You’ll spend years accumulating that RESP nest egg for your darling little Einstein. Because as a parent, you want your child to have the same – if not better – opportunities that you had. But sorting out the different options and regulations around RESPs can be overwhelming. Here’s a quick lesson on some key things you should know about Registered Education Savings Plans (RESPs), Canada Education Savings Grants (CESGs), Educational Assistance Payments (EAPs) and Accumulated Income Payments (AIPs).
How an RESP works
An RESP is an education savings plan that has been registered with Canada Revenue Agency (CRA), and is governed by the Income Tax Act and Regulations. It allows parents to save for their children’s post-secondary education, with the earnings in the plan growing tax-free.
The federal government will also contribute to the RESP by giving a Canada Education Savings Grant (CESG), based on the amount of contributions that you make to the plan. There are also a few provincial RESP grant programs.
There are two types of RESPs. The most common type is the family plan, which allows you (the subscriber) to name more than one child (beneficiary). A specified plan is essentially a single beneficiary RESP (non-family) plan. Beneficiaries must be connected by blood relationship or adoption to each subscriber, and must be a resident of Canada before the designation is made.
When your child begins post-secondary education, your financial institution (promoter) will pay out the RESP contributions and the income earned on them as an Educational Assistance Payment (EAP).
RESP contributions cannot be deducted on your income tax return; however, as long as the income stays in the RESP, it is not taxable.
If your child decides not to attend a post-secondary institution, you’ll receive those payments at the end of the contract. You do not have to include this in your income tax statement as it would be considered after-tax money. Beneficiaries do not have to include contributions in their income, however, they must include EAPs in their income the year in which they were received.
Your contributions can be returned either to you or your child tax-free at any time. They can also be transferred to your RRSP if there is contribution room available.
Under the family plan, no contributions (except transfers from another RESP) can be made after the 31st anniversary of the opening of the plan.
There is no annual limit for contributions to RESPs, but there is a lifetime limit of $50,000 per beneficiary. If a contribution is made that exceeds the lifetime limit for that beneficiary, each subscriber is liable to pay a 1% per-month tax on his or her share of the excess contribution that is not withdrawn by the end of the month. The tax is payable within 90 days after the end of the year in which there is an excess contribution, and exists until it is withdrawn.
Canada Education Savings Grant (CESG)
Employment and Social Development Canada (ESDC) provides an incentive for you to save for your child’s post-secondary education by paying a grant based on the amount contributed to the RESP. It will pay 20% of the annual RESP contributions that you make, to a maximum of $500 per child per year ($1,000 in CESG if there is unused grant room from a previous year), and a lifetime limit of $7,200.
Unused grant contribution room is carried forward and used when RESP contributions are made in future years. Beneficiaries will qualify for a grant on the contributions made on their behalf up to the end of the calendar year in which they turn 17 years of age. However, since the CESG has been designed to encourage long-term savings for post-secondary education, there are specific contribution requirements for beneficiaries who reach 16 or 17 years of age. If your child does not pursue post-secondary education, the CESG is returned to the government.
Educational Assistance Payments (EAPs)
An EAP consists of the CESG and the earnings on the money saved in the RESP. Your promoter will only pay out an EAP when:
– The student is enrolled in a qualifying educational program. This includes students attending a post-secondary educational institution and those enrolled in distance education courses, such as correspondence courses, provided by such institutions; or
– The student is at least 16 years of age and is enrolled in a specified educational program.
Students can receive EAPs for up to six months after ceasing enrolment, provided that the payments would have qualified as EAPs if they had been made immediately before enrolment ceased.
The maximum amount of EAPs that can be made to a student depends on whether he or she is enrolled in a qualifying or specified educational program.
Employment and Social Development Canada may, on a case-by-case basis, approve an EAP amount of more than the above limit if the cost of tuition plus related expenses for a particular program is substantially higher than the average.
Accumulated Income Payments (AIPs)
AIPs are usually paid to the subscriber, drawn from the money earned from contributions and/or grants paid into an RESP. They cannot be made as a single joint payment to separate subscribers. An AIP does not include:
– Educational Assistance Payments (EAPs)
– Payments to a designated educational institution in Canada
– The refund of contributions to the subscriber or to the beneficiary
– Transfers to another RESP
– Repayments of CESGs
Changing the beneficiary
A key benefit of the family plan is that if one child does not go to a post-secondary institution, a sibling can take advantage of the unused contributions. When one child becomes a new beneficiary in place of another, the contributions for the former beneficiary are treated as if they had been made for the new beneficiary on the date they were originally made.
If the new beneficiary already has an RESP, this may create an excess contribution. The exception to the rule ensures that the contribution history of your first child is not added to the contribution history of their sibling when determining whether the younger child’s lifetime contribution limit has been exceeded. This applies if the new beneficiary is under 21 years of age, and the parent of the new beneficiary was a parent of the former beneficiary.
Terry Willis, T.E. Wealth