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A Registered Education Savings Plan (RESP) is one of the easiest and best ways to fund the future ambitions of your child.
All you need to do is ensure that your child has a valid Social Insurance Number (SIN) and open an RESP. You can then use the plan to save for your child's education while deferring taxes on the earnings.
You may also be eligible to obtain one or more of the Government's education incentives.
You even have a number of options available should your child decide to not pursue a post-secondary education once the time comes.
Here are some answers to some of the most common RESP questions:
What is an RESP?
A Registered Education Savings Plan (RESP) is designed to help you save for the post-secondary education of a child or other beneficiary.
Although RESP contributions are not tax-deductible, they do allow savings to compound and grow tax-free until the child is ready to go full-time to college, university, or another post-secondary educational institution.
Who can open and contribute to an RESP?
Anyone can open an Individual RESP Plan and anyone can contribute to it. This includes parents, grandparents, aunts, uncles, and friends.
For Family RESP Plans, the contributor must be related by blood or adoption to the beneficiaries.
More information is available about Individual Plans vs. Family Plans.
How much can I contribute?
The maximum annual RESP contribution that will qualify for the 20% CESG is $2,500 or $500 per beneficiary.
The annual RESP contribution limit has been eliminated. The total RESP lifetime contribution limit for each RESP beneficiary is $50,000. Part-time students are also eligible for RESP assistance.
Can RESPs be transferred?
RESPs can be transferred from one institution to another, subject to the terms and conditions of the individual investments held in the plan.
How do RESP withdrawals work?
Principal contributions to your RESP can be withdrawn at any time with no tax implications. If the withdrawal is not a post-secondary education (PSE) withdrawal, it is known as a "capital withdrawal". Any Basic CESG, Additional CESG, CLB or ACES grant received on these contributions must be returned to the government at the time of the capital withdrawal.
A PSE withdrawal is composed of capital you have contributed to your RESP and is used to pay for post-secondary education costs. There are no Basic CESG, Additional CESG, Canada Learning Bond or ACES grant implications when completing a post-secondary education withdrawal.
Accumulated earnings on all contributions, Basic CESG, Additional CESG, CLB, ACES grant, and the earnings on Basic CESG, Additional CESG, CLB and ACES grant in the RESP are generally used for education purposes and are known as an "Education Assistance Payment" (EAP). EAPs are taxable in the student's hands as other income. Since they will have little other income, chances are they will pay little or no tax.
Note: Proof of enrolment must be provided prior to any PSE or EAP withdrawal.
What if my child decides against post-secondary education?
You have all kinds of options available should your original beneficiary decide not to pursue a post-secondary education. You can:
- Decide to select another beneficiary if it's permitted by your plan.
- Make a tax-free capital withdrawal of all the money you contributed to the plan. However you will be required to pay back the Basic CESG, Additional CESG, CLB and ACES grant.
- Withdraw the earnings as cash (subject to income tax in the year it is withdrawn, along with a 20% penalty).
- Transfer up to $50,000 of the earnings in the RESP to your personal or spousal RRSP, provided you have unused contribution room. With this option you will avoid paying income tax on the income withdrawn.
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Donate the earnings from the plan to a qualifying educational institution.
To take advantage of options 3 & 4, the RESP must have existed for at least 10 years, the contributor must be a Canadian citizen, and all beneficiaries (other than deceased individuals) must be 21 years of age or older and not pursuing a post-secondary education. In all cases where a withdrawal is made from an RESP for non-educational purposes the Basic CESG, Additional CESG, CLB and ACES grant must be returned to the government.
The Scotiabank Group of companies offers a range of RESP options, with a choice of investments that includes a premium savings account, mutual funds and self-directed plans.
To find out more
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