Registered Education Savings Plans (RESPs) for Ontario’s Children
A Registered Education Savings Plan, or RESP, is an investment vehicle used by parents to save for their children’s post-secondary education – one of the greatest gifts you can give a child. To help you save, one of your most valuable tools is a Registered Education Savings Plan (RESP).The principal advantages of RESPs are the access to the Canada Education Savings Grant (CESG) and a source of tax-deferred income. With the rising costs associated with sending a child to college or university, an RESP can really help because the government provides grants while the savings grow tax-deferred until withdrawn.
An RESP is a tax shelter, designed to benefit post-secondary students. With an RESP, contributions (comprising the investment’s principal) are, or have already been, taxed at the contributor’s tax rate, while the investment growth (and CESG) is taxed on withdrawal at the recipient’s tax rate. An RESP recipient is typically a post-secondary student; these individuals generally pay little or no federal income tax, owing to tuition and education tax credits. Thus, with the tax-free principal contribution available for withdrawal, CESG, and nearly-tax-free interest, the student will have a good source of income to fund his or her post-secondary education.
Anyone can open an RESP account for a child – parents, guardians, grandparents, other relatives or friends. You can open an RESP without having a bank account.
There are 3 general types of RESP plans.
- Family Plan: Ideal if you have 1 child or more.
- Individual (non-family) Plan: Ideal if you are not related to the child you are investing for.
- Group Plan: Ideal if you can make regular payments throughout the term of the RESP.
Moreover, you can open an RRSP for yourself. At any age. An RESP allows adults to earn interest on their registered education savings plan tax-free. While you can open a plan for a child, you can also name yourself or another adult as the definition of beneficiary. Please note that all children up to the age of 17 are entitled to the Canada Education Savings Grant.
Reason you should open a Registered Education Savings Plan (RESP) for your kid
Because the Government of Canada will help you save money if you open an RESP account through the Canada Education Savings Grant and the Canada Learning Bond. They are only available for your child if you open an RESP.
- Canada Education Savings Grant (CESG): The Canada Education Savings Grant is provided to complement RESP contributions, wherein the government of Canada contributes 20% of the first $2,500 in annual contributions made to an RESP. After changes introduced in the 2007 Canadian federal budget, the government may contribute up to $500 per year to a participating RESP. This income is available upon withdrawal from the RESP by a post-secondary recipient, with a maximum lifetime contribution of $50,000. Any contributions over this amount are subject to taxation. The government grants introduced in 2005, entitled Additional CESG, allowed an additional 10% or 20% for a total of an extra 30 or 40 cents on each dollar of the first $500 contributed to an RESP, depending on the family income of the beneficiary’s primary caregiver. An application is made through the promoter of the RESP, which is often a bank, mutual fund company or group RESP provider.
- Canada Learning Bond: The government of Canada also provides a Canada Learning Bond to encourage low-income families to contribute to an RESP. Families with children born on or after January 1, 2004, and who receive the National Child Benefit, will receive an additional $500 Canada Learning Bond when they open an RESP and $100 for each year they remain eligible.
Registered Education Savings Plan (RESP)
A registered education savings plan (RESP) is a contract between an individual (the subscriber) and a person or organization (the promoter). Under the contract, the subscriber names one or more beneficiaries (the future student(s)) and agrees to make contributions for them, and the promoter agrees to pay educational assistance payments (EAPs) to the beneficiaries.
There are two different types of RESP available: family plans and specified plans.
- Family plan: Family plans are the only RESP that allow subscribers to name more than one beneficiary. Each beneficiary must be connected by blood relationship or adoption to each living subscriber or have been so tied to a deceased original subscriber. A beneficiary under a family plan entered into after 1998, must be less than 21 years of age at the time he or she is named as a beneficiary. When one family plan is transferred to another, a beneficiary who is 21 years of age or older can still be named a beneficiary to the new RESP
- Specified plan: A specified plan is essentially a single beneficiary RESP (non-family plan) under which the beneficiary is entitled to the disability tax credit for the beneficiary’s tax year that includes the 31st anniversary of the plan. Furthermore, a specified plan cannot permit another individual to be designated as a beneficiary under the RESP at any time after the end of the year that includes the 35th anniversary of the plan. In addition, no contributions (except transfers from another RESP) may be made to the plan at any time after the end of the year that includes the 35th anniversary of the plan, and the plan must be completed by the end of the year that includes the 40th anniversary of the plan.
How an RESP works
The subscriber (or a person acting for the subscriber) generally makes contributions to the RESP. Subscribers cannot deduct their contributions from their income on their tax return. If the contributions are not paid out to the beneficiary, the promoter usually pays them to the subscriber at the end of the contract. Subscribers do not have to include the contributions in their income when they get them back.
The promoter usually pays the contributions, and the income earned on those contributions, to the beneficiaries. The income earned is paid as educational assistance payments (EAPs). Beneficiaries include the EAPs in their income for the year in which they receive them. However, they do not have to include the contributions they receive in their income.
The Canada Revenue Agency registers the education savings plan contract as an RESP, and lifetime limits are set by the Income Tax Act on the amount that can be contributed for each beneficiary. Unless the RESP is a specified plan, the RESP must provide that no contributions (except transfers from another RESP) may be made to the plan at any time after the end of the year that includes the 31st anniversary of the opening of the plan. Furthermore the plan has to be completed by the end of the year that includes the 35th anniversary of the opening of the plan.
Here is an overview of how an RESP generally works.
- A subscriber enters into an RESP contract with the promoter and names one or more beneficiaries under the plan.
- The subscriber makes contributions to the RESP. Government grants (if applicable) will be paid to the RESP. These grants can be the Canada Education Savings Grant (CESG), Canada Learning Bond (CLB), or any designated provincial education savings program.
- The promoter of the RESP administers all amounts paid into the RESP. As long as the income stays in the RESP, it is not taxable. The promoter also makes sure payments from the RESP are made according to the terms of the RESP.
- The promoter can return the subscriber’s contributions tax-free.
- The promoter can make payments to the beneficiary to help finance his or her post-secondary education.
- The promoter can make accumulated income payments.
Who can be a subscriber?
Except for family plans, generally, there are no restrictions on who can be the original subscriber under an RESP. An original subscriber can be:
- You and your spouse or common-law partner can be joint original subscribers under an RESP.
- A public primary caregiver of a beneficiary under an RESP may also be an original subscriber. A public primary caregiver is one who receives a special allowance under the Children’s Special Allowances Act and may be: 1) the department, agency or institution that cares for the beneficiary; or 2) the public trustee or public curator of the province in which the beneficiary resides.
If you are not the original subscriber, you can become a subscriber only if one of the following situations applies:
- you are a spouse or common-law partner, or ex-spouse or former common-law partner, of a subscriber and you get the subscriber’s rights under the RESP as a result of a court order or written agreement for dividing property after a breakdown of the relationship;
- you are another individual or another public primary caregiver who has, under a written agreement, acquired a public primary caregiver’s rights as a subscriber under the RESP;
- you acquired the subscriber’s rights under the RESP, or you continue to make contributions into the RESP for the beneficiary, after the death of a subscriber under the RESP; or
- you are the deceased subscriber’s estate that acquired the subscriber’s rights under the RESP, or that continues to make contributions into the RESP for the beneficiary, after the death of a subscriber under the RESP.
All subscribers under an RESP have to give their social insurance number (SIN) to the promoter before we can register the RESP.
Who can become a beneficiary?
You will be able to designate an individual as a beneficiary under the RESP only if:
- the individual’s social insurance number (SIN) is given to the promoter before the designation is made; and
- the individual is a resident of Canada when the designation is made.
Notes: The SIN may not be required if the beneficiary is a non-resident individual who has not received a SIN before the designation is made. The residency requirement does not apply when the designation is made in conjunction with a transfer of property from another RESP under which the individual was a beneficiary immediately before the transfer. A beneficiary under a family plan entered into after 1998, must be less than 21 years of age at the time he or she is named as a beneficiary. When one family plan is transferred to another, a beneficiary who is 21 years of age or older can still be named a beneficiary to the new RESP.
Every RESP is different. Some types require specific monthly contributions. Others let you put money into your RESP account whenever you want. The sooner you start to save, the sooner you’ll be earning interest, and the more your money will grow. Even savings of $5 a week can quickly add up, especially when the Government of Canada adds money to your savings.
Some types of RESPs have no minimum deposit requirements, while others do. The Government of Canada will still add to your savings, no matter how little you put into your child’s RESP account. Maximum contribution is $50,000 for each child (named in one or more RESPs).
Although there are no annual limits on contributions made to an RESP, the Canada Education Savings Grant will only be paid on the first $2,500 of contributions made every year. If the child has accumulated grant room, then the Canada Education Savings Grant will be paid on the first $5,000 of contributions made per year.
You will be able to make contributions for a beneficiary only if:
- the beneficiary’s social insurance number (SIN) is given to the promoter before the contribution is made and the beneficiary is a resident of Canada; or
- the contribution is made by way of a transfer from another RESP under which the individual was a beneficiary immediately before the transfer.
For 2007 and later years, there is no annual limit for contributions to RESPs and the lifetime limit on the amounts that can be contributed to all RESPs for a beneficiary is $50,000. Payments made to an RESP under the Canada Education Savings Act or under a designated provincial program are not included when determining if the lifetime limit has been exceeded.
- Your money grows tax-free while it is in your RESP.
- You don’t get a tax deduction for the money you put into an RESP.
- The money that your investment earns while it is in the RESP won’t be taxed until money is taken out to pay for your child’s education.
- Money paid out of the RESP as an Educational Assistance Payment is taxed in the hands of the student. Since many students have little or no other income, they can usually withdraw the money tax-free.
- The money that you have put in the RESP is returned to you, tax-free.
Payments from an RESP
The promoter can make the following types of payments:
- educational assistance payments
- accumulated income payments
- refund of contributions to the subscriber or the beneficiary
- payment to a designated educational institution in Canada
- repayment of amounts under the Canada Educational Savings Act or under a designated provincial program; and
- payment to a trust to accommodate transfers of property between RESPs.
Any principal contributed to the RESP can be withdrawn at any time by its contributor. In this case, any eligible CESG payments on those contributions must be repaid to the Government. If the beneficiary has also received additional CESG, none of the beneficiaries in the plan will be eligible for additional CESG for the next 2 years. If the student elects to not attend a post-secondary institution, any accumulated interest may be withdrawn by the contributor; this is called an AIP (Accumulated Income payment). To receive this AIP, the plan must be in place for at least 10 years and all beneficiaries must be over 21 years old. This AIP is taxed as income unless it is rolled into a registered retirement savings plan (RRSP), subject to individual contribution limits and applicable rules.
If your child decides not to continue education after high school
- You will not be taxed on the amount you contributed to the RESP, but you will have to pay taxes on the money that you earned in your plan as interest. This money is called “accumulated income”. It will be taxed at your regular income tax level, plus an additional 20 percent.
- The money that you have put into the RESP is returned to you.
- The Canada Education Savings Grant can be shared with a brother or sister if they have grant room available – otherwise, the grant must be returned to the Government of Canada.
- When you close your RESP, you will have to pay tax on the earnings in the RESP. (Although there will be earnings on the Canada Education Savings Grant, the grant must be returned to the Government of Canada.) You may be able to reduce the taxes you have to pay by transferring your accumulated income to either your or your spouse’s Registered Retirement Savings Plan. For more information, see the Accumulated Income Payments section of the Canada Revenue Agency’s Web site.
Definitions for Registered Education Savings Plans
- Additional tax: You calculate this tax separately, using Form T1172, Additional Tax on Accumulated Income Payments From RESPs. Include a completed copy of Form T1172 with your return for the year you receive the AIP. You have to pay the additional tax by the balance due date for your regular tax, usually April 30 of the year that follows the year in which you received the AIP.
- Common-law partner: This applies to a person who is not your spouse, with whom you are living in a conjugal relationship, and to whom at least one of the following situations applies. He or she: 1) has been living with you in a conjugal relationship for at least 12 continuous months; 2) is the parent of your child by birth or adoption; or 3) custody and control of your child (or had custody and control immediately before the child turned 19 years of age) and your child is wholly dependent on that person for support. In addition, an individual immediately becomes your common-law partner if you previously lived together in a conjugal relationship for at least 12 continuous months and you have resumed living together in such a relationship. Under proposed changes, this condition will no longer exist. The effect of this proposed change is that a person (other than a person described in b) or c)) will be your common-law partner only after your current relationship with that person has lasted at least 12 continuous months. This proposed change will apply to 2001 and later years. Reference to “12 continuous months” in this definition includes any period you were separated for less than 90 days because of a breakdown in the relationship.
- Post-secondary educational institution: 1) a university, college, or other designated educational institution in Canada; 2) 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 3) a university, college, or other educational institution outside Canada that has courses at the post-secondary school level, as long as the student is enrolled in a course that lasts at least 13 consecutive weeks.
- Public primary caregiver: A public primary caregiver is one who receives a special allowance under the Children’s Special Allowance Act and may be the department, agency or institution that cares for the beneficiary, or the public trustee or public curator of the province in which the beneficiary resides.
- Promoter: The promoter usually pays the contributions, and the income earned on those contributions, to the beneficiaries. The income earned is paid as educational assistance payments.
- Qualifying educational program: 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.
- RRSP deduction limit: The maximum amount you can deduct from contributions you made to your RRSPs or to your spouse’s RRSP or common-law partner’s RRSP for a year (excluding transfers to your RRSPs of certain types of qualifying income). The calculation is based, in part, on your earned income in the previous year. Pension adjustments (PAs), past service pension adjustments (PSPAs), pension adjustment reversals (PARs), and your unused RRSP deduction room at the end of the previous year are also used to calculate the limit.
- Regular tax: This is the tax you calculate when you complete your return. It is based on your total taxable income.
- Specified educational 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 hoursper-month on courses in the program.
- Spousal or common-law partner RRSP: A spousal or common-law partner RRSP is an RRSP that you establish to pay yourself income at maturity, but that your spouse or common-law partner contributes to.
- Spouse: This applies only to a person to whom you are legally married.