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Education – RESP

Educational savings strategies

Like everyone, you want the best for your children and grandchildren – including a good education. In today’s competitive job market, a college or university degree is more important than ever before, and will likely become even more necessary in the future. That’s why it’s essential to start planning now for how you will meet the costs of that education.

Registered Education Savings Plans (RESPs)

Registered Education Savings Plans (RESPs) are one of the best ways to meet your educational savings goals.

With RESPs, you can make contributions now towards the future cost of a child’s education. Unlike RRSPs, contributions made to an RESP are not tax deductible. However, the contributions grow tax- sheltered in the account, and the income earned on the contributions is not taxable until paid out to a beneficiary (who is typically taxed at a very low rate, if at all).

Withdrawals of income can be made to a beneficiary in full time attendance at a qualified post secondary institution.

Currently, you can make contributions of up to $5,000 a year to attract grant (if accumulated grant available), per beneficiary, to a lifetime maximum of $50,000 over 31 years, per beneficiary. The plan must be terminated no later than 35 years after it is first opened.

If for any reason your chosen beneficiary does not pursue a higher education, you can either name another beneficiary to the plan or transfer any unused income to your (or your spouse’s) RRSP, up to a $50,000 limit and provided you have the contribution room. You can also choose to have the income refunded to you with an additional 20% tax applied on top of the marginal tax rate.

RESPs and The Canada Education Savings Grant (CESG)

In the 1998 federal budget, the Canada Education Savings Grant was introduced to make RESPs a more attractive savings vehicle for Canadians and updates to the plan were added in 2007 and 2008.

Under the RESP program, every RESP beneficiary until the end of the year they turn 17 will be eligible to receive a grant of up to 20% of the first $2,000 contributed each year ($400 maximum per year) from 1998 to 2006 inclusive, then $2,500 contributed from 2007 onward. Contributions for beneficiaries aged 16 and 17 will only receive a CESG subject to certain stipulations.

While missed RESP contributions cannot be carried forward, the CESG room can be accumulated until the end of the year the beneficiary turns 17. There is a lifetime limit of $7,200 on the amount of CESG money that any one student can receive from an RESP.

Payments will be made directly into the RESP and can be invested along with the contributions.

The CESG can be included in the educational assistance payments paid out to the beneficiary once they are pursuing higher education, however, any unused CESG must be repaid to the government.

In Trust Accounts

Another education saving strategy is to open a regular investment account in your name “In Trust” for your child. With this type of informal trust account there are no restrictions on the amount you can put away for your child, and the money can be used for purposes other than post secondary education.

However, payments into In Trust accounts are not eligible for the CESG.

The taxation on a trust account is also very different from an RESP. Generally you are taxed for any interest and dividend income on original investments. Your child is taxed on any capital gains and any reinvested interest or dividend income. However, if the funds in the account are from Child Tax Benefit payments or an inheritance, then income will be taxed in the child’s name.

Once your child turns 18, he or she has the right to assume control over the money. Parents who want more control over the funds may wish to set up a formal trust, which generally involves legal and accounting advice.

Planning Ahead is Important

Given the rising costs of a university education, saving for a child’s education is becoming a priority for many Canadians. ScotiaMcLeod’s RESP offers you the most flexibility when it comes to planning your education savings strategy, by offering the widest range of investments eligible for RESPs, a choice between family and individual plans, and much more.

The RESP is a great opportunity to save for your children’s education. If you wish to contribute for the current year, ensure you have your child’s Social Insurance Number and plan to contribute on or before the end of December for the current year.

Future Generation Education Expenses

Do you wish to contribute financially to your future grandchildren’s education expenses? Many of us would like to help fund private school or post-secondary schooling, but it can be difficult if we don’t know exactly how many grandchildren there might be, and when they might be born. Here are a number of options that you may wish to consider.

Make an Outright Gift

You can take the “wait and see” approach and pay your grandchildren’s expenses as they arise. This lets you assess each grandchild’s individual situation while still keeping the assets in your name. If you pay tuition fees directly to an educational institute, there will be no income attribution concerns. However, if you plan to give money directly to a grandchild under 18 years of age and that money subsequently earns interest or other investment income, the tax liability may be attributed back to you. Financial gifts to grandchildren age of 18 and over will not be attributed back to you, and will be taxed at the child’s presumably lower rate of taxation. If the child uses the money to pay tuition, they may also be able to transfer unused tuition and education tax credits to a parent or to you. The outright gift approach makes sense for private school tuition fees, since RESPs can only be used to fund post-secondary education.

Contribute to a Registered Education Savings Plan (RESP)

Once the grandchildren are born, you can apply for a Social Insurance Number for them, and open an RESP. Although contributions to a registered education savings plan are not tax deductible, there is a tax deferral opportunity as the contributions accumulate tax-free within the plan.

Upon withdrawal, the payments will be taxable in the hands of your grandchild, provided that your grandchild is enrolled full-time or part-time in a qualifying educational program at a qualifying post-secondary educational institution. Your grandchild will likely be in a lower tax bracket than you at the time of withdrawal, and will be able to offset some of the tax liability with tuition and education tax credits, lowering the overall tax burden on these funds.

  • There are individual plans and family plans. In an individual plan, the subscriber can be anyone (no need for a blood or adoption relationship), but there can only be one beneficiary. In a family plan, the subscriber can only be a parent or grandparent, and you can have multiple beneficiaries as long as they are related to the subscriber by blood or adoption.
  • The total lifetime maximum of RESP contribution is $50,000. Contributions to a beneficiary in an individual plan may be made for up to 31 years after the plan is established. For example, if an individual plan is opened in the year 2000, the last contribution date is December 31, 2031. Contributions to a beneficiary in a family plan may only be made until the date the beneficiary turns 31 years of age. The plan must be closed by December 31st of the 35th year after being opened, eg. an RESP opened in May 2000 must be terminated by December 31st, 2035. A penalty of 1% per month is imposed on excess contributions for each month they remain in the plan.
  • Your capital contributions can be withdrawn at any time; however, you cannot withdraw the income of the RESP without tax consequences. For an RESP beneficiary who qualifies for disability tax credit termination date of RESP has been extended from 35 to 45 years.
  • Under the Canada Education Savings Grant (CESG) program, the federal government will pay a grant of 20% on the first $2,500 of your annual contributions. The maximum annual grant of $500 (up to $1,000 if there is sufficient unused accumulated grant room) is payable for each year until the end of the calendar year in which the beneficiary turns 17 to a maximum of $7,200 per beneficiary.