By the time you read this, a new school year has begun. That makes it an ideal time to summarize the important aspects of the Registered Education Savings Plan (RESP), one of the most effective ways of accumulating savings for a child’s education.
Who can contribute?
While parents are the most obvious candidates as contributors, anyone can open up an RESP plan. The person opening the RESP plan is referred to as the Subscriber. Where there is a single Subscriber, it is strongly recommended they designate a Successor Subscriber within a will to ensure the RESP continues after death.
What can be contributed?
The lifetime contribution limit for each beneficiary of an RESP plan is $50,000. This limit applies to the aggregate contributions made for that individual across all RESP plans for which they are a beneficiary. Accordingly, care must be taken to co-ordinate contributions where there is more than one plan so that limits are not exceeded.
What will the government contribute?
A Canada Education Savings Grant (CESG) is payable on between $2,500 and $5,000 of contributions made in a year per RESP beneficiary, depending on whether contributions have previously been maximized. The grant amounts to 20% of the contribution made to a lifetime limit of $7,200. Special rules exist for beneficiaries ages 16 and 17.
What is the lifetime of an RESP?
An RESP plan can exist for 35 years after it is opened.
What are the tax benefits?
While contributions to an RESP are not tax deductible, the CESG money and investment growth paid to RESP beneficiaries upon satisfactory proof of enrollment is taxed to them, at their presumably lower rate.
What if I have more than one child?
A “Family Plan” can be opened where there are two or more siblings. Such plans provide planning flexibility when the time comes to pay money out of the plan: although contributions are subject to the limits outlined above, money paid out of the RESP for beneficiaries can be in any proportion subject only to a limit of $7,200 in CESG money per beneficiary.
What if the beneficiary never attends qualifying post-secondary education?
In that situation, CESG money is returned to the government. The investment growth in the plan would be taxable to the Subscriber provided that all plan beneficiaries are at least 21 years of age and the plan has existed for at least 10 years. Furthermore, there is a 20% penalty tax applied to such withdrawals. If the Subscriber has available RSP contribution room equal to or greater than the amount of the income payment from the RESP, special rules allow for the transfer of the RESP growth into the RSP.
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