SAVING FOR CHILDREN'S EDUCATION
TAKE ANOTHER LOOK AT
REGISTERED EDUCATION SAVINGS PLANS (RESP's)

Government programs may give you an incentive to consider an RESP to provide for your children's education.

RESP's have been available for many years but at one time were not popular due to the conditions imposed under these plans. Changes to the rules and additional incentives have made these plans an attractive vehicle for funding education.

Highlights include:

• Canadian Education Savings Grants matching 20% of contributions (to a maximum grant of $500).
• Refundability of contributions and income earned thereon including the ability to transfer income amounts to the contributor's RRSP (up to $50,000 where contribution room exists - otherwise a 20% penalty is imposed!).
• Sharing of accumulated income between siblings where one sibling chooses not to continue his or her education (under either a group or family plan).
  

As a result of these changes, RESP's now provide an attractive savings plan for a child's education.
What Is An RESP?
An RESP is a savings plan for post-secondary education which may be set up by an individual (usually a parent or grandparent). The funds may be contributed to the plan on an after tax basis for one or more related beneficiaries (this may include children or grandchildren). The maximum annual contribution per beneficiary is unlimited with a lifetime maximum of $50,000. Income earned in the RESP is not taxable until distributed from the plan.
When the beneficiary pursues a post-secondary education on a full time basis at a qualified educational institution, the plan's accumulated income is paid out to the beneficiary as taxable education assistance payments. Since most students have low income, they will pay little or no tax on the accumulated income. The capital contributions are also paid out to the beneficiary free of tax.
There are two types of RESP's: Group plans and self-directed plans. Both can be individual or family plans and have several variations.
What Is The CESG?
The Canada Education Savings Grant ("CESG"). The CESG is a federal government grant which will match individual RESP contributions up to the lesser of 20% of amounts contributed to such plans after 1997 and $500 annually with a lifetime cap of $7,200. The CESG will not affect the annual or lifetime RESP contribution limits. Note that the maximum grant of $500 is on a per beneficiary basis regardless of the number of RESP plans in place for a particular beneficiary.
Each child under the age of 18 will accumulate CESG contribution room of $2,500 per year up to and including age 17. The CESG will be payable on contributions made in the year to the extent that the contributions in respect of the child do not exceed the lesser of $5,000 and the unused contribution room. The ability to accumulate grant contribution room helps those who do not have the funds available in a particular year to later make catch-up contributions. For example, where parents contribute $1,000 in a particular year to an RESP, the CESG paid to the trustee in that year will be $200 (20% of $1,000) with a carryforward of $1,500 of contribution room. In the following year, the parents may contribute $4,000 to the child's RESP, thereby earning a CESG of $800 for the plan (20% of $2,500 of contribution room for the current year, being $500 plus 20% of the $1500 contribution room carried forward from the previous year).
The grants are provided to the plan trustee to accumulate in the RESP. The grant will earn income along with the contributions until the beneficiary enrols in a qualifying educational program. The CESG will then be paid to the student as part of education assistance payments and will be taxable to the student.
If the beneficiary does not pursue post- secondary education, the CESG grant must be repaid to the government in most cases. If the plan is a group plan and one beneficiary chooses not to enrol in a post-secondary education program, the remaining beneficiaries may receive the CESGs up to their individual maximum of $7,200. Any remaining CESGs in the RESP account must be repaid to the government.
What Is Required To Obtain A CESG?
To obtain the grant for a beneficiary, the beneficiary's social insurance number must be provided to the plan trustee and contributions must be made by December 31 each year to qualify for the grant. There are some minimum requirements to obtain the CESG:

• The beneficiary must be under age 18,
• A minimum of $2,000 of RESP contributions must have been made before the year in which the beneficiary attains the age of 16 or a minimum of $100 in annual RESP contributions have been made in respect of the beneficiary in any four years before the year in which the beneficiary attains the age of 16.

What If No Beneficiaries Pursue Post-Secondary Education?
If none of the beneficiaries in the plan decide to pursue post-secondary education the contributor will be allowed to withdraw the contributions and the accumulated income if:

• the contributor is resident in Canada,
• the plan has existed for a least 10 years,
• none of the beneficiaries have commenced qualifying post-secondary education by age 21.
  

The latter two conditions are waived where the beneficiary is deceased.
The contributor will be permitted to transfer a maximum of $50,000 of the income earned in the RESP to his or her own RRSP or a spousal RRSP if he or she has sufficient RRSP contribution room. If both parents are joint contributors to a self-directed plan, then the transfer can be made to either parent's RRSP.
Any income withdrawal in excess of the amounts transferred to an RRSP will be subject to a penalty tax of 20% in addition to the regular tax that would be payable on the income.
The RESP must repay the CESG's at the time the accumulated earnings are withdrawn for non-educational purposes (including an amount transferred to an RRSP). Income earned on the CESG portion of the plan does not have to be repaid to the government.

Benefits of RESP

Assume $2,000 per year per child		With RESP
For 18 years		36,000
CESG		7,200
Accumulated earnings @ 6%		33,000
Income taxes upon distribution (assume 25%)		(10,000)
Funds available for education		66,200

Assume $2,000 per year per child		Without RESP
For 18 years		36,000
CESG		-
Accumulated earnings (@ 3% after tax)		11,500
Income taxes upon distribution (assume 25%)		-
Funds available for education		47,500

Conclusion
With the enhancement provided by the CESG, many parents should consider RESP's as part of their education saving strategy. You may want to contribute $2,500 per year to get the full benefit of the CESG.

"Information contained herein is of a general nature. No action should be taken without seeking professional advice that takes into account current developments and the specific facts of a particular situation."

[Updated - February 20, 2010]