Understanding ODSP is a job in itself. People do not know where to start. It’s a daunting task, trying to figure out which aspects to focus on. There are well over a 100 policies providing hundreds of pages of reading. Sound like fun? You can access them on-line, if you like, by clicking here. They are good resources to have, but they are not easy to read. They explain what you are allowed and what you are not allowed and how many of those rules change under different circumstances. User friendly they are not, though.
So here are some of the basics.
ODSP is a means-tested benefit. Simply put, if you are on ODSP, you may not have more than a certain amount of assets in addition to having a, ”…substantial physical or mental impairment that is continuous or recurrent and expected to last one year or more.” As well, there are limits to the amount of income you can earn while on ODSP. Exceeding these limits can reduce, suspend or terminate your benefits.
There are two fundamental rules ODSP recipients and their families should know about.
Rule Number One: The $40,000 Rule
A single adult with no dependents on ODSP is not allowed to have more than $40,000 in assets at any given time. The limit increases if the recipient has a spouse and/or dependants. Let’s focus on single adults without dependents to keep it simple.
Rule Number Two: The $10,000 Rule
A single adult with no dependents on ODSP is allowed to receive no more than $10,000 in gifts and voluntary payments in a 12-month period for non-disability related expenses.
Confused? The first rule is fairly simple. You are not allowed to have more than $40,000 in assets at any point in time. If you exceed that limit, by even the smallest amount, your ODSP eligibility is jeopardized. There are exceptions to this rule, but the easiest way to understand it is you are not allowed to have more than $40,000 between all your bank accounts, investment accounts, cash under your mattress, etc., etc., etc.
Rule number two is the one many find confusing. How can you be allowed to receive ONLY $10,000 in gifts and voluntary payments if you are allowed to have as much as $40,000 at any given time? It is about timing.
Yes, you are allowed to have as much as $40,000 at any given point in time, but you are not allowed to receive it all at once. Let’s assume you have $1,000 in assets when you receive $30,000 as a gift that you put it in your bank account. You don’t break rule number one that says you are allowed to have up to $40,000 in assets, but you do break rule number two that says you are not allowed to receive more than $10,000 in gifts and voluntary payments in a 12-month period.
If instead, you received $5,000 in gifts every 12 months over a 72-month period, eventually totaling $30,000, and saved it all in your bank account without spending any of it, you wouldn’t break rule number one or rule number two. You wouldn’t have received more than $10,000 in a 12-month period and you would never have had more than $40,000 at any point in time.
Think about rule number one, the $40,000 limit, this way. Imagine your kitchen sink could hold no more than $40,000. If you put more than $40,000 in the sink, it will overflow and cause a mess. If at any point in time, you have more than $40,000, it causes a mess and ODSP penalizes you for it. If you keep your asset level under $40,000 (you don’t let your sink overflow), you are fine.
Now think about rule number two, the $10,000 rule, as a flow of money as if it were coming out of a tap at your kitchen sink (wouldn’t that be nice!). While your sink could hold as much as $40,000, you are not allowed to let more than $10,000 come out of the tap in a 12-month period. If $20,000 flows out of the tap over a 6-month period, you would break rule number two, even if your sink doesn’t overflow, because you only had $500 in the sink before you turned the tap on.
You can now see how you can break rule number two without breaking rule number one. You can also break rule number one without breaking rule number two. Let’s say you have $38,000 in the kitchen sink and you receive a $5,000 gift (assume you have not received any other gifts in the last 12 months). You haven’t exceeded the limit of $10,000 in a 12-month period. But the $5,000 in gifts pushes your assets over the $40,000 limit because you already had $38,000 in the sink. Add $5,000 to the $38,000 that’s already in the sink and your sink overflows.
What are gifts and voluntary payments? Gifts include money from family and friends, but that is an obvious one. An inheritance, depending on what is done with it, can be, but isn’t always a gift. Money from a trust, such as a Henson Trust, is a voluntary payment, making it subject to this rule. If you receive $8,000 from a Henson Trust in a 12-month period and your uncle also happens to give you a $4,000 gift in the same 12-month period, the $10,000 limit is exceeded.
You must also make the distinction between a 12-month period and a calendar year. The $10,000 rule is not based on the calendar year; it is based on a rolling 12-month period. If you are going to receive a $1,000 gift on March 31st, the money you have received in gifts and voluntary payments over the previous 12 months, starting April 1st of the previous year, are the amounts subject to the rule on that given day.
Gifts and voluntary payments that are used for disability related items and services are not subject to the $10,000 rule. If the money is used to purchase something that is needed as a result of an ODSP recipient’s disability, that money is not counted toward the $10,000 limit. In fact, approved disability related gifts can be of any value. Example: parents spend $18,000 on a specialized wheelchair for their daughter. The $18,000 is completely exempt and does not affect their daughter’s ODSP eligibility. If they spent $18,000 on a fabulous TV, that would likely be an entirely different story.
Now that we have gotten our heads around the $10,000 rule, let’s revisit rule number one – the $40,000. There are exceptions to that rule. While an single adult with no dependants on ODSP is not allowed to have $40,000 in assets, here are a list of assets that are exempt.
- You are allowed to own your principal residence. As long as you live in the home, be it condo, townhouse, or standalone home, it is considered an exempt asset. If you move out of that home, it is no longer an exempt asset and you are given six months to deal sell it and purchase another one or convert the proceeds of the sale of the home to a different exempt asset.
- A vehicle. You are allowed to own a vehicle. You may be allowed to own a second vehicle if you can demonstrate you need it for work.
- A Registered Disability Savings Plan (RDSP). Any investment inside an RDSP is completely exempt. The RDSP is a long-term savings vehicle that can collect generous government contributions. The maximum than can be personally contributed to an RDSP is $200,000 over the lifetime of the person with the disability, it can collect as much as $90,000 in government contributions and there is no limit on growth. It is one of the best long-term planning tools available for people with disabilities in Canada. Another benefit of the RDSP is that withdrawals are not subject to rule number two. Any money withdrawn from an RDSP will not count towards the $10,000 maximum ODSP recipients are allowed to receive every 12 months, even if the money is used for non-disability related items and services.
- Henson Trust. A Henson Trust allows parents and others to leave assets from their estate for a person on ODSP without jeopardizing their eligibility. There is no limit on the amount of assets allowed in a Henson Trust. However, assets paid out from a Henson Trust are subject to rule number two, the $10,000 rule. Henson Trusts are commonly used in estate planning when a beneficiary of an estate is an ODSP recipient.
- Cash Value inside a life insurance policy. Some permanent life insurance policies have a savings or investment component. A person on ODSP is allowed to own a permanent life insurance policy that contains no more than $100,000 of cash value. Cash value refers to the amount of savings or investments that can be extracted from the policy even while the insured person is still living.
- Segregated Funds. A person on ODSP is allowed to have up to $100,000 in segregated funds without jeopardizing their ODSP. However, this $100,000 maximum applies to segregated funds and cash value life insurance, combined. You can’t have $100,000 in each. To read about using segregated funds as an exempt asset, read, Segregated Funds Saved My ODSP.
- Funds held in trust. Trusts (other than Henson Trusts) funded by an inheritance or the proceeds of a life insurance policy are allowed to hold up to $100,000. As with segregated funds, the combined value of cash value in a life insurance policy, segregated funds and trusts funded by an inheritance or the proceeds of a life insurance policy must not exceed a combined total of $100,000.
There are other asset exemptions, but we shall end the list here.
If you understand the $40,000 rule as well as the $10,000 rule and you are aware there are exceptions to both these rules, you have built a strong foundation to help you navigate the sometimes tricky ODSP waters.