What is an RESP?

This plan is a flexible, tax-deferred investment that offers growth and government of Canada assistance to help you secure your children’s future. When you open a Registered Education Savings Plan -RESP, you will receive grants from the federal and provincial governments, which could be up to 40% of the amount invested over time until the individual child is 18 years old. You can contribute up to $50,000 per beneficiary child over a lifetime, and you can contribute that all at once or over time – there isn’t an annual limit to contributions. It is important to note, though, that when your child goes to withdraw the money for educational purposes they will be taxed on any interest that has accumulated on the investment.

RESP is a registered savings account that a parent or other family member may use to save for a child’s education. The money invested in a RESP grows tax free, and when it is withdrawn, it is minimal taxed in most cases as child’s income bracket (which is usually low).

Additionally, when you invest in an RESP, you can also be eligible for government Basic grants, and some additional grants (depending on family income level). As long as the child attends an accredited post secondary education program, he/she can be eligible to get all the grants and growth on those grants as well In addition to the contributions.

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How does the RESP work?
As a parent or guardian, an RESP would be opened for your child when they are young. You can open the RESP policy at any time, up until the beneficiary is 18 years old. Once the account is opened anyone, including grandparents and other guardians, can be make contributions to this investment plan so everyone involved in your child’s life can feel like they are helping to set them up for a great future.

There are three main parties in an RESP – the subscriber, the promoter and the beneficiaries:

The subscriber is the person who is making the RESP contributions. Subscribers may not deduct these contributions from their taxes.

The promoter is the party that pays the contributions plus any earned income to the beneficiaries. Earned income is paid in the form of educational assistance payments (EAPs). If the funds end up not going to the beneficiaries, they go back to the subscriber at the end of the contract.

The beneficiaries, receive their payments as EAPs to pay for their education. These funds must be included as part of their earned income when they file their tax returns, however since the beneficiaries are attending post-secondary school, they are usually in a lower tax bracket than the subscriber.

The Canada Revenue Agency sets a lifetime limit of how much money can be contributed into an RESP for each beneficiary. The CRA also specifies that no contributions (except for transfers from another RESP) may be made into the plan after the 31st anniversary of opening the plan. Furthermore, the plan must be completed within one year of the 35th anniversary of the plan.

Below-mentioned information is how an RESP usually works:
The subscriber gets into an RESP contract with the promoter, and they name one more individual/s (beneficiaries) under the education savings plan.
The subscriber, along with the Canadian government, makes contributions to the RESP. Suppose there are any government of Canada grants such as the Canada Education Savings Grant (CESG), Canada Learning Bond (CLB), or any other educational government grant. In that case, it will be paid directly to the plan.
As long as the amount stays in the RESP, it is not taxable. Additionally, the promoter also makes sure that payments made to the plan are made according to terms of the RESP.
The subscriber’s contribution can be returned by the promoter tax-free if needed.
The promoter can help finance the beneficiary post-secondary education by making necessary payments, including making accumulated income payments.

RESP Contributions
The promoter will be eligible to make contributions to the beneficiary only if:

The promoter receives the beneficiaries’ Social Insurance Number (SIN) before the contribution is made. Also, the beneficiary must be a resident of the country.

The contribution is made by transfer from RESP to another if the person was a beneficiary before the transfer was made.

Contribution Rules
Ideally, you can make a contribution to the family plans of the beneficiary who are under thirty-one years of age. Even if the beneficiary is over thirty-one years at the time of transfer, they can transfer the contribution from one family plan to another. As long as the contract is amended and held, you can take advantage of your RESP contracts on the new age limits rule. You have to ensure that the amendment is applicable for 2008 and the following tax years.

The best part about Registered Education Savings Plan is that the contributions cannot be deducted from your income on your income tax and benefit return. Additionally, the interest you paid on money you borrowed to contribute to the RESP cannot be deducted as well.

Contribution Limits
From the year 2007 onwards, there is no annual limit for contributions made to your RESP. However, the lifetime limit for a beneficiary is $50,000. Payments that are made to the RESP under a provincial program by the government or the Canada Education Savings ACT (CSA) will be excluded when deciding if the lifetime contribution limit has exceeded.

Tax on RESP Excess Contributions
Any surplus contribution that arises at the end of the month after the subscribers have made all the contributions to the beneficiaries’ RESP will be added. Still, it should not exceed the lifetime limit. As mentioned above, payments to the CSA or any other government education savings plan will not be included to identify if the beneficiary has an excess contribution.

Every beneficiaries’ subscriber is liable to pay monthly 1% tax on their share of the excess contribution, which is not withdrawn by month-end. Surplus contribution is present until the beneficiary withdraws it, and tax must be paid within ninety days after the end of the year.

The Canadian government must be notified of the share of the surplus contribution of the beneficiaries’ RESP. If there is an excess contribution, the T1E-OVP form must be filled out.

Waiver of Liability
After all the factors have been reviewed, including if the tax occurred because of an error, all or part of the tax amount can be cancelled or waived off. For this request to be considered, you must write a letter addressing:

The reason for the tax liability appearing?
Why should this be considered as a reasonable error?
Why is it fair to waive or cancel a portion or the entire tax amount?
There is a contribution limit on the beneficiaries’ contribution to all Registered Education Savings Plan (RESPs).

The annual limit for every beneficiary is:
For 1996, it is $2,000
For 1997 up to 2006, it is $4,000
For 2007 and the following years, there is no limit.
The lifetime limit for every beneficiary is:
For 1996 to 2006, it is $42,000
For 2007 and the following years, it is $50,000

Grants and Bonds
One of the biggest reasons why people choose Registered Education Savings Plans(RESPs) over other forms of savings vehicles is that the Canadian Government offers incentives in the form of grants and bonds to contribute to an RESP. Here is what you need to know:

Canadian Education Savings Grant (CESG) – regardless of family income, a beneficiary is eligible to receive the CESG on contributions made up until the year they turn 18. The amount of the CESG is 20% on contributions up to a maximum of $500 per year and a lifetime maximum of $7200 per beneficiary.

Canada Learning Bond – for lower income families, there is an additional incentive up to $2000 per beneficiary.

Can you write off RESPs?
Any investments made will be an income tax benefit for the person who made the contribution.

How are RESPs taxed?
If the child decides to continue their education after school:

The amount will grow and remain tax-free if it is not withdrawn.
There will be no tax deduction for the money deposited in an RESP.
You will only be taxed when you withdraw the money to pay for your children’s post-secondary education.
The beneficiary will be taxed, and since children do not have an income, the amount in the Registered Education Savings Plans (RESPs) can be withdrawn tax-free.
If the child decides not to continue their education after school:

The contributed amount will not be taxable, but the money earned through interest in the plan will be taxable. An additional 20% will be levied apart from the standard income tax level.
The money you have put in the RESP will be returned.
If there was a government grant as part of the RESP, it could be transferred to a sibling or returned to the government.
Would you like to start saving for your children’s or grandchildren’s education in an RESP? Contact us today to get started.

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How does my child use the RESP?
When it comes time for your child to obtain post-secondary education they can start accessing the funds available in their RESP. If your investment was eligible for any government grants, they would have been added to the amount available already. Your child will need to provide proof of acceptance into a post-secondary institution to receive the funds. The monies will be given to them to pay towards costs associated with post secondary education. If they choose not to obtain the education, though, the financial institution can give the contributions back to the originating source, tax-free. If this happens, any grants received in the RESP account will be returned back to the government and cannot be redeemed. It’s never too early to start thinking about the future you want for your children, and saving for their future education costs is a great way to start them off in the right way. Post-secondary education costs are rising, and paying for that education can be stressful.

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