Registered Education Savings Plan
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Introduction
A Registered Education Savings Plan or RESP, is an effective way of financing post secondary education for children. With tuition[1] of around $5,000, miscellaneous fees around $1000, books around $1000 and living costs anywhere from $6-8000, 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.
Features
- RESPs are similar to RRSPs 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.[2]
- There are no annual limits for contributions[3] to an RESP. There is a lifetime contribution limit of $50,000 for each beneficiary.
- The federal government will deposit a Canadian Education Savings Grant[4] 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.
- Lower income families are also eligible for the Canada Learning Bond[5], 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[6] unless it is a specified plan[7].
- Funds can be withdrawn to pay for post-secondary education.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 Any contributed principal can be withdrawn tax-free by the original contributor.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.
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.
Tax on over-contribution
- An over-contribution[8] 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 overcontribution 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[9] for calculating the over-contribution and amount of tax payable.
Payments from an RESP
Refund of contributions[10]
- Original contributions can be withdrawn tax-free.
Educational assistance payments (EAPs)[11]
- 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 (CESG), 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.
Accumulated income payments (AIPs)[12]
- An AIP is an amount, usually paid to the subscriber, of the income earned from an RESP. 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).
References
- ↑ Canada's Higher Education and Career Guide, Tuition Fees @ Canadian Universities, viewed July 31, 2009.
- ↑ Canada Revenue Agency, Who can be a subscriber?, viewed July 3, 2009.
- ↑ Canada Revenue Agency, RESP contribution limits, viewed July 3, 2009.
- ↑ Canada Revenue Agency, Canada Education Savings Grant (CESG), viewed July 3, 2009.
- ↑ Canada Revenue Agency, Canada Learning Bond (CLB), viewed July 3, 2009.
- ↑ Canada Revenue Agency, Plan Completion, viewed July 3, 2009.
- ↑ Canada Revenue Agency, Specified Plan, viewed July 3, 2009.
- ↑ Canada Revenue Agency, Tax on over-contribution, viewed July 3, 2009.
- ↑ Canada Revenue Agency, Example, viewed July 3, 2009.
- ↑ Canada Revenue Agency, Refund of contributions, viewed July 3, 2009.
- ↑ Canada Revenue Agency, Educational assistance payments (EAPs), viewed July 3, 2009.
- ↑ Canada Revenue Agency, Accumulated income payments (AIPs), viewed July 3, 2009.
Canada Revenue Agency
