While a post-secondary education is an invaluable personal asset, it can be expensive to fund. Government cutbacks and inflation further undermine your ability to save for your child’s education. However, the good news is that CRA has significantly enhanced the Registered Education Savings Plan (RESP) rules over the past few years. In addition to the tax advantages, there are increased contribution limits, additional termination options and the Canada Education Savings Grant (CESG).
An RESP is a tax deferral plan designed to help save for a student’s post-secondary education. The contributor to the RESP is called the subscriber and the future student is the beneficiary. Although contributions to an RESP are not tax deductible, all of the income in the plan compounds on a tax deferred basis. In addition, there is also the CESG – a federal program that will deposit grants directly into your child’s RESP based on your contributions. Finally, when the accumulated income and CESG are withdrawn from the RESP to pay for education expenses, the beneficiary student pays the taxes, not the subscriber.
Withdrawals of CESGs and the accumulated income are taxed in the student’s hands as ordinary income (i.e. there are no dividend tax credits or reduced capital gain tax rates). Generally, this income would attract little or no tax if withdrawn over a few years due to the student’s basic personal exemption and tuition and education tax credits.
While most RESPs are set up by parents for the benefit of a child, anyone who wants to help fund someone’s education may set up an RESP, including grandparents, aunts, uncles, godparents and friends. You may even set up a plan for yourself.
You may contribute a lifetime maximum of $50,000 per beneficiary. From 1996 to 2006, annual and lifetime RESP contribution limits per beneficiary were $4,000 and $42,000 respectively. However in 2007, the lifetime contribution limit was raised to $50,000 and the annual contribution limit was eliminated. The number of years that contributions can be made is 31 years. There is no minimum annual contribution limit that you must make.
The CESG was introduced to help ensure that students will have enough money to fund a higher education. Under the program, the Government of Canada pays a grant of 20 per cent of annual contributions to a maximum of $500 per beneficiary ($1,000 in CESGs if there is unused grant room from a previous year) into the RESP.
When an RESP contribution is made, the government will pay a grant based on the child’s available CESG contribution room. The grant is calculated as the lesser of: 20 per cent of the RESP contribution amount; 20 per cent of available CESG contribution room; or $1,000 (20 per cent of $5,000 if there is unused grant room from a previous year).
Government of Canada has introduced a Canada Learning Bond (CLB) for children born after December 31, 2003 in families entitled to the National Child Benefit (NCB) supplement for their child. The CLB is a grant that is paid into the child’s RESP. It consists of an initial sum of $500 and for subsequent years, annual payments of $100 for up to 15 years for each year the family is entitled to the NCB supplement for the child.
The 20 percent CESG may be increased to 30 percent on the first $500 contribution for families with less than approximately $81,000 of annual income and to 40 percent for families with less than approximately $40,000 of annual income (the annual income amounts are adjusted yearly based on the rate of inflation).
The province of Alberta has introduced the Alberta Centennial Education Savings Plan that provides for a grant to all children born in Alberta on or after January 1, 2005, to be used to open an RESP. The grant provides for $500 in the year of birth with additional $100 grants available to those children at ages eight, eleven, and fourteen.
Each year, an RESP account can receive an amount equal to 10% of the net contributions paid into it over the course of a year, up to a maximum of $250. To help low-income families, an increase of up to $50 per year, calculated on the basis of family income, may be added to the basic amount. Under the Quebec Education Savings Incentive, a single beneficiary cannot be granted more than $3,600 for all of the RESPs of which the child is beneficiary.