Securing Children’s future : Registered Education Saving Plan (RESP)

Saving for your Child’s Education

Many parents wonder how much to save for their child’s education. They also wonder how soon they should start. The answer is simple. Save Early, Earn More. Even small savings each year will translate into substantial savings later. The RESP is a tax-sheltered education savings account that can help you, your family, or friends save for a child’s education after high school. It is also registered by the Government of Canada.Benefits of having a RESP : It allows savings for education after high school to grow tax-free and could also gain government money through the Canada Education Savings Grant and the Canada Learning Bond, if you qualify

This grant from the Government of Canada can help you start saving for your child’s education after high school. Your child can use the money for full-time or part-time studies in an apprenticeship program, CEGEP, trade school, college or university. The CESG is based on contributions made to an RESP in respect of an eligible beneficiary and is comprised of two components: Basic CESG & Additional CESG: Basic CESG is a payment of 20% on RESP contributions made in respect of an eligible beneficiary, up until the end of the calendar year in which the beneficiary turns 17. The Additional Canada Education Savings Grant (A-CESG) is extra money from the Government of Canada available to help you save for your child’s education after high school. This grant is in addition to the basic Canada Education Grant that you may already be receiving in your child’s RESP. Additional CESG is a payment (over and above the Basic CESG amount) of either 10% or 20% on the first $500 or less of annual RESP contributions made on or after January 1, 2005, in respect of an eligible beneficiary, up until the end of the calendar year in which the beneficiary turns 17. The amount of money that your child can receive in additional grant depends on the net family income of the child’s primary caregiver.

Up to $50,000 for each child (named in one or more RESPs). Although there are no annual limits on contributions made to an RESP, the Canada Education Savings Grant will only be paid on the first $2,500 of contributions made every year. If the child has accumulated grant room, then the Canada Education Savings Grant will be paid on the first $5,000 of contributions made per year.

  • Your money grows tax-free while it is in your RESP.
  • You don’t get a tax deduction for the money you put into an RESP.
  • The money that your investment earns while it is in the RESP won’t be taxed until money is taken out to pay for your child’s education.
  • Money paid out of the RESP as an Educational Assistance Payment is taxed in the hands of the student. Since many students have little or no other income, they can usually withdraw the money tax-free.
  • The money that you have put in the RESP is returned to you, tax-free.

How is an RESP taxed if a child decides not to continue education after high school?

  • You will not be taxed on the amount you contributed to the RESP, but you will have to pay taxes on the money that you earned in your plan as interest. This money is called “accumulated income”. It will be taxed at your regular income tax level, plus an additional 20 percent.
  • The money that you have put into the RESP is returned to you.
  • The Canada Education Savings Grant can be shared with a brother or sister if they have grant room available—otherwise, the grant must be returned to the Government of Canada.
  • When you close your RESP, you will have to pay tax on the earnings in the RESP. (Although there will be earnings on the Canada Education Savings Grant, the grant must be returned to the Government of Canada.) You may be able to reduce the taxes you have to pay by transferring your accumulated income to either your or your spouse’s Registered Retirement Savings Plan. For more information, Talk to your RESP provider to find out about any conditions that may apply to the plan if your child does not continue his or her education after high school.

A child can be named as the beneficiary of more than one RESP account. However, you should be aware of the following information: There is a lifetime limit of $50,000 that can be contributed for each child. & Be sure to find out if anyone else is making contributions to a plan for that child so that you don’t go over any limits when you decide how much money to put into an RESP.

AIPs are amounts, usually paid to the subscriber, of the income earned from an RESP. An AIP does not include: the payment of educational assistance payments (EAPs), payments to a designated educational institution in Canada; the refund of contributions to the subscriber or to the beneficiary; transfers to another RESP; or repayments under the Canada Education Savings Act or under a designated provincial program. AIPs cannot be made as a single joint payment to separate subscribers.

Educational Assistance Payments (EAPs)

An educational assistance payment (EAP) is the amount paid to a beneficiary (a student) from an RESP to help finance the cost of post-secondary education. An EAP consists of the Canada education savings grant, the Canada learning bond, amounts paid under a designated provincial program and the earnings on the money saved in the RESP. The promoter reports EAPs in box 042 on a T4A slip and sends a copy to the student. The student includes the EAPs as income on his or her return for the year the student receives them.

The promoter can only pay EAPs to or for a student if one of the following situations applies: the student is enrolled in a qualifying educational program. This includes students attending a post-secondary educational institution and those enrolled in distance education courses, such as correspondence courses, provided by such institutions; or the student has attained the age of 16 years and is enrolled in a specified educational program.

A beneficiary is entitled to receive EAPs for up to six months after ceasing enrolment, provided that the payments would have qualified as EAPs if the payments had been made immediately before the student’s enrolment ceased.

qualifying educational program is an educational program at post-secondary school level, that lasts at least three consecutive weeks, and that requires a student to spend no less than 10 hours per week on courses or work in the program.

specified educational program is a program at post-secondary school level that lasts at least three consecutive weeks, and that requires a student to spend not less than 12 hours per-month on courses in the program.

post-secondary educational institution includes:

  • a university, college, or other designated educational institution in Canada;
  • an educational institution in Canada certified byHuman Resources and Skills Development Canada (HRSDC) as offering non-credit courses that develop or improve skills in an occupation; and
  • a university, college, or a university outside Canada that has courses at the post-secondary school level at which the beneficiary was enrolled on a full-time basis in a course of not less than three consecutive weeks.

Limit on EAPs: For RESPs entered into after 1998, the maximum amount of EAPs that can be made to a student as soon as he or she qualifies to receive them is for studies in a qualifying educational program – $5,000, for the first 13 consecutive weeks in such a program. After the student has completed the 13 consecutive weeks, there is no limit on the amount of EAPs that can be paid if the student continues to qualify to receive them. If there is a 12-month period in which the student is not enrolled in a qualifying educational program for 13 consecutive weeks, the $5,000 maximum applies again; or for studies in a specified educational program – $2,500, for the 13-week period whether or not the student is enrolled in such a program throughout that 13-week period. Subject to the terms and conditions of the RESP, the promoter can supplement the $5,000 or $2,500 EAP by paying a portion of the contributions tax-free to the beneficiary.

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