From December 2008 to December 2010, Canadians opened 41,060 RDSP’s, which represents only 9% of the eligible population.
So why have the existing 91% of Canadians not accessed the RDSP?
Throughout the summer, we’ve been discussing the possible barriers to accessing the RDSP. But before we launch into the final barrier – it’s important to acknowledge that we’ve been talking A LOT about “barriers”, and maybe we should have named this series as “Top Ten Possible Adjustments” or “Top Ten Opportunities for Change” because we are really talking about tweaking the RDSP and making adjustments to an existing policy. Your survey comments have made us realize this when people have said: “I don’t think any changes are needed – we should be grateful to the Government for starting the RDSP!”
Still, less than 10% of the eligible population has accessed the RDSP and the majority of survey respondents have identified that the number one barrier to the RDSP is the 10-year rule. Families have told us: “10 years is too long to wait”, and that “ people with disabilities have different needs – most of us wont live as long and we need to access our savings earlier”.
So here we go:
The policy in the box:
- If a person receives grants or bonds from the government, they must wait 10 years after the last contribution in order to withdraw money from their RDSP account
- In other words – the RDSP is a (very) long-term savings plan
- Paul is 20 and has just opened an RDSP
- He wants to access the full grant or bond (and not return any funds to government) so he must wait 30 years from the time of making his first deposit before accessing his (or the government’s) contributions – 20 years of contributions plus 10 years of waiting for the holdback amount to diminish to 0.
- Paul must wait until he is 50 years of age to access his RDSP savings
- Paul is 20 and has just opened an RDSP
- He wants to access the full grant or bond (and not return any funds to government) so he must wait 30 years from the time of making his first deposit before accessing his (or the government’s) contributions – 20 years of contributions plus 10 years of waiting for the holdback amount to diminish to 0.
- Paul must wait until he is 50 years of age to access his RDSP savings
Why is there a 10-year rule?
It’s important for us to understand why this rule exists in the first place. There are two main reasons:
- To prevent tax “slippage”: a person could use the same money to get government contributions year after year. For example, Paul contributes $1,500 in 2008 and receives a matching $3,500 from the federal government. In 2009, he withdraws $1,500 from the RDSP and then re-deposits it. Paul gets another $3,500 from the federal government. In other words, he would receive $7,500 from the federal government for his $1,500 contribution. That would defeat the purpose of encouraging personal saving.
- To make the RDSP a long-term savings plan: The RDSP was not intended to act like a bank account, where a person could make contributions and withdrawals as needed. Nor was it intended to act like an income program, where federal contributions are considered an income supplement each year.
The question remains: Is it possible to achieve these two public policy goals while at the same time reducing the 10-Year rule?
We think so.
As we’ve discussed in previous blogs, there may be a need to call for parity or parallelism between the RRSP and the RDSP. People who have an RRSP are given an opportunity to withdraw money for real estate or educational purposes, tax-free. Could there not be something similar for the RDSP? For example, if someone wanted to buy a new home, or make an important medical equipment purchase could they make a special withdrawal from their RDSP and not be penalized? Perhaps there could be a maximum number of times one could make withdrawals in a lifetime and as well as a maximum withdrawal amount.
Some of you have suggested to decrease the 10-year rule to 5-years or 2-years. Recently Minister Flaherty did make some changes to this rule in the latest federal budget, by reducing the 10-year rule to 5 years if and only if, the beneficiary has 5 years or less to live. This is a step in the right direction and shows the willingness of the Canadian Government to make adjustments to the RDSP. However, as many of you pointed out in the survey – most of us don’t know what the future holds, and seems reasonable to be able to access saved funds when they’re needed most.