A good education is a goal most parents have for their children. But the rising cost of post-secondary education has many parents concerned about whether they will be able to afford to send their children to college or university.
The Registered Education Savings Plan (RESP) is a financial tool specially designed to accumulate savings to be used as a financial resource for a child's post-secondary education. As with a registered education savings plan (RESP), the federal government allows the investment income to grow, in a tax shelter, until the money is withdrawn from the plan.
The RESP is an education savings vehicle that involves four parties: the subscriber, the beneficiary, the promoter and the trustee.
The subscriber is the individual who is the contract holder and who will make the contributions to the RESP.
The beneficiary is the person designated by the subscriber to receive the educational assistance payments when pursuing post-secondary studies.
The promoter is the company that distributes and manages the plan.
Company is the trustee that will irrevocably hold the amounts invested in the plan, as required by the federal government for the purposes of the RESP.
When the subscriber enrolls in the RESP, he/she must designate a beneficiary to use the investment income generated by the plan, the Canada Education Savings Grants (CESGs) paid by the Canadian government and the grants paid by certain provincial governments. This income is to be used as financial aid so that the beneficiary can pursue his/her post-secondary education.
No contributions can be made after December 31 of the 31st calendar year following the plan's creation, and the plan must cease to exist no later than December 31 of the 35th year following the plan's creation.
There are three types of plans offered, the individual plan, the family plan and the Group plan depending upon the promoter. Here is a brief description of each plan Cash value interest or earnings accumulate tax-free or tax deferred, depending on whether gains are distributed at death or during lifetime.Individual plan:
This plan allows the subscriber to designate one beneficiary per plan. The beneficiary may or may not be related to the subscriber by blood or adoption.Family plan:
This plan allows the subscriber to designate several beneficiaries. However, they must all be linked to the subscriber by blood or adoption and be under 21 years of age. Moreover, the special feature of the family plan is that all children from the same family can be combined in a single education savings plan. The family plan is more suited to parents and grandparents whose family is complete so that they can take advantage of the longest possible accumulation period for each child. The family plan also offers the flexibility of distributing the amounts among the children as each one begins their post-secondary studiesGroup Plan:
Group plans work differently from individual and family plans, and each plan has its own rules. They also tend to have higher fees and more restrictive rules. You can open a group plan for one child. They don't have to be related to you. You must make a minimum deposit when you open the plan. Your child shares in the pooled earnings of investors with children the same age. How much your child receives depends on how much money is in the group account, and the number of children in the group who will be starting post-secondary education. Group plans often have additional rules about how much and how often your child can take EAPs, and which education programs are eligible. Know the rules before you open a group plan.Policy owners can use life insurance policies as collateral or security for personal loans.Guaranteed ceiling on mortality and expense charges and guaranteed floor on interest credited to cash values.
Companies that offer RESPs are called promoters. There are 2 main types of promoters:
1.Financial institutions-includes banks, credit unions, mutual fund companies, insurance and investment firms and trust companies. They offer individual and family plans.
2.Scholarship plan dealers-companies that only sell RESPs. They offer individual, family plans and group RESPs.
RESP contributions are not tax deductible from the subscriber's income. However, as with an RESP, the accumulation of investment income is tax-free as long as it remains in the plan. Also, the subscriber may not deduct from his/her income interest paid on a loan taken out to make RESP contributions.
The EAPs, which represent the investment income portion, the CESGs paid, the grants paid by certain provincial governments and the education bonus if any, must be included in the beneficiary's annual taxable income during his/her post-secondary studies. Since students are generally are low income earners, the amount of taxes will probably be fairly low.
RESP contributions are not tax deductible from the subscriber's income. However, as with an RRSP, the accumulation of investment income is tax-free as long as it remains in the plan. The contribution period corresponds to a calendar year, i.e. from January 1 to December 31. Also, the subscriber may not deduct from his/her income interest paid on a loan taken out to make RESP contributions. Finally, note that the subscriber’s contributions are not protected against potentialcreditors.The contribution limits set by the federal government are as follows:
A 1% monthly tax penalty applies to contributions made on behalf of a beneficiary in excess of the total limit set by the federal government. The tax penalties are payable by each subscriber on his/her share of the excess contributions that are not withdrawn by the end of the month. The subscribers are solely responsible for ensuring that the contribution limit is respected.
The penalty taxes payable by each subscriber must be paid to Canada Customs and Revenue Agency within 90 days following the end of the year in which the excess contributions were made.
In January 1998, the federal government implemented the CESG for all contributions made to an RESP. This is a very beneficial program as it allows for a concrete and substantial increase in savings designated for the post-secondary education of beneficiaries.Basic CESG
The basic Canada EducationSavings Grant (CESG) will top upyour annual contribution by 20%, up to a maximum of $500 eachyear for each beneficiary.You need to contribute $2,500 a year to get the full grant of $500 each year. Your child can carry forward unused grant contribution room until they turn 17. Thelifetime limit for the grant isgenerally $7,200.Additional CESG
Depending on your income, the government may top up your contribution by an extra 10% or 20% on the first $500 of annual RESP contributions made on or after January 1, 2005. If your net family income in 2016 is:
The Canada Learning Bond (CLB) is a grant offered by the government of Canada to help low income families to begin saving early for their child’s post-secondary studies. The RESP promoter applies to the federal government for the CLB on behalf of the subscriber. The prescribed form, duly completed, must be sent to head office.The CLB is paid directly into the RESP of the child who is the named beneficiary. CLB Amount
When a beneficiary is registered for a qualifying post-secondary education program, the CLB, CESG and other government grant amounts as well as the return obtained on the amounts invested in the RESP can be paid to him/her as Educational Assistance Payments (EAP). Each EAP contains a specified amount from the CLB.
If the beneficiary doesn’t pursue post-secondary studies, the CLB must be reimbursed to the government of Canada
The CLB cannot be used by another child
Depending upon the provider you choose to set up RESP, option to invest will vary. Here are some of the examples:
GIC products are low risk and have fixedreturns. Mutual funds and stocks may offer potentially greater returns, but they are riskierthan GICs because you can lose some or all of your investment if the value falls.
It is important talk with licensed agent to discuss the options before you set up the plan. Agent must identify your tolerance of risk before recommending you any investments. Make sure you understand all the available options to make the informed decision
The following types of institutions are considered by the federal government as being designated post-secondary educational institutions:
Note: There is no exhaustive list of acceptable programs or institutions. Contact the district tax office to obtain confirmation that an institution is recognized by the Human Resources Development Minister.
A qualifying educational program meets the following criteria:
What are the options available whenyour child doesn't continue their education?