It makes common sense that saving now for your child’s post-secondary education eases the financial crunch on you, and that child once they reach college or university.
Putting money aside for education early enough reduces the need for financial assistance, which can help keep student loan repayments under control.
A Registered Education Savings Plan, or RESP, provides a savings vehicle that makes educational assistance payments for a student beneficiary at the time of post-secondary education.
How RESPs Work
An RESP allows contributions, any education grants received and investment income earned to accumulate tax-sheltered and to be paid out at a later date for post-secondary educational assistance. Each RESP has a subscriber – usually parents, or grandparents – and a promoter, which is where the RESP is purchased through, and that is banks, or investment firms. The beneficiary, is the student, if they go to post secondary school.At the time the student accepts to go to post secondary school, the promoter pays the beneficiary from the accumulated contributions and investment income. It’s that easy.
The benefit for setting up and using a RESP, is that at the time the contributions are made, there is no tax deduction for amounts going into RESPs, and at the time of payment, income earned on the contributions is paid as an Educational Assistance Payment (EAP). The student receiving this income includes EAPs in their income for the year in which it is received.
Students are not required to include contribution amounts paid out, because these represent after-tax dollars at the time of contribution.Family and Specified Plans
RESPs come in two different types: Specific Plans & Family Plans
Payouts From RESPs
Educational assistance payments consist of interest earned from an RESP, the Canada Education Savings Grant, the Canada Learning Bond and amounts from a provincial education savings program. The RESP promoter pays the EAP to the student and declares these amounts annually in box 42 of the student’s T4A Statement of Pension, Retirement, Annuity and Other Income slip.
The student declares this amount as income on the federal return for the tax year in which the funds are received.
EAP’s can only be paid if the student is enrolled in a qualifying program.
Accumulated income payments are usually paid to the subscriber when a beneficiary does not qualify or use the proceeds of an RESP. Any refund of contributions, to either the subscriber or beneficiary, can be made at the end of the RESP contract or any time before, subject to the terms of the individual RESP. Any payout of contributions is tax-free, does not require the issuance of a T4A and is not included on tax returns as income.
Changing Beneficiaries and Transfers
You can contribute to RESPs up to a lifetime maximum of $50,000 per child.
Since not all children will attend post-secondary or other qualifying programs, transfer of beneficiaries is allowed, and previous contributions are considered made for the new beneficiary, as though from the date of the original contribution. When the new beneficiary is under 21 and has a common parent with the old beneficiary, contribution history remains with each beneficiary, so it is possible the new beneficiary can exceed the $50,000 maximum.
In any other case where transfers result in excess contributions, tax penalties and repayment of government grants and bonds may be required.
An RESP rollover to a RDSP can take place if the following conditions are met:
- the beneficiary of the RDSP is a beneficiary of the RESP that is rolling over income;
- the RESP allows accumulated income payments; and
- the beneficiary of the RESP has a severe and prolonged mental impairment that prevents them from enrolling in a qualifying educational program at a post-secondary educational institution or the RESP must be either:
- open for at least 10 years, where each beneficiary in the RESP is at least 21 years of age and is not eligible to receive educational assistance payments at the time the rollover is made; or
- open for at least 35 years.