: Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. Contributions and distributions must be reported here since the U.S. treats an RDSP as a foreign trust.
Form 3520-A: Information Return of Foreign Trust With a U.S. Owner. The RDSP trustee must file this, but the beneficiary may be required to do so if the trustee does not.
FBAR (FinCEN Form 114): If the aggregate value of your foreign financial accounts exceeds $10,000 at any time during the year, you must report the RDSP account balance.
Form 8938: Statement of Specified Foreign Financial Assets, required under FATCA (Foreign Account Tax Compliance Act) if the value of your foreign financial assets exceeds certain thresholds (e.g., $200,000 for single filers living abroad).
- Double Taxation
Income generated within the RDSP: Although Canada allows tax-deferred growth on contributions and grants, the U.S. taxes this income. This could result in double taxation if you withdraw funds from the RDSP and pay Canadian taxes on the withdrawals.
Grants and bonds: Any Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs) received could also be treated as taxable income by the U.S., even though they are not taxed by Canada until withdrawn.
- Tax Treaty Limitations
The Canada-U.S. Tax Treaty does not explicitly address RDSPs, unlike other registered accounts (e.g., RRSPs), which enjoy specific deferral provisions. This makes RDSPs more challenging to manage for U.S. tax purposes.
- Penalties for Non-compliance
Failing to report RDSP contributions or income can lead to severe penalties. For example:
Non-filing of Form 3520 or Form 3520-A can result in penalties starting at $10,000 annually.
FBAR violations can result in significant financial penalties if you don't report foreign accounts.
- Loss of U.S. Benefits
Owning an RDSP could impact your eligibility for certain U.S. benefits (e.g., Medicaid, Supplemental Security Income), as the account may be treated as an asset.
Possible Solutions:
Please seek professional help: U.S. citizens or residents with RDSPs should work with a cross-border tax expert who understands U.S. and Canadian tax laws.
Trusteeship in Canada: Some individuals may designate a non-U.S. person as the trustee of the RDSP to help simplify reporting, but more is needed to eliminate U.S. tax obligations.
These complexities require U.S. citizens considering or holding an RDSP to carefully plan and manage the account in compliance with U.S. and Canadian tax regulations.
