Registered Education Savings Plans
One of many important tasks parents face in the modern world is saving for their child’s post-secondary education. As with most financial goals, starting early is key. Fortunately, the government provides financial incentives to start early with the Registered Education Savings Plan.
A RESP is opened by a subscriber (often the parent but can be opened by anyone) with a promoter (a financial institution). The plan can be opened on behalf of a single beneficiary or for multiple beneficiaries with a family plan. There is no annual limit for contributions and a lifetime limit of $50,000 per beneficiary. Unlike other registered accounts such as RRSPs, the contributions to the plan are not tax deductible. The benefits of the RESP arise from the non-taxation of earnings within the plan and the grants and bonds offered by the government as a tax-free contribution to your child’s future.
The Canada Education Savings Grant (CESG) is available to supplement your contributions to the plan. The basic CESG, available to all subscribers regardless of income level, will match the first 20% of annual contributions up to a maximum of $500 per year and a lifetime maximum of $7,200. If you have unused contribution room from a prior year, the maximum grant increases to $1,000 for the first year of the plan. You must start making contributions to the plan before the calendar year in which the beneficiary turns 15 in order to be eligible for the grant and it is available until the calendar year in which the beneficiary turns 17. To assist modest-income families, there is an additional CESG that can increase the annual limit to $550 or $600 based on family net income.
The Canada Learning Bond (CLB) is available to eligible children from low-income families who were born in 2004 or later. An initial payment of $500 is deposited into the RESP upon creation of the plan, plus an additional $100 per year for each additional year of eligibility up to age 15. The lifetime limit is $2,000. Annual contributions do not need to be made the plan in order to receive the CLB.
The beneficiary becomes eligible for educational assistance payments (EAP) during their post-secondary studies. An EAP consists of the CESG, the CLB, any amounts paid under a provincial education savings program and the earnings on the money saved in the RESP. EAP is included in the taxable income of the beneficiary in the year of withdrawal. As many post-secondary students have minimal taxable income which is below the basic personal exemption, or tuition tax credits available to apply against any income taxes payable, EAP can often be received tax-free or at a low effective tax rate. As original contributions are made with after-tax dollars, the withdrawal of these contributions is not taxable to the beneficiary. EAP is limited to $5,000 during the first 13 consecutive weeks of enrolment in full-time post-secondary studies. There is no limit on withdrawals thereafter unless the beneficiary takes a break from their studies and does not re-enroll in a qualifying educational program for 12 months or more. The original limit will be re-instated in this situation. There is a limit of $2,500 for every 13-week period of enrollment in part-time post-secondary studies.
If your child does not attend post-secondary school, the plan can be terminated. Original contributions will be returned to the subscriber and all grants and bonds will be returned to the government. Earnings within the plan will be paid to the subscriber as Accumulated Income Payments. These payments are subject to tax on your income tax return at your marginal tax rate and may be subject to an additional tax calculated separately from your income tax return.
Although your child’s post-secondary studies may be years away, the RESP provides many reasons to begin preparing now.
For more information, please contact info@gytdcpa.com or 1 844-GYTD-CPA
GYTDCPA.com-Registered Education Savings Plans
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