Registered Education Savings Plans (RESPs)

What is an RESP?

  • A contract between an individual who is the subscriber, and a person or organization who is the promoter
  • The subscriber (or a person on behalf of the subscriber) makes contributions to the RESP, which earns income
  • Government grants (if applicable) will be paid to the RESP (see below)
  • The promoter agrees to pay the income as educational assistance payments to one or more beneficiaries designated in the contract
  • Only spouses can be joint subscribers under an RESP
  • RESP contributions are not deductible from the subscriber’s income
  • If a plan allows for more than one beneficiary (commonly called a family plan), each beneficiary must be related to each living subscriber and must not have reached 21 years of age when he or she is named as beneficiary

 

Canada Education Savings Grant (CESG)

  • Human Resources and Skills Development Canada (HRSDC) provides an incentive for parents, family and friends to save for a child’s post-secondary education by paying a grant based on the amount contributed to an RESP for the child
  • No matter what your family income is, HRSDC pays a basic CESG of 20% of annual contributions made to all eligible RESPs to a maximum $500 in respect of each beneficiary ($1,000 in CESG if there is unused grant room from a previous year), and a lifetime limit of $7,200
  • The 20% grant is doubled to 40% for the first $500 contributed to an RESP by families with incomes up to $45,916 in 2017
  • For families with incomes between $45,916 and $91,831 in 2017, the grant will be increased to 30% for the first $500 contributed to an RESP

 

RESP Contribution Limits

  • There is no longer an annual contribution limit however there is a lifetime limit of $50,000 for each beneficiary
  • Every child under age 18 who is a Canadian resident will accumulate $400 (for 1998 to 2006) and $500 (from 2007 and subsequent) of CESG contribution room. Unused CESG contribution room is carried forward and used when RESP contributions are made in future years provided that the specific contribution requirements for beneficiaries who attain 16 or 17 years of age are met
  • Only one previous year’s worth of contributions can be used each year so you are limited on how quickly you can “catch-up” on past unused contribution room.  For example, if you open an account for your three-year-old child, you can contribute $2,500 (this year’s contribution room) plus another $2,500 (from previously unused contribution room) for a total of $5,000, to receive a grant of $1,000.  You are allowed to contribute more than $5,000, but there will be no grant paid on the amount above $5,000.  Next year, to fully “catch-up”, you can make another $5,000 contribution to receive an additional grant of $1,000

 

RESP Fees

  • It is very important to understand exactly what fees are going to be paid out of the RESP to the promoter, and when the fees are taken. Normally the fees are paid before the RESP earns any income, and a subscriber could lose all contributions to the fees if payments to the RESP are discontinued. Fees may also be charged on each payment out of the RESP

 

Payments from an RESP

 

Return Of Contributions

  • Subject to the terms and conditions of the RESP, all contributions made to the RESP by the subscriber can be returned to the subscriber
  • Because RESP contributions are not deductible when made, they are not taxable when returned
  • The CESG must be repaid if the beneficiary does not go on to a post-secondary educational institution
  • However, you may not have to repay the CESG when you replace the beneficiary with a child who is under 21 and a brother or sister of the original beneficiary

 

Educational Assistance Payments (EAP)

  • An EAP is the amount paid to a beneficiary (a student) from an RESP to help finance the cost of post-secondary education
    • The student is enrolled in a qualifying educational program. This includes students attending a post-secondary educational institution and those enrolled in distance education courses, such as correspondence courses, provided by such institutions; or
    • The student has attained the age of 16 years and is enrolled in a specified educational programThe promoter can only pay EAPs to or for a student if one of the following situations applies:

A beneficiary is entitled to receive EAPs for up to six months after ceasing enrolment, provided that the payments would have qualified as EAPs if the payments had been made immediately before the student’s enrolment ceased.

A qualifying educational program is an educational program at post-secondary school level, that lasts at least three consecutive weeks, and that requires a student to spend no less than 10 hours per week on courses or work in the program.

A specified educational program is a program at post-secondary school level that lasts at least three consecutive weeks, and that requires a student to spend not less than 12 hours per-month on courses in the program.

A post-secondary educational institution includes:

  • A university, college, or other designated educational institution in Canada;
  • An educational institution in Canada certified by Human Resources and Skills Development Canada (HRSDC) as offering non-credit courses that develop or improve skills in an occupation; and
  • A university, college, or a university outside Canada that has courses at the post-secondary school level at which the beneficiary was enrolled on a full-time basis in a course of not less than three consecutive weeks
  • An EAP has to be included in the beneficiary’s income for the year the EAP is received
  • For RESPs entered into after 1998, the maximum amount of EAPs that can be made to a student as soon as he or she qualifies to receive them is:
    • For studies in a qualifying educational program – $5,000, for the first 13 consecutive weeks in such a program. After the student has completed the 13 consecutive weeks, there is no limit on the amount of EAPs that can be paid if the student continues to qualify to receive them. If there is a 12-month period in which the student is not enrolled in a qualifying educational program for 13 consecutive weeks, the $5,000 maximum applies again; or
    • For studies in a specified educational program – $2,500, for the 13-week period whether or not the student is enrolled in such a program throughout that 13-week period.

 

Accumulated Income Payment (AIP)

  • An AIP is any distribution from an RESP other than a refund of contributions, an EAP, a payment to a designated educational institution in Canada, a transfer to another RESP, or a repayment of the CESG
  • When AIPs are made from an RESP, the RESP must be closed by the end of February of the year after the year in which the first payment is made
  • AIPs have to be included in the recipient’s income for the year the payments are received
  • These payments are subject to two different taxes: the regular income tax and an additional 20% tax
  • The AIP can be reduced by transferring an amount to the subscriber’s RRSP if they have available contribution room

 

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