Q. I am 46 years old and live in Edmonton. I currently have $10,000 saved for emergencies and no money invested. Three years ago, I was involved in a car crash and suffered a brain injury. I was awarded some money from the insurance company just this past year and I was required to take the money as a monthly annuity until age 65.
Right now, my income includes $2,600 per month (at 55 it increases to $2,850), all tax free. Plus, I get $650 per month through Canada Pension Plan disability benefits for a total of $3,250 monthly. My monthly expenses total $1,800, meaning I can save roughly $1,450 per month to invest every month.
Also, if I can earn the roughly $7,500 per year that is allowed while on CPP disability, then I will have another $625 per month to invest. I would also like to take a vacation each year but that doesn’t have to be more than $2,500 total. This annuity money runs out when I reach 65 years of age. What can I do to ensure I won’t be cash strapped at that time? Should I consider saving in tax-free savings accounts (TFSAs), registered retirement savings plans (RRSPs) or both?
I am also in the process of applying for the disability tax credit (DTC) so hopefully I can utilize the registered disability savings plan (RDSP) and grants. Any help on this would be appreciated. —Best, Anita
FP Answers: The disability tax credit, if approved, will be helpful for your situation, Anita. The DTC is available for individuals with a severe or prolonged physical or mental impairment. Because it is a non-refundable tax credit, and your income is mostly tax-free, you may not save any tax. But it is the gateway to the registered disability savings plan (RDSP) you mentioned.
To qualify, you would need to have restrictions that prevent you from performing a substantial portion of daily activities. Usually, the condition must have lasted at least 12 months or be expected to last at least that long, with two or more significant limitations if a single limitation does not justify the impairment. The application process involves medical certification from a licensed practitioner who can assess the severity of the disability.
The RDSP is a registered account designed to help eligible individuals benefit from long-term tax-deferred growth, as well as government grants and bonds that can supplement investment growth. You can contribute to the account until age 59, and withdrawals generally begin by age 60.
It would be a good time to open the account if you qualify for the DTC, as you have a limited number of years to benefit from government grants, which are only available until age 49. You may be eligible for up to $3,500 in grants and $1,000 in bonds annually, as well as retroactive grants and bonds available going back up to 10 years that could total tens of thousands of dollars.
Outside of the RDSP, which should be your first choice, you should consider a TFSA. If you have lived in Canada every year since 2009, you could have TFSA contribution room of $109,000 if you have never contributed nor withdrawn from a TFSA. Investment growth, income and withdrawals are not taxed, and withdrawn amounts can be recontributed in future years once new contribution room is available.
RRSPs are generally more suitable for individuals with higher taxable income who expect to be in a lower tax bracket in retirement. Since RRSP contributions reduce taxable income, these accounts can improve tax efficiency over time. At this time, contributing to an RRSP may not be the most appropriate strategy since your taxable income is quite low. Contributing may not save much or any tax, and withdrawals could be taxable and reduce future government benefits. As such, prioritize your RDSP if you qualify for the DTC, followed by a TFSA, followed by a regular, taxable non-registered account.
Your Canada Pension Plan Disability benefit will convert to a CPP retirement pension once you turn 65. The CPP retirement pension is calculated based on your contributions and a special disability drop-out provision excludes years you were receiving a disability benefit and not contributing. This means your income may change at age 65 due to the transition in benefit types and will typically decrease.
However, at age 65, you will also be eligible for Old Age Security (OAS). If you have lived in Canada for most of your adult life, you will be entitled to the full benefit, which is approximately $743 per month. The benefit is income-tested and may be partially clawed back at higher income levels, which may not apply in your case.
Low-income OAS recipients may also qualify for the Guaranteed Income Supplement (GIS), which provides additional tax-free income if income falls below certain thresholds.
Given your current income and savings capacity, I would plan around these income sources while prioritizing contributions to RDSP (if eligible) and TFSA accounts using your annual surplus.
Andrew Dobson is a fee-only, advice-only certified financial planner (CFP) and chartered investment manager (CIM) at Objective Financial Partners Inc. in London, Ont. He does not sell any financial products whatsoever. He can be reached at adobson@objectivecfp.com.
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