With tuition fees and the cost of living rising each year, it makes sense to start saving as soon as possible for your child's post-secondary education. A Registered Education Savings Plan (RESP) is a savings account specifically designed to help you save for your child's higher education by providing several financial incentives.
As the subscriber, you can contribute up to $50,000 per child to a RESP over the lifetime of the plan (the annual limit was eliminated last year). Unlike a Registered Retirement Savings Plan (RRSP), contributions to a RESP are not tax deductible. However, savings within the plan grow tax-free until they are withdrawn for education purposes by the beneficiary. They are then taxed in the beneficiary's hands, which could mean there may be no taxes to pay if the student is in the lowest tax bracket at the time.
One of the benefits of opening a RESP is the Canada Education Savings Grant (CESG). The Canadian government helps you save for your child's future by adding 20% of your annual contribution directly to the RESP, to a maximum of $500 per year, per beneficiary. The lifetime CESG maximum per beneficiary is $7,200. Your child will need a Social Insurance Number in order to qualify for the CESG.
When a beneficiary is ready for post-secondary school, he or she will receive educational assistance payments (EAPs) from the savings accumulated in a RESP while attending an eligible institution as a full-time student. The payments can be used for tuition, housing, transportation, books, supplies and other education-related costs.
You can open a RESP with GP Wealth Management by choosing which type of RESP you want and completing the appropriate application form. The Individual Plan can be set up for any one beneficiary, including yourself or your spouse.
The Family Plan is for more than one beneficiary. Each beneficiary must be under 21 years of age and must be related to the subscriber by blood or adoption. Anyone can contribute to an Individual Plan, but only blood relatives can contribute to a Family Plan.
There are rules and tax implications regarding both RESPs and CESGs, so it is wise to find out everything you need to know.
Open a RESP account with us by clicking here.
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Set up a RESP Account with GP Wealth Management
How do I set up a RESP?
You must complete the RESP application form and determine if you require an individual RESP (one beneficiary) or a family RESP (more than one beneficiary). Please be aware that different application forms are required.
Does the beneficiary require a Social Insurance Number (SIN)?
A person does not need a SIN to become a beneficiary of a RESP, but must obtain one in order to receive the CESG. The form for a SIN application can be completed online and printed for signatures by clicking here.
How do I apply for a SIN?
Most cities have a Human Resources Development Canada (HRDC) office (look in the blue pages of your phone book for a location and phone), where you can drop off or mail in a completed SIN application form. Or you can download an application form by clicking here. You can visit the HRDC web site for more information on how to complete the form by clicking here.
Please note that you will need to provide an original copy (or notarized copy) of each beneficiary's birth certificate. There is no fee for an initial SIN.
Who makes the application for the grant?
The administrator of the plan will make the application for the CESG grant on behalf of the subscriber.
Can I set up a Pre-Authorized Chequing (PAC) plan to contribute to a RESP?
Yes. With the maximum CESG credit of $500 per year allowable per beneficiary you may want to consider arranging a monthly deposit of $208.33 per month ($2500 per year).
To open a RESP Account today, click here.
Recent changes to the contribution rules for RESPs include the elimination of the $4,000 annual RESP contribution limit and the increase of the lifetime RESP contribution limits to $50,000 from $42,000.
The Canada Education Savings Grant (CESG) rules also changed. The maximum annual RESP contribution limit that will qualify for the 20% CESG is now $2,500 (up from $2,000), thereby increasing the maximum CESG per beneficiary to $500 from $400.
Note, however, that the $7,200 lifetime CESG limit is unaffected by this change.
Family Plan vs. Individual Plan
What is an Individual Plan and who can be a beneficiary?
An individual RESP Plan set up by the subscriber can only have one beneficiary. A subscriber may designate anyone as the beneficiary of the plan, including himself/herself or his/her spouse.
What is a Family Plan and who can be a beneficiary?
This is a RESP set up by a subscriber on behalf of one or more individuals designated as beneficiaries. However, each beneficiary must be under 21 years old at the time of designation and must be related to each subscriber by blood or adoption. For these purposes, your children, grandchildren, brothers and sisters are related to you by blood. Your nieces and nephews are not related to you by blood. As a subscriber you can't designate yourself or your spouse as a beneficiary under the Family Plan.
Are there restrictions to the types of funds I can invest in?
A RESP is restricted to qualified investments which are the same as qualified investments for a RRSP.
Who can contribute to a RESP?
Anyone can contribute to an Individual Plan but only a blood relative may contribute to a Family Plan. All contributions are considered to have been made by the subscriber.
Can I set up a RESP for my child even though I am living abroad?
Yes. As the subscriber, you need not be a Canadian resident to qualify for the CESG. However, the beneficiary must be a Canadian resident.
How long can I contribute into a RESP?
Contributions can be made up to and including the 22nd year of the plan. A RESP must be terminated on or before the last day of the 25th year in which the plan was entered into.
Is there a minimum contribution level?
Generally no, however some plans have a $500 minimum to open an account.
Can I determine how the contribution money will be allocated between the beneficiaries (in a Family Plan)?
Yes. You may indicate the allocation you desire on the application form as long as the total contribution per beneficiary does not exceed $50,000. You may change this percentage at any time by calling your financial advisor.
What happens when a beneficiary is ready for post-secondary school?
The beneficiary will receive educational assistance payments (EAPs), which include accumulated earnings and grant money received from the plan. The EAPs are spread out over the years the full-time student is enrolled in a qualifying institution. Please note that the investment earnings portion (growth) is taxed at the student's income level. There may not be any taxes to pay however, if the student is in the lowest tax bracket at that time.
Can I withdraw money contributed to a RESP for non-educational purposes?
You, as a subscriber, can withdraw your money at any time, however, there may be an impact on the grant you have received. If contributions are withdrawn from a RESP that contains the CESG, and no beneficiary is enrolled in a qualifying educational program and eligible to receive an EAP, you may have to return all of the CESG.
What happens if I over-contribute to the plan?
For the year 2007 and subsequent years, there is no annual contribution limit, only a life time limit of $50,000. There is a penalty of 1% per month imposed on you, the subscriber, on the over-contributed amount (over $50,000) until the over-contribution is withdrawn. If there is more than one RESP for a beneficiary, you must keep track of all contributions made to your RESPs.
How will I know if there has been an over-contribution?
Most mutual fund companies track contributions, however, it is ultimately your responsibility to ensure that you have not over-contributed into the plan(s).
Can original contributions be paid back to the subscriber tax-free?
Yes. The contributions may be withdrawn by the subscriber tax-free at any time during the lifetime of the RESP. However, if they are withdrawn before the beneficiary is registered in an eligible institution, the CESG will have to be repaid to the government and the CESG grant is suspended for two years. Ideally, contributions should not be withdrawn from the RESP before the maximum CESG has been received from the government and then paid out to the beneficiary. The original contribution amount belongs to the subscriber and can be retained or assigned to the beneficiary.
Are there restrictions on the type of school my child can attend?
Yes. To receive payments from the plan, the beneficiary must be enrolled in an eligible institution.
What is considered an eligible institution?
Full-time attendance in a designated university, community college, cégep, Canadian technical college or university outside Canada.
Do I have to indicate which institution the money is intended for?
No. To draw on the RESP, however, the beneficiary must show proof of attendance at an eligible institution.
What happens if the beneficiary doesn't go to school?
There are three options:
- You may change the beneficiary. In a Family Plan, the beneficiary must be under 21 years of age and is related to the subscriber by blood or adoption.
- If you are a Canadian resident and you have room, you can contribute up to $50,000 to your or your spouse's RRSP (only if the RESP has been open for at least 10 years and the beneficiary is at least 21 years of age and is not pursuing higher education).
- You can redeem the original contributions in the plan tax-free, paying back the CESG. Any accumulated earnings are subject to a 20% penalty and tax is payable at your highest marginal tax rate, or you can donate the investment earnings to an educational institution of your choice.