Registered Education Savings Plan

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A Registered Education Savings Plan (RESP) is an effective way of financing post secondary education for children. An RESP is a contract between an individual (the subscriber) and a person or organization (the provider). Under the contract, the subscriber names one or more beneficiaries and agrees to make contributions for them, and the promoter agrees to pay educational assistance payments (EAPs) to the beneficiaries. The federal government and some provinces provide incentives to encourage RESP contributions, yet less than half of children age 0 to 17 in the Canadian population have ever received a RESP-related federal grant[1] [2]; in other words, there are no RESPs opened for these children, despite the "free money" being offered and the ever-increasing importance, and high cost, of post-secondary education. Encouragingly though, the RESP participation rate has steadily increased from 20% in 2000 to 49% in 2014.[1]

This article first mentions the high and rising costs of post-secondary education. It then describes the main RESP features, including government incentives that can reach a total of 30% of contributed funds in some provinces. The article goes on to explore the three types of RESP accounts, i.e. family plan, individual plan, and group plan. There are three types of payments that can be made from an RESP and these are described next. The last sections of the article compare RESPs with TFSAs and suggest ideas for RESP portfolios.

Costs of post-secondary education

With undergraduate tuition fees of just under $6,000[3], additional compulsory fees around $1000, books around $1000 and living costs (including meal plans) around $8000[4], a year at university can easily cost $15,000 with a four year undergraduate degree costing $60,000. At 3% inflation, that $60,000 today becomes $102,000 eighteen years from today when today's newborn child begins university. The Canadian Centre for Policy Alternatives reports that "Between 1990 and 2011 the average increase in tuition fees and ancillary fees was 6.2% (ranging from 3.4% in Newfoundland and Labrador to 7.5% in Alberta) while inflation over roughly the same period was 2.1%."[5]

Given these costs, planning ahead is typically necessary and RESPs can be the ideal vehicle for education savings.

RESP features

  • A RESP is similar to a Registered Retirement Savings Plan (RRSP) in that they allow money to grow tax-free. The major difference is that you do not get a tax deduction when you deposit money into the account.
  • There are no restrictions on who can be the original subscriber under an RESP.[6]
  • There are no annual limits for contributions[7] (there were annual limits before 2007) to an RESP. For 1996 the limit was $2000 and for 1997-2006 the limit was $4000.
  • There is a current lifetime contribution limit of $50,000 for each beneficiary. For 1996-2006 the limit was $42,000.[7]
  • Lower income families are also eligible for the Canada Learning Bond[8], a supplementary grant of $500 plus $100 for each year of a child's life through age 15.
  • The account has a maximum contribution term of 32 years and must be completed by the end of the year that includes the 35th anniversary of the opening of the plan[9] unless it is a specified plan[10].
  • Funds can be withdrawn to pay for post-secondary education. Accumulated income and government grants are then taxed in the hands of the beneficiary. As most children have low incomes, withdrawals are likely to be taxed lightly if at all. Any contributed principal can be withdrawn tax-free by the original contributor.
  • If the beneficiary does not continue with an education beyond high school, government grants must be repaid and principal returned to the contributor. Accumulated income is taxable (at a penalty rate) in the contributor's hands, although tax may be deferred by contributing the funds to an RRSP.

Canada Education Savings Grant (CESG)

Human Resources and Skills Development Canada (HRSDC) provides an incentive for parents, family and friends to save for a child's post-secondary education by paying a grant based on the amount contributed to an RESP for the child. The CESG money will be deposited directly into the child's RESP.[11]

  • The federal government will deposit a Canada Education Savings Grant[12] when contributions are made for children up to age 17.
  • Only the first $2,500 of a contribution will be matched in any one year, typically at 20% with some increment for lower income families.
  • The lifetime maximum CESG is $7,200.
  • There are provisions for accumulation of unused CESG room to be carried forward.

Provincial incentives

Certain provinces encourage families to plan and save for their children's post-secondary education by offering incentives to open an RESP. Currently British Columbia (BC Training and Education Savings Grant), Quebec (Québec Education Savings Incentive) and Saskatchewan (Saskatchewan Advantage Grant for Education Savings Program) offer such incentives. Formerly there was an Alberta Centennial Education Savings Plan, which is now closed.[13] See Provincial Education Savings Programs for further details.

Types of RESP

Family plan

  • You can name one or more children as beneficiaries.
  • They must be related to you either through birth or adoption.
  • Any or all of the children named in the plan can use the money.
  • You — or a financial adviser — decide how to invest the money.
  • Wide range of investment options.

Individual plan

  • There is one beneficiary who does not have to be related to you.
  • The beneficiary can be an adult, including yourself.
  • You — or a financial adviser — decide how to invest the money.
  • Wide range of investment options.

Group plan

  • Administered by a group plan dealer (similar to group RRSPs).
  • Investments normally limited to fixed-income securities, such as GICs, T-bills and bonds.
  • You are often required to sign a contract committing to regular contributions.
  • Savings are pooled and amount of money each pool member receives depends on how much money is in that pool.
  • You can name only one child as beneficiary.
  • If the beneficiary does not go on to post-secondary education, you will get back only what you put into the plan.
  • Group plan RESP dealers are not insured against insolvency by an investor protection fund.[15]

Tax on over-contribution

  • An over-contribution[16] occurs at the end of a month when the total of all contributions made by all subscribers to all RESPs for a beneficiary is more than the lifetime limit for that beneficiary.
  • Each subscriber for that beneficiary is liable to pay a 1%-per-month tax on his or her share of the over-contribution that is not withdrawn at the end of the month. The tax is payable within 90 days after the end of the year in which there is an over-contribution. An over-contribution exists until it is withdrawn.
  • Example[17] for calculating the over-contribution and amount of tax payable.

Payments from an RESP

The promoter can make the following types of payments: refund of contributions[18], educational assistance payments (EAP)[19] and accumulated income payments (AIP)[20].

Refund of contributions

  • Original contributions can be withdrawn tax-free, and paid by the promoter to the subscriber or to the beneficiary (student).
  • If the beneficiary is not yet enrolled in a qualified educational program at the time of withdrawing the original contribution, Canada Education Savings Grant amounts received by the plan may need to be returned to the government. [21]

Educational assistance payments (EAPs)

  • An EAP is the amount paid to a beneficiary (a student) from an RESP, to help finance the cost of post-secondary education. An EAP consists of the Canada Education Savings Grant, the Canada Learning Bond (CLB), amounts paid under a designated provincial program and the earnings on the money saved in the RESP. Specific situations apply under which EAPs are paid.
  • The student has to report the EAP on his income tax return for the year. However, if the student's total taxable income is low, little or no tax will be payable. Furthermore, the student may use tuition tax credits and education tax credits to offset the income.[22]
  • When withdrawing from a family plan RESP, attention must be paid not to exceed the maximum limit of $7,200 CESG paid per beneficiary.[23]

Accumulated income payments (AIPs)

  • An AIP is an amount, usually paid to the subscriber, of the income earned from an RESP.
  • AIPs are paid when the RESP is not going to be used by the beneficiary for qualifying educational programs.[22]
  • Specific conditions apply and the payment will be treated as income and is subject to two different taxes: the regular income tax and an additional tax of 20% (12% for residents of Quebec).

Special rules

There are few rules when you open an RESP. However, there are specific rules that apply when changing the beneficiary of an RESP or when transferring RESP property to another RESP. See Special rules - RESP for more details of these rules.

Transferring between institutions

Transferred between Registered Education Savings Plans (RESPs) held within different financial institutions requires the cooperation of the transferring and receiving RESP promoters.[24] There are multiple forms involved, HRSDC SDE 0088 (Form A); HRSDC SDE 0089 (Form B) and HRSDC SDE 0090 (Form C). Promoters must also submit accurate transfer transactions to the Canada Education Savings Program (CESP) system of ESDC. In addition, when undertaking the transfer, certain conditions are required to ensure that the beneficiary continues to be eligible for the educational incentives. The full PDF guide to the process is Chapter 3-1 RESP Transfers and the Education Savings Incentives

RESP or TFSA?

Beyond the amount that attracts the maximum CESG grant, should you still make RESP contributions? Or if you have space in your Tax-Free Savings Account (TFSA), should that be used for additional education savings instead? One author makes the case that:

it is more profitable to save for your child’s education in a RESP by contributing just enough to get the maximum CES grant. But it now makes no sense to contribute the maximum 50K allowed to a RESP over time. It is better to channel any contribution that doesn’t receive a matching grant into a TFSA instead

— Ram Balakrishnan, TFSA versus RESP, Canadian Capitalist, February 28, 2008

The reason being that TFSAs are more flexible and that withdrawals are not taxed.

Self-directed RESP portfolios

Asset allocation

When a child is born, we have a good idea when post-secondary education, if any, will begin: when the child is about 16-19 years old. At that stage, withdrawals from the RESP will start, and the RESP should clearly be invested in cash equivalents and/or short term fixed income (bonds or GICs). But when the child is younger, a proportion of the RESP portfolio can be in equities. One way to plan the transition from riskier assets with a higher expected return to a more conservative asset allocation is called a glide path. The US-based Bogleheads wiki offers the following Vanguard-inspired Education savings plans glide paths, where post-secondary education is assumed to start at age 18:

Percentages equity / fixed income / cash

Glide path Age 0 to 5 Age 6 to 10 Age 11 to 15 Age 16 to 18 Age 19+
Conservative 50/50/0 25/75/0 0/75/25 0/75/25 0/0/100
Moderate 75/25/0 50/50/0 25/75/0 0/75/25 0/75/25
Aggressive 100/0/0 75/25/0 50/50/0 25/75/0 0/75/25

When the start of post-secondary education gets near, the investor may turn to liability matching to guide the RESP portfolio.

Implementation

The chosen glide path can be implemented in a RESP mutual funds account or a RESP discount brokerage account, for example using simple index portfolios. If the approach of liability matching has been adopted, then fixed income ladders can be used, with bond/GIC maturity dates matching planned education expenses. Fees of all types must be minimized.

Before opening an RESP account, consider and ask if you are eligible to a provincial program. Financial institutions do not offer all programs available. It could influence your choice of a RESP mutual funds account or a RESP discount brokerage account.

See also

References

  1. 1.0 1.1 Employment and Social Development Canada, Canada Education Savings Grant Participation Rates by Province and Territory, viewed January 26, 2017
  2. CBC News, RESPs: free money from government that half of Canadians don't ask for, October 8, 2016, viewed January 26, 2017
  3. Statistics Canada, The Daily — University tuition fees, 2013/2014, viewed November 2, 2013.
  4. CanLean, Cost of Education After High School - CanLearn, viewed November 2, 2013.
  5. David Macdonald and Erika Shaker, Eduflation and High Cost Learning.pdf, Canadian Centre for Policy Alternatives, September 11, 2012.
  6. Canada Revenue Agency, Who can be a subscriber?, viewed July 3, 2009.
  7. 7.0 7.1 Canada Revenue Agency, RESP contribution limits, viewed November 2, 2013.
  8. Canada Revenue Agency, Canada Learning Bond (CLB), viewed July 3, 2009.
  9. Canada Revenue Agency, Plan Completion, viewed July 3, 2009.
  10. Canada Revenue Agency, Specified Plan, viewed July 3, 2009.
  11. Canada Revenue Agency, Canada Education Savings Grant (CESG), viewed November 2, 2013
  12. Canada Revenue Agency, Canada Education Savings Grant (CESG), viewed November 2, 2013.
  13. Employment and Social Development Canada, Closure of the Alberta Centennial Education Savings (ACES) Plan, March 26, 2015, viewed December 12, 2015
  14. CanLearn.ca, RESP - Consumer Information, viewed August 17, 2012.
  15. Ken Kivenko, Investor Protection -- Group Education Savings Plan (a.k.a. Scholarship Plans), Canadian Money Saver, May 2012 issue (subscription required)
  16. Canada Revenue Agency, Tax on over-contribution, viewed July 3, 2009.
  17. Canada Revenue Agency, Example, viewed July 3, 2009.
  18. Canada Revenue Agency, Refund of contributions, viewed July 3, 2009.
  19. Canada Revenue Agency, Educational assistance payments (EAPs), viewed July 3, 2009.
  20. Canada Revenue Agency, Accumulated income payments (AIPs), viewed July 3, 2009.
  21. GP Wealth Management, RESP Plans, viewed August 17, 2012.
  22. 22.0 22.1 TaxTips.ca, How Are The Funds Paid Out of The RESP, And Are They Taxable?, viewed January 26, 2017
  23. Human Resources and Skills Development Canada, InfoCapsule: Calculating the Educational Assistance Payment, viewed January 12, 2015.
  24. CESP - RESP Provider User Guide: Transfers and Payments | ESDC, viewed April 6, 2014

Further reading

There have been a number of discussions about RESPs that might be useful to help understand the nuances of RESPs.

External links

RESP basics and post-secondary education

Provincial grants

Types of RESPs

  • Informetrica Limited, Review of Registered Education Savings Plan Industry Practices, report prepared for Human Resources and Social Development Canada
  • Canadian Capitalist, Is a Group RESP Plan Right for You?, March 26, 2007. Drawbacks of scholarship plans include: (i) lack of flexibility; (ii) "you’ll derive full benefit from the program only if your child attends a four-year degree program"; (iii) invested only in low-risk assets, even when your child is still a baby; (iv) many types of fees are involved.
  • Canadian Capitalist, Group RESP Plans are Loaded with Fees, January 21, 2013. "The bottom line over the first three years is quite simple. The self-directed RESP incurred a total cost of just $60. The group RESP incurred a total cost of $3,721."

RESP portfolios