Registered Educational Savings Plans (RESP)
What are they?
RESPs are registered plans used by parents, other relatives or friends to save for their or someone else’s children’s education. Contributions to an RESP are not tax deductible as is a contribution to an RRSP. The income earned within an RESP is not subject to tax until funds are withdrawn by the child to pay for education. This money is then taxed in the child’s hands, not the contributor. It is assumed that a child attending University, College or a technical school would have a very low income and would pay little or no tax on these funds. Life insurance companies, mutual fund corporations, banks and non-profit scholarship or educational trust foundations offer these plans.
Are there different types of plans available?
Most large financial institutions offer self-directed individual plans. There are also non-profit scholarships or Education Trust Foundations which offer group plans. The two types of plans have there own distinct characteristics. Individual plans allow you to choose your investments to meet your objectives and risk tolerances. Individual plans may also be subdivided into single beneficiary and multi beneficiary plans. Under single beneficiary plans, the beneficiary does not need to be related to you. Under multi beneficiary plans, the beneficiaries must be children, brothers, sisters, grandchildren or great-grandchildren. If you are saving for two related children, you may wish to contribute to a multi beneficiary plan as these plans allow you to transfer contributions, earnings and grants to one child if the other child does not pursue post secondary education. Group plans are generally more restrictive. They are normally for a single child and give you no say in the choosing of investments, although they do tend to be very conservative government issued securities. If your child does not pursue post secondary education, funds contributed to the plan are returned to you, but income earned is left to the plan. The remaining students through a series of formula are allocated the earnings left in the plan on an annual basis.
What are the contribution limits?
Beginning in 2007, annual limits for RESP contributions were eliminated. There is however a lifetime cap of $50,000 per beneficiary. Contributions can be made for up to 31 years.
Does the government offer assistance in making contributions?
The Canadian Educational Savings Grant (CESG) program was introduced in 1998 as an incentive for Canadians to invest in their children’s education. This plan has been enhanced where the federal government will contribute an additional 20% of the annual contributions to an RESP up to a maximum of $500 per year per beneficiary under the age of 18. The lifetime maximum is $7,200. Unlike the annual contribution limits, unused CESG can be carried forward to the next year.
What can the funds withdrawn be used for?
Payments from the plan can be used for a student’s living expenses, tuition and books although specific plans may have their own restrictions. The amount of funds withdrawn are limited to $5,000 in the first thirteen weeks of a beneficiary’s post secondary education unless pre-approved by Human Resources Development Canada. There are no limits to amounts withdrawn thereafter.
What if the child does not pursue a post-secondary education?
If the intended beneficiary is 21 years of age or older, the RESP has been in existence for at least 10 years and post-secondary education will not be pursued, up to $50,000 of the accumulated income of the RESP can be transferred to the contributor’s RRSP if the sponsor has RRSP contribution room. If the contributor has no RRSP room, the accumulated income will be taxed in the contributor’s hands at normal marginal tax rates plus an additional special 20% tax. In addition, the CESG principal will have to be repaid to the federal government.
Are there any additional benefits of the program available to lower income families?
For families with income below the lowest marginal tax bracket (2013- $43,561), the CESG is increased to 40% on the first $500 of contributions. For families with income in the second tax bracket (2013 -$43,562 to $87,123), the CESG is increased to 30% for the first $500 of contributions. The maximum CESG for a particular year in increased accordingly to $600 for families in the lowest tax bracket. The lifetime grant for each child remains at $7,200. Lower income families may also qualify for the Canada Learning Bond. This is a grant for families who receive the National Child Benefit supplement. The money is placed by the government directly into the RESP on the child’s behalf.
Are there any additional benefits to people with disabilities?
For people with disabilities, income generated under an RESP may be sheltered for a maximum 40 years whereas other individuals are restricted to 35 years. Whereas most individuals must be full-time students, individuals with disabilities may receive payments for part-time studies.
Are there any similar provincial programs?
The provinces of British Columbia and Saskatchewan offer their own enhancements to the RESP program.
CRA publishes Guide RC 4092 which goes into further detail on the RESP.
Another useful government reference is the HRSDC web page Savings for Education which discusses RESPs and The Canada Learning Bond.