What is a Registered Education Savings Plan?
And why should every Canadian child have one
A Registered Education Savings Plan (RESP) is a type of savings account that grows tax free until a child is ready for post-secondary education. RESPs are a good way to save for a number of reasons:
The money grows tax free until the child needs it for tuition, residence and other educational expenses;
An RESP allows you to apply for the Canada Education Savings Grant (CESG) on your child’s behalf which is 20% ($500) of the maximum $2,500 contribution per year. The lifetime CESG limit per child is $7,200.
Also available is the Canada Learning Bond (CLB). The government can contribute up to $2,000 to an RESP for an eligible child, $500 for the first year of eligibility, $100 each year the child continues to be eligible (up to and including the benefit year in which they turn 15).
Bonus grants for middle- and low-income families are available which means an extra 10% or 20% is added to the first $500 contributed to an RESP each year (up to $100 if the 2021 adjusted income is $49,020 or less ($500 x 20% = $100) and up to $50 if the 2021 adjusted income is greater than $49,020 and up to $98,040).
Where does one open an RESP?
Begin by locating promoters of RESPs. The Canada Education Savings Grant (CESG) Program provides a list of promoters to assist in this regard.
We just had our first baby. When should we start saving?
Right away. In fact, the earlier in life you set up an RESP and apply for the Canada Education Savings Grant, the bigger your child’s savings will grow.
What are the maximum annual and lifetime contributions allowed for an RESP?
There is no annual maximum contribution limit but there is a lifetime limit of $50,000 per beneficiary.
Are contributions to an RESP tax deductible?
Unlike Registered Retirement Savings Plans (RRSPs), there are no tax deductions for contributions made to an RESP.
How many years can contributions be made to an RESP, and how long can income remain sheltered in the plan?
Does this depend on the age of the beneficiary?
In the case of a non-family plan, contributions can be made up to and including the 22nd year of the plan’s existence. The family plan is a little more restrictive in that contributions must stop in the year on the beneficiary’s 21st birthday. Both types of plans must be terminated no later than the 36th year. Depending on the type of plan, the age of the beneficiary is relevant.
Can a subscriber transfer from one RESP to another RESP?
Subject to the terms of the plan, partial or full transfers are permitted under the Income Tax Act. The transfer of an amount from an RESP to another RESP is considered eligible for CESG purposes if:
* there is a common beneficiary between the originating plan and the receiving plan; or
* a beneficiary under the receiving plan is under 21 years of age, and is a brother or sister of a beneficiary under the originating plan.
Otherwise, the CESG must be repaid and an over contribution tax may apply.
How will Educational Assistance Payments (EAPs) be taxed?
An EAP consists of earnings on contributions, earnings on the Grant and the Grant itself. EAPs are taxed in the hands of the beneficiary. Since students typically have little other income, they pay little or no tax on EAPs.
If the beneficiary does not pursue post-secondary education, can the Accumulated Income Payment be rolled over in either the subscriber's RRSP or the beneficiary's RRSP? How long can the money sit in the plan after an AIP is made?
Investment earnings can only be returned to the subscriber under certain conditions. Specifically:
(1) the plan must have been in existence for at least 10 years,
(2) all current and former beneficiaries must be at least 21 years of age and not currently pursuing higher education, and
(3) the subscriber must be resident in Canada.
If these conditions are met, the subscriber may be allowed to receive an accumulated income payment. The subscriber may choose to transfer the payment to a registered retirement savings plan, without penalty, if the subscriber has sufficient room to absorb the amount of the transfer. The subscriber also has the option to receive a cash payment. In this case, the promoter will be required to deduct tax at source. When an AIP is made from an RESP, the subscriber must terminate the plan by the end of February of the following year. The CESG will be returned to the government when the first AIP is made. The AIP cannot be rolled over into the beneficiary’s RRSP.
In a family plan, who decides how the earnings and the grant are divided if one beneficiary decides not to pursue post-secondary education?
With the exception of Group Plans, the subscriber decides how to divide the earnings and the grant among remaining beneficiaries for educational purposes provided that none of the beneficiaries receive more than $7,200 in CESG.
What happens if the beneficiary does not go to school?
Here are some alternatives should this occur:
- You may wish to leave money in the plan for a few years in case the beneficiary changes his or her mind, if the plan allows you to do this;
- You may name a new beneficiary;
- You may use the Accumulated Income Payment (AIP) route if the following conditions are met:
* the beneficiary is at least 21 years of age,
* the plan has been in existence for at least 10 years, and there are no other eligible beneficiaries, and
* the subscriber is a resident of Canada
The RESP earnings can be paid out to a subscriber in the form of an Accumulated Income Payment (AIP).
What is the limit on the amount of Educational Assistance Payments (EAPs) a beneficiary may receive as a first payment?
The total of all EAPs that can be made to a beneficiary before he or she completes 13 consecutive weeks in a qualifying educational program is limited to $5,000. Once this period is completed, the beneficiary can receive any amount of EAPs. Students requiring more than $5,000 in EAPs may apply to HRDC for permission to receive larger EAPs. The promoter may impose other restrictions within their plans with respect to EAPs. Beneficiaries should consult with the promoter or trustee for specific information.
Can a subscriber contribute to the plan after the beneficiary begins receiving Educational Assistance Payments (EAPs) from the plan?
Yes, but one must remember that contributions must cease 22 years after the plan has been opened, and the plan must terminate in the 36th year after the plan has been opened. Please note however, that under a family plan, contributions can only be made until the beneficiary turns 21 years of age.
Will I lose my money if my child does not go on to post-secondary education after high school?
No. An RESP can exist for 36 years before you must close it. If a child does not wish to pursue post-secondary education immediately, it is recommended that you wait a few years until the child decides whether or not to pursue his or her education. Rest assured that the money invested in the RESP will continue to earn tax-sheltered income during this period. Should your child decide never to pursue post-secondary education, you have the option of transferring the earned income (up to a maximum of $50,000) into your Registered Retirement Savings Plans (RRSPs), or that of your spouse. Finally, the money can be withdrawn subject to various tax rates. Under all these circumstances, the grant is returned to the Government of Canada. However, the interest earned on the grant remains with you, the subscriber.
If a subscriber has two children in a family plan, is each child eligible for the $500 Grant?
Yes. Eligible Grant limits are calculated for each beneficiary individually.
In the case of a family plan - could all the investment earnings and the grant be paid out in the form of an EAP to only one of the beneficiaries, if it is felt that the others will not attend post-secondary institutions?
Under a family plan, the subscriber may select any or all of the named beneficiaries to receive some or all of the earnings and Grant up to each beneficiary’s maximum grant limit. For example, one beneficiary could receive all earnings and grant (up to $7,200) if the subscriber chose to direct that EAPs be made that way.
Important Details about Registered Education Savings Plans
Any child can be the beneficiary;
Parents, grandparents, relatives or friends may put any amount per year into RESPs in respect of a particular beneficiary;
Subscribers can contribute for up to 22 years after a non-family plan has been opened and up to the year in which the beneficiary turns 21 years of age in a family plan;
Contributions to all RESPs on behalf of a beneficiary are subject to a lifetime limit of $50,000;
Contributions made to an RESP are not tax deductible, and are not taxed when returned to the subscriber;
The money in an RESP grows tax-free until the beneficiary is enrolled full-time in a qualifying program at a college, university or other recognized post-secondary educational institution
Then, the beneficiary can use Educational Assistance Payments paid from the RESP to help finance his/her post-secondary education;
If the beneficiary does not go on to full-time studies, another beneficiary can be named (subject to the terms of the plan). However, in order to keep the CESG, the new beneficiary must be under 21 years of age and either the new beneficiary is a brother or sister of the former beneficiary or both the new and old beneficiaries are under 21 years of age and are related to the subscriber. RESPs also now permit the payment to the subscriber of Accumulated Income Payments (AIP), or the roll over of the income to a subscriber’s or subscriber’s spousal Registered Retirement Savings Plan, under certain conditions.
An RESP must be terminated by the end of the 36th year.