Registered Education Savings Plans (RESPs)
An RESP is a type of trust through which you can save for a child’s education. If you make contributions to such a plan, the amounts are not tax deductible, but the major advantage is that earnings accumulate on a tax-deferred basis. Also, when the funds are finally paid out to the child, the accumulated income earned in the plan (such as dividends or interest) is taxed in your child’s hands at his or her lower tax rate.
RESPs are often set up as family plans. This allows you to allocate the plan assets among related children or change the beneficiary of the plan to someone else in the family. Individual plans now have this same flexibility.
An RESP has a maximum life of 35 years and contributions can only be made until the beneficiary reaches 31 years of age. The contribution and termination period is extended by 10 years for beneficiaries who qualify for the disability tax credit.
To enroll your child in an RESP you must obtain a Social Insurance Number (SIN) for the child.
There is no annual contribution limit and the cumulative ceiling is $50,000 for each beneficiary, regardless of the number of subscribers. Overcontributions are computed at the end of each month and are subject to a special 1% monthly tax. It’s possible to reduce overcontributions by withdrawing funds from an RESP.
Transfer to an RRSP or RDSP
If all intended beneficiaries have reached the age of 21 years, and the plan has been in place for at least 10 years, you can withdraw the principal and the income from the plan. If you have sufficient RRSP contribution room, you can transfer the RESP income to your RRSP (or a spousal RRSP). Any excess income that cannot be transferred to an RRSP will be subject to a 20% penalty tax, in addition to regular income tax.
For transfers after 2013, investment income earned in an RESP can also be transferred on a tax-free basis to an RDSP provided the plans share a common beneficiary.
The total RESP income that you can transfer to an RRSP is subject to a lifetime limit of $50,000.
Canada Education Savings Grants (CESGs)
The federal government pays a subsidy for each child that is a beneficiary of an RESP from the day the child is born until his/her 17th birthday.30* The current annual maximum CESG per beneficiary is $500 (i.e., 20% of the first $2,500 of contributions paid annually). Each child is entitled to a cumulative limit of $7,200.
A family that did not contribute to its child’s RESP for a year or more can receive a grant of not more than $1,000 as a CESG in a year (i.e., on a maximum contribution of $5,000).31
The maximum annual grant on the first $500 contributed per child is increased slightly for low- and mid-income families.
An RESP will be required to repay CESG money in certain situations, such as when a beneficiary does not pursue higher education or the plan is terminated.
30 Contributions for a child aged 16 or 17 will receive a grant only if certain conditions are met.
31 For more information see: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/resp-reee/cesp-pcee/csg-eng.html.
Canada Learning Bond (CLB)
Under the Canada Learning Bond (CLB) program, every child is entitled to assistance, provided the family receives the National Child Benefit (NCB) Supplement. An initial $500 bond is provided in the year of the child’s birth with subsequent annual instalments of $100 until the age of 15 for each year the family is entitled to the NCB supplement.