The Federal Government has introduced draft legislation for registered disability savings plans, first proposed in the 2007 budget. The plans will be operated similar to the existing registered education savings plans and are intended to help parents and others save for the long-term financial security of a child with severe disabilities.

The new plans will potentially be very good for low-income or middle-income families. For others, advisors should step back and look at all the alternatives, says Cynthia Kett, a principal with Stewart & Kett Financial Advisors Inc. in Toronto.

For instance, Kett notes, there is a lifetime limit of $200,000 on amounts that can be contributed to an RDSP, and contributions may be made only up to the end of the year in which the beneficiary turns 59. For older parents doing estate planning to provide for an adult child with disabilities, these conditions may prove too restrictive, she says. Most high net-worth clients will probably prefer to use a discretionary trust, which gives them more flexibility in providing for disabled children, Kett says.

Such trusts — at least, in Ontario — allow funds to be distributed to beneficiaries without affecting their right to provincial disability support payments. The federal government’s budget documents acknowledged the Expert Panel on Financial Security for Children with Severe Disabilities had advised that for the RDSP program to be effective, RDSP assets should not disqualify a plan beneficiary from receiving provincial or territorial income support provided to persons with disabilities. But there’s no indication at this point whether the provinces will claw back benefits from RDSPs by reducing their provincial disability income supports accordingly.

Along with the RDSPs, the feds also plan to introduce a Canada disability savings grant, through which it will match contributions to an RDSP at rates of 100%, 200% or 300%, depending on family income and the amount contributed. For family net incomes up to $74,357 (in 2007 dollars) the matching grant will be 300% on the first $500 contributed and 200% on the next $1,000 each year. For family incomes over $74,357, the matching grant will be 100% on the first $1,000 contributed in a year.

Lower-income families may receive Canada disability savings bonds of up to $1,000 paid annually to the RDSPs of low- and modest-income families. The CDSBs will not be contingent on contributions to an RDSP. There will be a lifetime limit of $20,000 on CDSBs paid in respect of an RDSP beneficiary. The RDSP beneficiary will be eligible to receive CDSBs until the end of the year in which she or he attains 49 years of age.

Payments from an RDSP will have to begin by the end of the year in which the beneficiary turns 60 and will be subject to a maximum limit determined by the life expectancy of the beneficiary and the fair market value of the property in the plan.

The federal government has asked for comments in writing on its proposals and it plans to introduce legislation to implement its proposals. An official in the Department of Finance says there are no set timelines for implementation. The budget documents suggest financial institutions should be able to offer the plans “as soon as possible in 2008.”

Generally, any person eligible for the disability tax credit and resident in Canada can be named as a beneficiary of an RDSP. Contributions to the plans will not be tax-deductible, but investment income in the plans will accrue tax-free and will be taxable in the hands of the beneficiary when it is paid out.

Unlike an RESP, there will be no restrictions on who can contribute to these plans — parents, grandparents, friends, and so on — but contributors will not be able to withdraw their contributions. Kett says that raises the issue of what happens to the funds in an RDSP if the beneficiary dies and there is no will or no remaining family members to inherit the funds. IE