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Registered Education Savings Plans

Registered Education Savings Plan (RESP)

RESPs are usually set up through an investment dealer, mutual fund company, bank or scholarship plan. Plans can exist for up to 35 years and contributions can be made for the first 31. All funds must be withdrawn by the end of the 35th year.

Self-directed plans are offered in two varieties: family plans and individual plans.

  • Family plans may have more than one beneficiary as long as each one is related to the subscriber (the person contributing the money to the plan) by blood or adoption. A subscriber may not be a beneficiary under a family plan. Beneficiaries can be changed if the new beneficiary is related to the subscriber, but if a new beneficiary is 21 or older no contributions can be made on their behalf. After 1998, only beneficiaries under age 21 can be added to a family plan.

  • Individual plans may only have a single beneficiary who need not be related to the subscriber, and may be the subscriber.

Under the Canada Education Savings Grant (CESG) program, the federal government will provide a direct grant to the RESP of 20% of the first $2,500 of annual contributions made to the RESP in a year (with enhanced rates on the first $500 for lower and middle income families). The grant will be worth up to $500 per year for each year the beneficiary is under 18, to a maximum of $7,200 per beneficiary. In 2007, the federal goverment eliminated the annual contribution limit and raised the maximum lifetime contribution limit to $50,000 from $42,000.

Mutual fund RESPs are restricted to the investments of the firm managing the account and self-directed plans allow for a broad range of investments.

RESPs permit tax sheltering of investment income for up to 35 years and they avoid income attribution issues. Contributions are not tax deductible and withdrawals of the original capital are not taxable (whether paid to the subscriber or a beneficiary). Accumulated income and Canada Education Savings Grants paid to a beneficiary as educational assistance payments are taxed in the beneficiary’s hands.

The capital may be withdrawn by the subscriber at any time, though early withdrawal will result in a repayment of the Canada Education Savings Grants. Accumulated income and grants may be used by the beneficiary for post secondary education only. This refers to full-time post-secondary programs at universities and colleges in Canada or outside Canada and certain other post-secondary institutions.

Accumulated income can be withdrawn by the subscriber if the subscriber is a Canadian resident, the plan is 10 years old or more, each beneficiary is 21 or older and no beneficiary is pursuing post-secondary education. Accumulated income can also be withdrawn by the subscriber if all the beneficiaries under the plan have died and each beneficiary under the plan was related to the subscriber, or was a niece, nephew, great niece or great nephew of the subscriber.

Where the accumulated income is returned to the subscriber it is taxed in the subscriber’s hands at normal rates and a further tax of 20% is levied. The 20% tax can be avoided on up $50,000 by making a regular or spousal RRSP contribution to the extent the subscriber has RRSP contribution room available.

The subscriber has full discretion over when withdrawals are made and how the assets are invested.