Registered Education Savings Plan (RESP’s)
RESP’s are a great way to start investing and saving for your child's (a beneficiary) future. It is available to contributors (parents, grandparents or friends) through RESP promoters(contract must be registered under Income Tax Act with Canada Revenue Agency). Growth in this fund is not taxable until the funds are taken out of the account and used towards your child’s education. Although tax-free, contributions cannot be deducted from the contributor’s income on income tax and benefit returns.
Contributions can be made for beneficiaries that are under 31 years of age at the time of contribution. There is a maximum contribution allowance of $50,000 towards each child’s RESP. After that, contributions are taxable as specific rates.
Types of RESPs
Individual Non-family RESPs
Only one beneficiary, can be over 21 years old when named, and doesn’t have to be related to the individual opening the RESP. When and how much to contribute is chosen by the subscriber in this type of RESP.
A family RESP can have multiple beneficiaries that are under 21 years of age when named that are all related to the individual opening the RESP. Related beneficiary includes relation by blood or adoption (parents, siblings, children, or grandchildren), but not nieces or nephews. This plan also allows freedom on when and how much to contribute, as long as the beneficiary is under 31 years of age. Contributions can be transferred from another family RESP plan. Thus, if you open an account for 3 kids, and only 2 pursue education, the income can be redirected to the 2 pursuing education.
Group RESPs (Pooled RESP, Education Trust, Scholarship Trust)
Group RESPs have a “pooling principle” meaning the beneficiary receives educational assistance payments if they enrol in a qualifying program. In this plan, a pre-set amount is contributed and do not get investment choices. If the beneficiary of a Group RESP fails to qualify, it will go to other beneficiaries who qualify (i.e. siblings).
Educational Assistant Payments (EAP’s)
EAP’s add contributions to the amount contributed to the savings plan. This helps funds grow in time for the beneficiaries education.If payments have qualified as EAPs, once a students enrolment ends, a beneficiary can receive EAPs for up to 6 months. EAPs can be received for a student as long as one of the following situations applies:
student is enrolled in a qualifying educational program, or
student is 16 years of age and is enrolled in a specified educational program
Qualifying educational program
A program at post-secondary school level, at least 3 consecutive weeks long, and requires students to spend a minimum of 10 hours per-week on courses or work in the program.
Limits: $5,000, for the first 13 consecutive weeks in such a program. There is no limit on the amount of EAPs after completing 13 consecutive weeks, if the student continues to qualify to receive them. If there is a 12-month period where the student is not enrolled in a qualifying educational program for 13 consecutive weeks - $5,000 maximum applies
Specified educational program
A program at post-secondary school level, that is at least 3 consecutive weeks, and requires students to spend at least 12 hours per-month on courses in the program.
Limits: $2,500, for the 13-week period whether or not the student is enrolled in such a program throughout the 13-week period.
ESDC, on a case-by-case basis, may approve a higher EAP limit if the cost of tuition plus related expenses for a particular program is substantially higher than the average.
A post-secondary educational institution includes:
a university, college, or other designated educational institution in Canada;
ESDC certified educational institution in Canada offering non-credit courses that develop or improve skills in an occupation;
full time enrolment at an international university with courses at post-secondary school level for at least 3 consecutive weeks;
Full time enrolment an international university, college or educational institution with courses at post-secondary school level for at least 13 consecutive weeks
In Ontario, there are two types of EAP’s:
1. Canadian Education Savings Grant (CESG)
These are designed to encourage long-term savings for post-secondary education. Contributions to RESP’s should be made before the end of the calendar year of when your child turns 15 in order to qualify for a CESG.
When a child is 16 or 17 years old there are specific contribution requirements for CESG’s. They can only receive CESG if at least one of the following 2 conditions are met:
A $2,000 minimum is contributed and not withdrawn from the RESP before the end of the calendar year when the child turns 15 years of age
A $100 minimum annual contribution is made and not withdrawn from the RESP in at least 4 years before the end of the calendar year when the child turns 15 years of age. If the beneficiary does not pursue post-secondary education, the CESG is returned to the government.
There are two types of CESG’s:
Irregardless of family income, Employment & Social Development Canada (ESDC) pays 20% of a basic CESG annually to eligible RESP’s and qualifying beneficiaries.
Maximum of $500 per beneficiary annually (or $1000 if there is unused grant from a previous year)
Lifetime limit of $7,200
ESDC may pay additional amounts based on income to eligible RESP’s and qualifying beneficiaries.
As of 2017: for a child under 18 years of age: 40% (Extra 20% on the first $500) for families who’s net annual income is equal or less than $45,916 30% (Extra 10% on the first $500) for families who’s net annual income is between $45,916 and $91,831
The CESG and accumulated earnings will be part of the educational assistance payments paid out of the RESP to the beneficiary.
2. Canada Learning Bond (CLB)
ESDC provides an additional incentive up to $2,000 to help modest-income families start saving early for their child’s post secondary education.
CLB’s contributions get deposited directly into a child’s RESP starting with an initial $500 to modest income families to help cover costs of opening an RESP (For children born on or after 2004). ESDC also pays an extra $25 with this $500. Further the CLB pays $100 annually for up to 15 years up to a maximum of $2,000.
If the beneficiary does not pursue post-secondary education, the CLB is returned to the government.
Information summarized from https://www.canada.ca/en/services/taxes.html