The situation
“We are parents of a 7-year-old child with a disability,” confides Camille*.
Camille and Jonathan* are de facto spouses and have lived together for almost 15 years.
A registered education savings plan (RESP) in their daughter’s name was opened at her birth by her grandmother. “But we see the fact that she may not be able to pursue higher education. We want to see what would be most beneficial for her. »
“We would like this RESP to potentially be transformed into an RDSP [régime enregistré d’épargne-invalidité] and put in our name, since the grandmother has difficulty keeping track of this placement,” specifies Camille.
The value of the RESP is around $5,000, she believes.
But both parents are swimming in uncertainty here.
“We are having difficulty finding clear information regarding the RDSP. Can we really change the RESP to an RDSP? Do we have to first have the RESP put in our name and then change it? »
Will they themselves be able to contribute to this possible RDSP? Should they instead favor their tax-free savings accounts (TFSA)?
Aged 37, Camille works in the cultural sector. She has a job that provides her with a salary of $40,000 per year, to which she adds income as an artist and self-employed worker which varies from $3,000 to $13,000, depending on the year.
At 41, Jonathan also works for himself in the artistic sector and holds a permanent job two days a week to ensure a stable income. He receives approximately $19,000 in salary and $20,000 in self-employed income.
“We have a standard of living that suits us, especially with flexibility that allows us to have medical appointments for our daughter,” notes Camille.
The approximately $600 in government benefits they receive each month are entirely devoted to services for their daughter.
“As for retirement, we each have a pension fund to which our employers contribute generously for the moment. » In proportion to their modest salaries, at least.
They live in Montreal in housing that costs them $1,500 per month, where they plan to live “as long as possible.”
In 2021, their little daughter was recognized as disabled since birth. This observation earned them retroactive financial assistance of around $30,000 – a sudden and unexpected jackpot.
“We really asked ourselves the question of how to use this money for her and we looked for a small chalet so that she could have moments of peace and quiet. Nature is good for him,” says the mother.
Camille and Jonathan don’t build castles in Spain.
“We simply hope not to become poorer despite the constantly increasing cost of living and our little room for maneuver, and we would like to be able to plan projects for ourselves and for the future of our child. »
Neither can save regularly because their income is too unpredictable and their daughter’s services are expensive.
“As rents and the cost of living increase, how can we ensure that our small savings are maximized? », asks Camille.
Whenever possible, she contributes to her TFSA, where she has accumulated approximately $14,600.
Jonathan “has no savings, but he contributes to our joint account, where we always keep around $2,000,” she adds.
“We wonder what the optimal investment options would be. We would like to travel a little and we want to keep a cushion in case we have repairs to do on our small chalet or if we have less independent income. »
NUMBERS
Camille, 37 years old
Employment income: $40,000
Independent income: from $3,000 to $13,000/year
Retirement plan with your employer
Current account: $11,000
RRSP: none
TFSA: $14,600
Jonathan, 41 years old
Employment income: $19,000
Retirement plan with your employer
RRSP: none
TFSA: none
Joint account: approximately $2,000 in reserve
Cottage
Value: approximately $150,000
Monthly mortgage payment: $442
Mortgage balance: $94,000
No other debt
The answer
Can I transfer from an RESP to an RDSP?
The simple answer is yes. But there are shapes.
Let’s first recall the principle. The registered disability savings plan aims to provide (very) long-term income to a person who qualifies for the federal tax credit for persons with disabilities.
If the beneficiary is a minor, the RDSP can be opened in his or her name by a legal parent.
In addition to the fact that the returns accumulate tax-free, its great advantage lies in the Canada Disability Savings Grant that the federal government will pay into it.
“We could contribute an amount of $1,500 in a year, for example, and be entitled to grants of $3,500,” emphasizes Stéphane Thibault, chartered professional accountant and senior tax advisor at Desjardins Wealth Management.
The maximum subsidy depends on family income, which must not exceed a ceiling adjusted each year. For the contribution year, the income considered is generally that of the second previous year.
“To be eligible for these enhanced subsidies in 2023, as a general rule, family income for 2021 must be less than $106,717,” indicates the advisor.
For the first $500 of contributions, the Canada Disability Savings Grant will then pay $3 per dollar contributed, or a maximum of $1,500. For the additional $1,000 in contributions, the government will add $2 per dollar contributed.
If family income exceeds this ceiling, the subsidy is limited to $1,000 for the first tranche of $1,000 contributed.
Contributions from all sources cannot exceed $200,000 for life and grants are capped at $70,000.
In the case of Camille and Jonathan, “given that their daughter’s disability was recognized retroactively at her birth, there is an accumulation of unused rights from previous years,” informs Stéphane Thibault. There is a possibility of catching up.”
The girl is 7 years old. Contributions of $10,500 starting this year would open the door to grants that could total $24,500 (7 x $3,500).
For each year caught up, the subsidy is calculated based on the corresponding family income. Contributions paid in the current year will be applied to unused rights, year by year, in descending order of subsidy rate.
However, unused rights are lost after 10 years. Those of the year of birth of the little girl will therefore evaporate in 2026, and so on for each subsequent year.
Transfer the RESP to an RDSP?
Among the situations that authorize the transfer of earnings from an RESP to an RDSP is the following: “The beneficiary has a severe and prolonged mental incapacity which, based on reasonable expectations, would prevent him or her from pursuing post-secondary education,” states the Government of Canada website.
“They are in a situation where the transfer from the RESP to the RDSP seems possible,” confirms Stéphane Thibault.
With certain constraints, however. The funds held in an RESP are divided into three categories: contributions made by contributors, subsidies added by the two levels of government, and finally the return made on these sums.
PHOTO ROBERT SKINNER, THE PRESS
Stéphane Thibault, chartered professional accountant and senior tax advisor at Desjardins Wealth Management
When you transfer from an RESP to the RDSP, it is only the yield accumulated in the RESP that is transferred. Grants go back to governments and contributions go back to the person who made them.
Stéphane Thibault, chartered professional accountant and senior tax advisor at Desjardins Wealth Management
The money paid by the grandmother into her granddaughter’s RESP would therefore be reimbursed to her.
If she wishes, she can then pay it into the child’s RDSP, with the written consent of the account holder, in this case Camille or Jonathan. This contribution would entitle you to the Canada Disability Savings Grant. However, the government will not pay a subsidy for the return transferred from the education savings plan.
To make the most of the RDSP grants, Camille and Jonathan will therefore have to contribute there too.
But because they have a low savings capacity, the question will arise for them: RDSP or TFSA?
RDSP or TFSA?
Camille and Jonathan “seem to have savings objectives that are more medium and short term than long term,” observes Stéphane Thibault. “We are in no way talking about putting money aside for their retirement, for example. We’re talking about putting money aside to travel, keep a little cushion, do work on the cottage, pay for services for their disabled daughter. In terms of investment horizon, this influences the vehicles that can be used. »
The TFSA, which allows withdrawals without tax impact, provides them with this flexibility.
“On the other hand, in terms of accessibility of sums, the RDSP is more restrictive. »
Withdrawals from the RDSP can be made at any time for the benefit of the beneficiary, but if grants were paid during the previous 10 years, they must be repaid.
“It is therefore really with a view to helping the disabled person in the longer term that we are going to deposit sums in the RDSP,” emphasizes Stéphane Thibault.
They could consider massively moving their current savings to the RDSP to recover all the subsidies that are sleeping quietly.
“But if a significant financial need arises in the coming years and they need a certain amount of capital, this money is not accessible to Camille and Jonathan,” observes the accountant.
Their current approach to putting money into the TFSA is possibly the most attractive because it offers flexibility that they seem to need.
Stéphane Thibault, chartered professional accountant and senior tax advisor at Desjardins Wealth Management
What type of investment?
Camille and Jonathan wonder what type of investment they should favor to optimize their meager savings.
Unfortunately, there is no clear answer here.
“The key is to look at how much they want to keep available in the short and medium term, how much they want to invest in the longer term for their daughter, how much they want to invest for retirement. This is what will dictate the amount they can invest in different types of vehicles. Then, based on their investor profiles, they will be able to invest in investments that will meet their objectives. »
* Although the case highlighted in this section is real, the first names used are fictitious.