Post secondary education is very expensive in North America and unless you are fairly wealthy will be a worry for most parents. Obviously, not all kids go onto University or College but if they do and you haven’t planned for it you could find yourself with a large financial burden. This would probably happen just when most families are looking at finally having some financial security
A Registered Education Savings Plan – RESP – is vital for your financial health if you have kids who you feel may want to go into post secondary education. An RESP is government sponsored (Registered with Canada Customs and Revenue Agency) and is allowed to grow tax free. Money paid from the plan at maturity may be taxed as income for the student.
The plans are administered by private companies/persons (Promoter) who will collect contributions and invest them accordingly. Up to $4,000 per beneficiary (student) can be contributed per calendar year, with a lifetime limit of $42,000 without any tax implications. Each student may have more than one plan but the limit is strictly per student.
The most important aspect of the RESP’s is that the Government will add 20% to the first $2,000 per calendar year ($400) up to and including the year of the students 17th birthday. This is called the Canada Education Savings Grant (CESG) and any amounts paid in are not included in the annual limit for tax purposes.
The maximum a student can receive from CESG is $7200 over the lifetime of the plan. Any amount of CESG not claimed each year will accumulate as up to $800 can be paid if not previously claimed. If the RESP is not eventually used for educational purposes any CESG payments will have to be repaid to the government.
To apply, the student must be resident in Canada and have a Social Insurance Number (SIN) which must be provided to the promoter at the plan inception. Also, the individual making the contributions will be required to provide their SIN.
Types of RESP Plans
There are 3 main types of Plan:
Non-Family – There can be only one beneficiary but anyone (grandparents/godparents etc.) can make the contributions whenever they want for however much they want to pay.
Family – There can be one or more beneficiary’s as long as they are blood relatives or adopted by the person/s making the contributions. There are no restrictions on when and how much is paid in (apart from the tax implications of over subscribing).
Group – These plans are normally offered by foundations who set how much is paid in and when. Each age group will have a particular plan and all members will take a share. There are some fairly complicated rules attached and should be thoroughly researched with the plan providers before committing.
At termination/maturity, there are several options:
1. The intended student does not go into post secondary education. The contributions are returned tax free to the person who made them. The CESG is repaid to the government. Any income generated by the plan will be subject to taxation.
2. The student enrolls in a qualified program at a post secondary educational institution and completes the full program. Initially, $5000 can be paid from the plan, then after 13 weeks there is no limit to the amount paid as long as the student remains in the program. These payments are called Educational Assistance Payments (EAP’s). The student cannot be receiving EI (employment Insurance) or the program must not be part of the students employment (an apprenticeship for example).
3. The proceeds can be transferred to another RESP.
4. The proceeds can be paid to a designated educational institution.