Registered Education Savings Plan
The Learning Experience – For The Kids In Your Life. And You.
Higher education is something almost every parent wants for their child and with good reason. A Statistics Canada study indicates that 65 percent of all new jobs require some postsecondary education. In the first half of the nineties, available employment for students with less than a high school diploma dropped a full 30 percent, while the number of jobs for university grads (which pay 45 percent more, on average) jumped by 20 percent.
With the cost of post-secondary education in Canada steadily climbing, many parents are looking for ways to fund their children's future education needs. At BMO Nesbitt Burns, our experience has shown that a dedicated savings strategy, that includes a Registered Education Savings Plan (RESP), has proven to offer the greatest assurance that the money will be there when it's needed.
Registered Education Saving Plan (RESP)
A Registered Education Savings Plan is essentially a tax deferred savings plan that you open on behalf of a future post-secondary student. While RESP contributions are not tax deductible, the income earned on contributions compounds on a tax-deferred basis. There is no annual contributions limit, but RESP contributions may be made for up to 31 years — to a lifetime maximum of $50,000 per beneficiary. (Plus, the federal government will pay you an incentive on a portion of your RESP contributions — see Canada Education Savings Grant below.) An RESP terminates when all the funds have been withdrawn or 35 years after the plan was opened, whichever comes first.
You may withdraw your RESP contributions at any time, with no tax consequences — only the accumulated income and any CESG in the plan is taxable. When money is eventually withdrawn from an RESP to pay for education-related costs, the income and grant is taxed in the hands of the beneficiary (the student), not the contributor. If the student withdraws the money over a few years, the income should attract little or no tax.
Subject to certain conditions, if the beneficiary does not pursue post-secondary studies, up to $50,000 of RESP income may be transferred to the contributor's RRSP, as long as there is available contribution room. If there is more RESP income than RRSP contribution room, the excess income may be added to the taxable income of the contributor and, in addition to the tax that would normally be paid, a 20 per cent penalty tax would be charged.
Canada Education Savings Grant (CESG)
RESPs are even more attractive when you consider the federal government's Canada Education Savings Grant (CESG), which was designed to encourage you to save for your child's education. On the first $2,500 of annual RESP contributions that you make for each child up to and including the year they turn 17, the government will contribute an extra 20 per cent directly to the RESP. The maximum CESG available for any single year is $500 (20 per cent of $2,500). The maximum lifetime CESG for each beneficiary born after 1997 is $7,200.
For more information on the RESP, please contact us for an appointment.