Bob Mcdonald CMA,ISP (403) 484-1133
RESP -Registered Educational Savings Plan
Budget Changes make these plans more favourable:
The Registered Education Savings Plan (RESP) is unique in that its sole purpose is to assist parents (and certain other relatives) in accumulating funds for future education. This is becoming increasingly important as the cost of post-secondary education escalates.
An RESP is a tax-sheltered investment purchased from a "Promotor" who manages the invested funds and administers the RESP rules. RESP's are specifically designed to assist parents, grandparents or other qualified individuals (other than a trust) (CONTRIBUTOR) to accumulate funds for their children's (or beneficiaries') education. Unlike the registered retirement savings plan (RRSP), there is NO TAX DEDUCTION for contributions to an RESP. However, the income that accrues is TAX DEFERRED until it is withdrawn. Upon admission to a qualified post-secondary institution, the income earned can be withdrawn as required and is taxed in the hands of the beneficiary (i.e. child), usually at a lower rate. The contributor controls how payments are made, and withdrawals (lump sum or periodic), to cover educational related costs (tuition, books, living expenses etc.).
The RESP Family Plan
A family plan allows you to open a single RESP and name as many beneficiaries as you wish. The condition placed upon a family plan is that all named beneficiaries must be blood related (either by birth or adoption) as defined by the Income Tax Act. Beneficiaries may be added or removed at any time.
A) A maximum of $4,000 per year per beneficiary can be contributed for 21 years, with an overall contribution limit of $42,000. Contributions are not tax deductible. Note: The limit is based on the beneficiary NOT the contributor. If two (or more) contributors fund the same beneficiary they cannot exceed the beneficiary's allowed maximum.
B) Missed annual RESP contributions cannot be made up, and Revenue Canada charges a penalty of 1% per month on contributions in excess of the annual maximum.
C) Unlike RRSPs, the annual contribution deadline is December 31.
Canadian Educational Savings GRANTS:
The creation of the Canada Education Savings Grant (CESG), a new feature to help contributors save more.
Effective January 1, 1998:
The Government will provide a grant of 20% on the first $2,000 contributed to an RESP each year for beneficiaries under age 18. RESP beneficiaries will be eligible to accumulate a lifetime grant of $7,200, or $400 per beneficiary, per year if:
A) A minimum of $2,000 was contributed to RESPs before the beneficiary was 16, and not withdrawn. OR
B) A minimum of $100 was contributed to RESPs in any four years before the beneficiary was 16, and not withdrawn. OR
Note: A Canada Education Savings Grant application must be completed in order to receive the grant.
The Government will provide the CESG directly to the Promotor, to be invested in the same Plan
chosen by the contributor. The grant itself is not included in calculating the annual and lifetime
contribution limits. You can find a list of Promoters at HRDC's site - and more RESP and CESG Information
The grant is allowed to grow as part of your RESP, and is paid to or on behalf of the student upon
enrollment in an eligible full-time post-secondary education or training program. If the beneficiary
does not pursue education or training, the grant(s) must be returned to the Federal Government.
However, under certain conditions income generated by the grant along with income generated by
the contributions may be transferred to the contributor's RRSP.
A provision has been added to assist families who aren't always able to make contributions every year. Grant eligible (CESG) contributions may be carried forward to future years up to a maximum of $4,000 per year, translating into a maximum grant in any given year of $800.
The Plan must be collapsed within 25 years of inception. Upon enrollment in a post-secondary program, funds are transferred to the beneficiary for the specific purpose of financing tuition, room and board, books, and associated personal expenses.
If the beneficiary decides against continued education, is 21 years or older and the Plan has been running for 10 years the CONTRIBUTOR is allowed to transfer up to $40,000 of RESP income ($50,000 after 1998) which can INCLUDE interest earned on the investment to a Registered Retirement Savings Plan (regular or spousal) without penalty, provided that there is sufficient contribution room.
Family plans established for several beneficiaries are not restricted to withdrawal "shares". Portions allotted to any beneficiary who decides against a continued education may be divided among the remaining beneficiaries, without penalty.
All income is tax sheltered until withdrawn for educational purposes, at which time it is taxed in the hands of the beneficiary. Income transferred to the CONTRIBUTOR's RRSP is not tax deductible, but continues under the tax shelter. Income received by the CONTRIBUTOR in cash is subject to a 20% charge on top of regular income taxes.
Go to Human Resources Canada's RESP/CESG site for the latest info...
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