What is an RESP?
A registered education savings plan (RESP) is a contract between an individual (the subscriber (usually a parent)) and a person or organization (the promoter). Under the contract, the subscriber names one or more beneficiaries (the future student(s)) and agrees to make contributions for them, and the promoter agrees to pay educational assistance payments (EAPs – consists of the Canada education savings grant, the Canada learning bond (CLB), amounts paid under a provincial education savings program and the earnings on the money saved in the RESP to the beneficiaries.
How does an RESP work?
The subscriber (or a person acting for the subscriber) generally makes contributions to the RESP. Subscribers cannot deduct their contributions from their income on their Income Tax and Benefit Return. In other words, the contributions are made from the subscriber’s after-tax income. The promoter usually pays the contributions, and the income earned on those contributions, to the beneficiaries. The income earned is paid as educational assistance payments (EAPs).
If the contributions are not paid out to the beneficiary, the promoter usually pays them to the subscriber at the end of the contract. Subscribers do not have to include the contributions in their income when they get them back.
Beneficiaries generally receive the contributions and the EAPs from the promoter. They have to include the EAPs in their income for the year in which they receive them. However, they do not have to include the contributions they receive in their income.
Who can contribute to an RESP?
You will be able to make contributions for a beneficiary only if:
- the beneficiary’s social insurance number (SIN) is given to the promoter before the contribution is made and the beneficiary is a resident of Canada; or
- the contribution is made by way of a transfer from another RESP under which the individual was a beneficiary immediately before the transfer.
RESP contributions cannot be deducted from your income on your Income Tax and Benefit Return. In addition, you cannot deduct the interest you paid on money you borrowed to contribute to an RESP.
Generally, you can contribute to family plans for beneficiaries who are under 31 years of age at the time of the contribution. However, transfers can be made from another family plan even if one or more of the beneficiaries are 31 years of age or older at the time of the transfer. An RESP can stay open for up to 36 years and the child can use it at any time, could be for a masters degree, an MBA or even a doctorate.
How much can we contribute?
For 2007 and later years, there is no annual limit for contributions to RESPs, however, the lifetime limit on the amounts that can be contributed to all RESPs for a beneficiary is $50,000.
Yes, you can certainly contribute to your spouse’s or common-law partner’s RRSP, however, contributions you make will reduce your RRSP deduction limit. The maximum amount you can contribute is the same (calculation steps shown above) whether you contribute to your own RRSP or your spouse’s.
My child is 14 years old and I have never contributed before. Is it too late to contribute now?
RESPs offer a way to “catch up” on education savings if you didn’t get started right away. The basic CESG provides 20 cents on every dollar you contribute to an RESP, up to an annual maximum of $500. So, if you put in $2,500, you’d be eligible for the full $500 in grant money available each year. If you’ve delayed starting an RESP or haven’t been able to contribute enough to get the maximum grant amount each year, you may still be able to take advantage of that “free” government grant money.
If you don’t start making catch-up payments by the time the child is 10 years old you won’t be able to maximize the government grant because the grant ends the year the child turns 18.
Example 1: Susan has a 14-year-old son and hasn’t made any contributions to date. If she opens an RESP in the calendar year her son turns 14, she can have four years to contribute and double-up on the grant amount. For example, a contribution of $ 5,000 annually would allow her to receive $ 1,000 of grant money each year ($500 for the current year and $ 500 for the unused room from a previous year). That would mean a total grant amount of $ 4,000 – less than the $ 7,200 maximum available, but still sizable!
Example 2: Daniel normally contributes $ 2,500 to RESP but missed last year’s contribution altogether, which also meant no $ 500 grant. If Daniel’s son meets the 17-year-old cutoff requirement, he could double his contribution to $ 5,000 this year and the government contribution would rise to $ 1,000 to make up for last year’s missed grant.
Contribution requirements for beneficiaries who are 16 or 17 years old
Since the CESG has been designed to encourage long-term savings for post-secondary education, there are specific contribution requirements for beneficiaries who attain 16 or 17 years of age. RESPs for beneficiaries 16 and 17 years of age can only receive CESG if at least one of the following two conditions is met:
- a minimum of $ 2,000 was contributed to (and not withdrawn from) the RESP of the child before the end of the calendar year they turned 15
- a minimum annual contribution of $ 100 was made to (and not withdrawn from) the RESP in at least four of the years before the end of the calendar year the child turned 15
This means that you must start to save in RESPs for your child before the end of the calendar year in which the beneficiary attains 15 years of age in order to be eligible for the CESG.
What if my children do not pursue post-secondary education?
If the beneficiary does not pursue post-secondary education, the CESG and CLB are returned to the government.
Is there a deadline to apply?
The annual contribution deadline is the end of the year (December 31) – there is no 60-day grace period as there is with Registered Retirement Savings Plans (RRSPs). As for CESGs, these are paid out only to the end of the year in which the child turns 17.
What can the money be used for?
Funds within an RESP can be used for your child’s education. After high school your child can withdraw funds from the RESP to pay for full-time or part-time education in the following areas:
- an apprenticeship program
- a trade school
- a college or university