DTCs and RDSPs revisited

I've used this before, but I forget where:

Fitzgerald: The rich are different from you and me.
Hemingway: Yes, they have more money.

I've been an enthusiastic supporter of the Disability Tax Credit (DTC) and the Registered Disability Savings Program (RDSP), but their effect needs full disclosure.  Under the program, the higher your income, the greater the benefit.  To parallel the quote:

Fitzgerald: The rich are different from you and me.Hemingway: Yes, they have more expensive disabilities.

The basics are:

• The DTC is a nonrefundable tax credit of up to $12,846 
• Having a DTC means you are eligible to have an RDSP
• Low and moderate income RDSP holders are eligible for government contributions 
• Those contributions must remain untouched for 10 years before withdrawal.

The DTC is worth $8,113 plus another $4,733 each year if it is for a family supporting a minor child.  Call it $13,000.  A person making $200,000 would owe about $75,000 in taxes.  With a DTC, that becomes $62,000.  There are no requirements for how that $13,000 DTC can be spent.  It's a gift from taxpayers.  Over ten years, the total value of the DTC is $130,000.  If the DTC is invested in an RDSP with 5% return, it becomes $161,576, all taxpayer funded.

Now consider a minimum wage worker making $22,000.  Taxes would be $2,257, and the DTC would cover that nicely.  Since it is a non-refundable credit, $2,257 is the annual cost to taxpayers.

A minimum wage income entitles a person to a $1,000 annual government contribution to an RDSP, so the total annual cost to taxpayers becomes $3,257, almost exactly 25% of the $13,000 available to the $200,000 earner.  Over 10 years, taxpayers have invested $32,570.  Private contributions from the minimum-wage earner are unlikely.



It gets better.  In year 10, if the $200,000 earner needs a $30,000 wheelchair it is generously covered by the RDSP.  For the minimum wage earner hoping to fund the wheelchair from their RDSP, there is a holdback equal to the government contributions over the previous ten years.  In our example, the RDSP value after 10 years is $12,578.  The holdback is $10,000 and the maximum RDSP payout would be $2,578.  

Don't forget that whatever is done with the tax credit, it continues over the entire life of the DTC holder.  Over a lifetime, the minimum wage earner gets less than a third of the subsidy given to the high earner.

From 8 to 83
	High Earner $200K	Minimum Wage Earner $22k
Lifetime Contributions	$200,000	$20,000
From taxpayer	100%	100%
Lifetime Payout	$3,121,765	$283,603
20 Year average annual payout	$156,088	$14,180
Additional DTC used	$462,441	$171,532
Total taxpayer subsidy	$662,441	$191,532

--> I still recommend an RDSP for everyone with disabilities, but without a doubt the DTC favors high earners.

	Income
	$200,000	$22,000
Useful annual DTC	$12,846	$2,257
Annual government contribution to RDSP	$0	$1,000
Annual private contribution funded by DTC	$12,846	$0
RDSP value at 10 years	$161,576	$12,578
Wheelchair	$30,000	$30,000
Holdback when withdrawing from RDSP	$0	$10,000
Wheelchair cost not covered by RDSP	$0	$27,422

This is patently unfair.  The government just hands $13,000 to prosperous families, no questions asked, but sets draconian requirements on the much smaller amounts given to low and moderate earners.

DTCs and RDSPs are generously conceived but unfairly realized.  At the very least, the 10 year holdback should be eliminated.  Better yet, the DTC should be refundable, so rich and poor get equal benefit.  After all disabilities don't vary by income, so why does the offer of help differ?