The Ultimate Guide to the Disability Tax Credit and Registered Disability Savings Plan
There’s not a lot to love about having diabetes, but having access to the Disability Tax Credit (DTC) and Registered Disability Savings Account (RDSP) if you live in Canada is one of the best things. The DTC helps reduce the amount of income tax you pay and the RDSP is a retirement account for people who are approved for the DTC, and like a lot of government-run things, they can get confusing in a hurry. Unfortunately, a lot of people give up on the DTC and RDSP because it gets overwhelming, and they miss out on lots of free money and tax savings. It took me YEARS to figure this out all on my own, so I’m happy to share a step-by-step breakdown of everything you need to know in hopes you can avoid some of the headache!
Quick disclaimer: I’m not an accountant or other form of financial professional, this is just my experience and knowledge having navigated the DTC and RDSP for many years now. Reach out to your financial pros or the Canadian Revenue Agency (CRA) with any specific questions you have!
Disability Tax Credit
What is the DTC and Why Should I Apply?
The DTC is a certificate that gets put on file with the government and entitles you to a tax credit (aka money back) when you file your taxes. It lowers the amount of income tax you owe, recognizing that as a person with a disability life is more expensive.
Having the DTC also allows you to check off the “disability” boxes when you fill out your provincial and federal tax forms when you start a new job, meaning the amount of money you get before your employers starts taxing your income will be more, so there will be a bit less taken off each paycheck.
Who is eligible for the DTC?
People with Type 1 diabetes are automatically eligible under the “life-sustaining therapy” category. It does not matter whether you use a pump or insulin injections, everyone with Type 1 qualifies. Type 2 does not automatically qualify, you’d need to call the CRA to see if your case meets the requirements.
How much will I get back on my taxes with the DTC?
The amount of money you get back with the DTC when you file your taxes depends on how much you make and therefore owe in taxes, of course. In my experience, having the DTC is significant and usually results in several thousands of dollars (up to $8,000 one lucky year!) back in a tax refund, so I’d say it’s worth the administrative hassle of getting it. Which brings me to my next point…
How do I get the DTC?
To get a DTC added to your file, you need to fill out an application with the CRA. You can do it online via your MyCRA account or in a paper format, but since most people do things digitally these days I’m going to cover that version.
To apply online, you complete the form here, which involves answering some questions about your disability and the impact it has on your daily life.
Once you submit your section, you’ll get a reference number which you need to give to your doctor so they can fill out their part. I had my endocrinologist do it, but I believe a family doctor can also fill it out.
Your doctor will use the reference number you give them to fill out the doctor’s version of the form.
Your application will then be reviewed and you’ll be notified if you were accepted or denied. In my experience, the whole process takes about a month.
Once approved, you don’t need to do anything else with the DTC. When tax time rolls around, you can check off the box when filing that says you have a disability tax credit and that will be factored into how much you owe/get back.
Fun fact: Having a DTC entitles you to some other cool perks, like being about to get back the administrative account fees in many bank institutions (TD refunds my monthly account fee, for example) and being able to use the money in your RRSP to buy a home more than once, whereas most people can only use it one time with the first-time homebuyers plan. It helps to mention you have a DTC when doing a lot of financial things, so don’t be shy bringing it up!
Registered Disability Savings Plan
What is the RDSP?
The RDSP is similar to a Registered Retirement Savings Plan (RRSP) or Registered Education Savings Plan (RESP) in that it is a government savings account that provides tax breaks and/or benefits. With the RDSP, it’s a tax-sheltered, long-term investment account where you aren’t taxed on gains made with your investment until you start withdrawing money after age 60, and are also given a supplemental grant each year to help with your savings. This account can be held in addition to an RRSP or RESP, so you could have all three. The downside is that you can’t withdraw any money from the account before the age of 60 without losing all the grant money (the free money given by the government) and facing significant fines, similar to the RRSP, so whatever you put in there needs to stay put for a long time.
Sidenote: I spoke with an accountant and the money you add into an RDSP is not eligible to be claimed in your taxes like money added to an RRSP, so be sure to leave that out of your tax filing. For that reason, I only put in the amount needed to get the government match (more on that below) and then opt to use my RRSP for regular retirement investing to get the tax return.
Who is eligible for an RDSP?
Anyone who is eligible for the DTC is able to open an RDSP, however you still need to go through the steps to apply for and open up an RDSP. They don’t automatically set you up with one when you’re approved for the DTC.
Why should I apply for an RDSP?
In my experience, the RDSP is a game-changer and everyone in Canada with type 1 diabetes should take advantage and get one. You can put in any unlimited amount of your own money each year, up to a lifetime value of $200,000 before age 59. For each $1,000 you put in, you’ll get either $1,000, $2,000, or $3,000 in a grant (known as the Canadian Disability Savings Grant) depending on your household income. This is given automatically once you have the RDSP set up, you don’t have to do anything else besides add in your chunk of the money each year. Here’s the breakdown of what you can expect to get:
Amount of Canada disability savings grant when the beneficiary’s adjusted family net income is $106,717 or less:
on the first $500 contribution—$3 grant for every 1 dollar contributed, up to $1,500 a year
on the next $1,000 contribution—$2 grant for every 1 dollar contributed, up to $2,000 a year
Amount of Canada disability savings grant when the beneficiary’s adjusted family net income is more than $106,717:
on the first $1,000 contribution—$1 grant for every 1 dollar contributed, up to $1,000 a year
There is also an extra $1000 Canadian Disability Savings Bond you may be eligible for if you make less than $54,000 household income, which is also automatically given to you in addition to the grant if you qualify.
I spoke with a financial advisor once and based on my household income, she recommended just putting in $1,000 each year to get the $1,000 match that I was eligible for, and then using my RRSP for other savings. It might be worth asking a financial professional about how to maximize the free money in your RDSP if you’re not sure.
The other amazing thing about the RDSP is that they will back pay money you were eligible for before you opened the account. In my case, I was diagnosed with diabetes at age 10 but didn’t open my RDSP until I was 18, and when I set up the RDSP the first government payment included grant money and bonds I would have accumulated for the eight years before (aka it was a lot of money for an 18 year old!). I don’t know the ins and outs of how they calculate everything because I obviously wasn’t adding my own contribution money for those eight years, but I’m not complaining!
How do I get an RDSP set up?
On the government website there’s a lot of jargon and I think this is where people give up and throw in the towel, so I’m going to try and explain it as simply as possible. The account can either be opened by you if you’re over 18, or a parent/guardian can open it in your name if you’re below age 18. The next step is to contact a financial institution that offers RDSPs - this is NOT every bank institution, especially online ones. At the time when I set mine up (around 2016) only the big banks offered them, and I opened mine with TD Canada Trust. It was done on the spot for me, although it did take a few representatives before someone knew what the RDSP was since it’s not an account many people use.
When you go to the bank, be sure to bring the letter that shows you were approved for the Disability Tax Credit because you’ll need that, along with usual forms of ID. You’ll need to speak to someone in the self-directed investing group of whatever bank you use because the RDSP is a self-directed account vs. a savings account or other investment type.
How do I Invest my RDSP money?
This part is so, so key. You, yes you, yourself, need to invest the money you put in and the money the government gives you in order to maximize your RDSP. Do not just let the money sit there for 30 years as a savings account making zero interest! (it won’t have any interest built in because it’s not a savings account!).
The RDSP is a bit daunting because it’s an investment account that you manage instead of something someone else manages. So, you will need to pick the stocks or exchange traded funds (ETFs) that you want to invest in versus using buying a mutual fund or having a financial advisor do this for you. This was the scary part for me because I was barely 18 and had never made any big money decisions before and definitely never invested, and I was so worried about screwing it up. However, it was actually the best thing to happen to me because it forced me to learn about stocks and investing at a young age, which has served me well ever since. I read a few books and gave myself an imposed deadline, then made my stock choices online in their investing portal and I was off to the races!
If you’re overwhelmed, a fairly safe thing to do (coming from a non-investment pro, mind you) is to pick some ETFs that own a bunch of shares in a variety of companies and are automatically diversified (for example, if the tech market drops, the ETF also has shares in retail, industrials, etc.). Then, each year when you put in your money and get the government grant, just buy more shares in whatever ETFs you have and then forget about it for the year. Over time, this will grow your money without having to constantly buy and sell stocks like Monica Geller in that one episode of Friends where she’s unemployed. No “buy low, sell high” stress needed!
When and How do I Transfer Money into My RDSP?
This part drove me nuts for years because it was never straightforward and every person at the bank had a different answer, but I’ve figured it out and would love to spare you the headache. The best time to invest in your RDSP, if you have the funds available, is in January so you can get it off your plate early and not think about it the rest of the year. About two weeks later the grant money will be added into your account and you can go ahead and buy your new stocks for the year. The RDSP works on the calendar year instead of the RRSP March deadline, so you need to get your contributions in before December 31 to get the grant for that year. However, if you leave it to the last minute and add your funds at the end of December, you’ll still get your government match in January, don’t worry.
In terms of actually moving the money into your bank, it’s often difficult because the RDSP isn’t the same as other accounts, and it’s not usually possible to move money into the account online the way you would any other account. I used to have to go in person to the TD investing desk to ask them to move the money from my chequing account into the RDSP, and several times I got people who either a) did not know how to do it, or B) said it was done, but it wasn’t done correctly and the money didn’t move over. For that reason, always get a reference number and try to give at least a few weeks before the end-of-year deadline in case there’s an issue. You don’t want a clerical error costing you thousands in free money! I’ve now figured out the simplest way to do it at TD (and I’ve heard this should work at the other big banks), and the steps are as follows:
Have the money ready to transfer from a chequing account. It’s easiest if this is at the same place as your RDSP, but it could also be from another bank.
Sign into your bank app where the RDSP is held, then navigate to the contact page and call the bank from within the app, selecting the option for direct investing.
When you get through to someone, tell them you want to move money from your chequing to your RDSP.
They’ll do some steps on their end, and provide a reference number (write this down in case of issues!).
You should see the money in your RDSP account within 48 hours, with the government grant and/or bonds being added 1-3 weeks later. It will be in the account as cash until you purchase your stocks.
Closing Thoughts
Although it might seem confusing at first, getting the Disability Tax Credit and a Registered Disability Savings Account is something that is so worth your time! It saves me thousands every year in taxes, plus the RDSP is a forced retirement savings vehicle with added free money each year. So if you haven’t gotten started yet, do it today - your future self will thank you! Enjoy this one perk of having diabetes 🙂
