HOW RESP WORKS
A Registered Education Savings Plan, or RESP, is an investment vehicle used by parents to save for their children’s post-secondary education in Canada. Even grand-parents can contribute towards and RESP of their grand-child. The child for whom the plan is setup is called the beneficiary and the person contributing into the plan is called the subscriber.
The primary reason for setting up an RESP is the grants and bonds received into the plan and the tax-advantage of it. When you setup a plan, you contribute a portion of your after-tax income into the plan, and Government of Canada contributes grant. There are some provincial grants also available.
To enroll your child in an RESP you must obtain a Social Insurance Number (SIN) for the child.
In addition to your own contribution to the RESP, following are the additional monies received within the plan, from the Government.
* The grants and programs mentioned in this page are solely based in British Columbia. Some grants will be different based on your province of residence.
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.
Effectively, all of the grants and interest are taxed in the child’s hands. Considering your child is pursuing higher education, his or her income will be a lot less than your income. So the tax payable by the child will negligible or very little, if any. A dollar taxed in the hands of individual with lesser income, is better than the same money taxed in the hands with higher income.
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. If the beneficiary qualifies for Disability Tax Credit, consider the Registered Disability Savings Plan (RDSP) as well.
The Canada Education Savings Grant (CESG) is provided to complement RESP contributions, wherein the Employment and Social Development Canada (ESDC) contributes 20% of the first $2,500 in annual contributions made to an RESP. So, no matter what your family income is, you will receive 20% grant on the contribution made into an RESP plan.
The maximum grant received in a year is $500, i.e. 20% of $2,500. But if there is unused grant room for previous year, the maximum you can receive in the form of grant is $1,000 (for contributing $5,000). The total lifetime grant for each child is $7,200.
There is additional grant available based on your family income. The following chart explains it in greater detail:
In simpler words, you will still receive a total of $7,200 in grant, per child; but if your family income is lower, you can receive the same grant dollar faster and with lesser of your own contribution.
Who is eligible?
To be eligible for the $1,200 available via the B.C. Training and Education Savings Grant the following criteria must be met:
When can I apply?
The earliest you can request the grant is when your child turns six. After that, you may apply any day before their ninth birthday.
Since this is a new program, if your child had their 6th birthday in 2013, 2014 or 2015, you have an extension until August 14, 2018 or the day before their ninth birthday, whichever is later to get the grant. If your child was born in 2006, you have an extension until August 14, 2019, to get the grant.
The following table explains it in greater detail:
The Canada Learning Bond is money that the Government of Canada deposits into a Registered Education Savings Plan (RESP) to help you save for a child’s education after high school. The total amount the Government deposits can be up to $2,000. Applying for and receiving the Canada Learning Bond will not affect any other benefits that you or an eligible child receives.
The Canada Learning Bond is available to children:
How much could a child receive?
A child could receive a total of up to $2,000 in a Registered Education Savings Plan (RESP) to help pay for their education after high school.
In addition, the Government of Canada will deposit $25 in an RESP to help cover the costs of opening the plan.
A child can get the Canada Learning Bond in an RESP even if you do not contribute any money to the plan.
You probably have a lot of questions regarding making withdrawals from your RESP account, including the following:
When discussing withdrawals, we often only think in terms of the withdrawals to help pay for a student beneficiary’s educational costs, but we must also think about how the withdrawn funds are to be treated for income tax purposes.
Let’s say you have been making your RESP contributions for 20 years and the time has come when you want to make some withdrawals to either help pay for education costs.
Your after-tax contributions have been made, tax-free government grants (CESGs) have been received, and the RESP’s investment earnings have been sheltered from all taxation. Everything has gone according to plan. You have saved and accumulated the funds needed to pay for your child’s education by taking advantage of the government’s offer of free money in the form of grants and no taxation on your RESP earnings.
Now you are about to begin withdrawing money from your RESP account and the Canada Revenue Agency (CRA) requires that tax be paid upon the tax-free grant monies and the income earned and sheltered from income tax.
As a result, when you withdraw funds from your RESP account, the withdrawn funds must be classified as a Refund of Contributions or an Education Assistance Payment (EAP), or a combination of the two.Each is briefly described below.
One question you may have at this point in the withdrawal process is how much you have contributed (to your RESP?), how much the government has contributed, and how much your RESP investments have earned? If you started the RESP 18 years previous, how can you possibly know how much of your RESP withdrawal is taxable?
Well, the good news is you do not need to track all of your contributions, the amounts you have received from the government, nor the accumulated income. The financial institution that administers your RESP is required to keep track of all these amounts. They should be able to provide you with the breakdown identifying what portions of your RESP account are attributed to each. You will need to know this information as it will be asked on your withdrawal application.
Example: Let’s assume that your child is about to begin their post-secondary education and for the past 18 years you have been diligently contributing $2,500.00 and successfully applying for the government grant monies every year. Your RESP is now worth approximately $66,949.00.
So your financial institution has provided you with the following breakdown for the origin of the funds held in your RESP account.
You now know that you can withdraw up to $45,000.00 tax-free and the $7,200.00 and $14,749.00 are the taxable amounts that will make up any future EAPs.
Your financial institution is required to track this information for the RESP account, but not for each beneficiary to the RESP. So if your RESP has more than one beneficiary you will need to track the dollar amounts associated with each beneficiary.
How does the withdrawal of original contributions differ from the EAP?
The withdrawal of original contributions is different from the withdrawal of EAPs as outlined below.
Withdrawals of Original Contributions
The withdrawal of a subscriber’s original contributions is called a Refund of Contributions and is tax-free, and this withdrawal can be made at any time. The subscriber can request a Refund of Contributions be paid to the subscriber or they can direct the RESP promoter/provider to pay the Refund of Contributions directly to a student beneficiary. For example, if a RESP beneficiary decides not to go to school or the RESP is to be terminated, a Refund of Contributions can be requested at any time. There are no restrictions on the use of the refunded contributions.
In general, because the subscriber’s original contributions were not deductible from their income in the year of the contribution, these contributions were made with after-tax monies. As a result, the subscriber’s original contributions are consider by the CRA to be a refund and can be withdrawn from the RESP at anytime – tax-free.
In addition, the government grants were contributed to the RESP account free of taxation and the RESP investment income was allowed to accumulate within the RESP without paying any income tax. As a result, when these amounts are withdrawn from the RESP account, the withdrawal must be included in the student beneficiary’s income for tax purposes.
Because the original subscriber contributions can be withdrawn tax-free at anytime, there are no restrictions on Refund of Contributions. If you plan to make a withdrawal of subscriber contributions and there is not a student beneficiary eligible to receive an EAP payment, the following rules are applied:
Withdrawals classified as an Educational Assistance Payment (EAP)
The EAP is a withdrawal that includes tax-free government grant monies and/or tax-sheltered RESP investment income. Education Assistance Payments (EAP) are taxable withdrawals and they are included in the student beneficiary’s taxable income, for the year the EAP was made.
The EAP amounts are taxable and are reported in box 42 of a T4A Income Tax Information slip that will be issued by your financial institution in the name of the student beneficiary. The student beneficiary is required to include the amount in Box 42 in his/her taxable income.
There are restrictions, however, on the amount of EAPs that can be paid in any given year.
Example: For RESP accounts that were established after 1998, the following rules govern the permitted EAP withdrawal limits:
In summary, withdrawals from a Family or Individual RESP plan are classified according to the origins of the funds. This is to ensure that all contributions, government grants, and accumulated earned income is recorded and tax is paid at some point on all of the RESP funds.
In general, because the subscriber’s original contributions were not deductible from their income in the year of the contribution, these contributions were made with after-tax monies. As a result, the subscriber’s original contributions are considered by the CRA to be a refund and can be withdrawn from the RESP at anytime – tax-free.
In addition, the government grants contributed to the RESP account free of taxation and the RESP investment income allowed to accumulate within the RESP without paying any income tax. As a result, when these amounts are withdrawn from the RESP account, the withdrawal must be included in the student beneficiary’s income for tax purposes.
Before the financial institution administering your RESP can make an EAP, the student beneficiary must prove that they are enrolled in a Qualifying Educational Program. This includes students studying full-time or part-time at a post-secondary educational institution and those enrolled in distance education courses. (See our section RESP Designated Qualifying Educational Institutions for specific details.)
Note: Ask your financial institution what documentation they require as proof of the student beneficiary’s enrolment.
What education costs can the RESP monies cover?
Typically RESP withdrawals made to cover tuition, room and board, school supplies, computers and transportation are all eligible educational expenses under the Human Resources and Skills Development Canada (HRSDC) criteria.
Note: The guidelines for withdrawals from a Group RESP account are governed by the plan’s contract or prospectus. Group plans may have more restrictions than Family or Individual plans. You should understand the withdrawal guidelines set out in the Group RESP contract prior to opening an account
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