It appears attending post-secondary education is the obvious choice for our young people across Canadian provinces and what used to be a privilege only for the wealthy, has now become the first next step for many who are graduating high school. Apart from scholarships, this can be quite an expensive undertaking between the tuition costs, books, housing and more. Student loans can certainly make attending these institutions possible, though this requires the most up and coming generation to begin their adulthood riddled with debt. Fortunately, our government has provided the Registered Education Savings Plan to help parents save for their children’s education from an early age and on a tax-deferred basis.
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Starting The Registered Education Savings Plan
Plan Subscriber, Sponsor, and Beneficiary
The Registered Education Savings Plan begins when the plan subscriber (literally the person who sets up the plan and investments) sets up the plan. The plan subscriber, who can be the anybody, works alongside the plan sponsor (ie. the bank, trust company, mutual fund company, scholarship foundation) to determine the type of RESP needed and the investment selection and applies for government grants.
When starting the plan, the subscriber will have somebody in mind they are saving for whether it is their child, grandchild, niece, nephew, friend, or even themselves. The plan type can be for a specific individual if they are not related to the subscriber, a family with multiple kids if they are related to the subscriber, or a group of individuals. The beneficiary (the person going to school) can be changed or added on in future, though it is always a good idea to check with your plan sponsor first to see how this will affect the plan. For example, grants or bonds already received may need to be repaid.
Investment options include mutual funds, guaranteed investment certificates, term deposits, and savings accounts but may vary depending on what your plan sponsor offers. Fees may also be incurred inside the plan.
When paying into the plan, any contributions made by the subscriber will not be tax deductible though any money earned on contributions, grants, and bonds will be tax-deferred until withdrawn by either the beneficiary or subscriber. It is also possible for another person to contribute to the plan, though if this were to happen and the beneficiary were to not go to school, the growth would be taxed back to that individual and any grants or bonds repaid.
The contribution limits are separated by pre-2007 rules and post-2007 rules:
- Pre-2007 there was an annual limit on contributions made between 1998 and 2006 of $4000 and with a lifetime contribution limit of $42,000.
- Post-2007 and including 2007 there is no annual limit to how much you can contribute to the plan. There is, however, a $50,000 lifetime limit applied to each individual beneficiary, meaning you can contribute up to $50,000 for each child. This lifetime limit is applied to all RESPs set up for the child where there is more than one.
Contributions may be flexible or fixed depending on the plan type and your sponsor. For example, any contributions made to a group plan will be fixed for the duration of plan whereas you can make multiple contributions to a family plan. It is always a good idea to check with your plan sponsor to see what your options are, if any.
Contributions will also be tracked differently depending on the plan type. For a family plan, any contributions made, and any grants or bonds received will be tracked per beneficiary whereas for a group plan, contributions can be distributed between beneficiaries, but any grants or bonds received will be tracked individually.
Contributions must end after the 31st year the RESP was opened.
Canada Education Savings Grant
Simply put, the Canada Education Savings Grant (or CESG) is money that the government contributes into your RESP in addition to your own contributions for children 15 and under. The maximum amount the government will grant to an individual beneficiary is $7,200.
There are eligibility requirements that must be met, and it is up to the plan subscriber to apply for this grant with the sponsor. As long as the child is a Canadian resident, has their social insurance number (which is required when the plan is set up), and is named as the beneficiary of the RESP, they will eligible for the basic CESG. Where the primary caregiver of the child earns an adjusted income below a certain level, the child may be eligible for an additional CESG amount from the government up to the lifetime limit of $7,200. This helps to accelerate the tax-deferred growth in the early years of the plan.
It is important to know that the basic and additional grants received do depend on contributions made to the RESP that year. To maximize the basic grant for a newborn, you will need to contribute $2,500 a year and the government will add $500 to the plan. To maximize the additional grant, the child’s family must earn an adjusted income of $46,605 or less in 2018 and the government will add an additional $100 to the plan. If the child’s family earns an adjusted income between $46,605 and $93,208 in 2018, the government will add an additional $50 to the plan.
The basic grant is provided based on 20% of the contributions made in a year up to the $2,500. The additional grant is provided based on either 10% or 20% (depending on the adjusted income of the family) on the first $500 of contributions already made. The grants will be deposited into the RESP within 65 days of the application being approved.
If you are setting up a plan for an older child, it is best to do so before the child turns 15. This way, they still may be eligible for the CESG up to the age of 17. You can increase the amount you contribute in a year and still be eligible for the grant. For example, you can contribute up to $5,000 in a year and receive a maximum basic grant of $1,000 plus your additional grant of up to $100 (as eligible) for a combined total of $1,100 in grants provided that year. This is because the grant room carries forward and the grants are payable up to the maximums listed and up to the lifetime limit of $7,200.
Keep in mind the lifetime contribution limit for a Registered Education Savings Plan is $50,000 and the lifetime Canada Education Savings Grant is $7,200. This means only $36,000 of contributions are eligible or required to receive the additional 20% grant. It can still be beneficial to contribute the remaining $14,000 worth of contribution room as any growth earned inside the plan will be tax-deferred.
Canada Learning Bond
The Canada Learning Bond is paid to the RESP of a child born on or after January 1, 2004 who is from a low-income family. Contributions are not required to receive the bond of up to $2,000 from the government where $500 is paid in the first year the child is eligible and $100 every year after, that is, until the end of the year they are 15 when they retain their eligible status.
Determining if your child is eligible or not depends on the number of children in the family and your adjusted net family income. Parents (or the primary caregiver) will apply for the Canada Learning Bond for their child even where the parent is not the same person as the plan subscriber. You can do this with the plan sponsor and will need to talk to the subscriber to gain appropriate access to the plan
Using The Registered Education Savings Plan
When the beneficiary (child) goes to post-secondary and is enrolled in a qualifying or specified educational program, they will be paid through an Educational Assistance Payment (EAP) any government grants, bonds, and earnings on the money that was saved inside their RESP.
Once in a qualifying program, the new student will receive up to $5,000 for the first 13 consecutive weeks they are in the program. After the first 13 weeks are complete and they still qualify, the student will have access to the rest of the funds. The EAP can be used for tuitions costs, books, housing and more and will be included in the child’s income for that year to be taxed accordingly (it is likely the student will have a low income and the taxes will be minimal). If the new student is in a specified program, they will receive up to $2,500 in the first 13 weeks of the program even if they were to not follow through with the program to the end.
Any money you may have contributed as the subscriber or parent will be paid back to you tax-free.
Ending The Registered Education Savings Plan
The RESP can continue to be used and/or continue earning money tax-deferred up to the end of the 35th year from when the plan was opened, after which the plan will expire. There is always a chance your child may choose not to attend post-secondary or will attend after their 36th birthday and the plan will need to be closed.
If there is another RESP you would like to transfer the funds to, you can do so up to the lifetime contribution limit of the other beneficiary. If not, however, any grants and bonds received in the RESP will need to be repaid to the government and any money you may have contributed as the subscriber or parent will be returned to you tax-free. Any money earned inside the RESP will be paid back to the subscriber and taxed at their marginal tax rate plus 20%. Alternatively, the accumulated income can be transferred to the subscriber’s Registered Retirement Savings Plan or Spousal Registered Retirement Savings Plan, another child’s Registered Disability Savings Plan, or gifted to a designated educational institution.
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