24.3.3 Registered Education Savings Plan (RESP)

Introduction to Registered Education Savings Plans (RESPs)

A Registered Education Savings Plan (RESP) is a government-registered account designed to help individuals save for a child’s post-secondary education. The plan facilitates tax-sheltered growth of investments, along with availing various government grants, making it an attractive savings vehicle for educational funding.

Education Savings Incentive

Tax-Sheltered Growth: RESPs provide the significant advantage of allowing contributions to grow tax-free. The income earned within the RESP, such as interest, dividends, and capital gains, is not subject to tax as the funds grow. Tax is only payable when funds are withdrawn for educational purposes, at which point they are typically taxed in the student’s hands, who often has little or no other income, thereby reducing the overall tax burden.

Contribution Limits: Although there is no annual contribution limit for RESPs, the lifetime contribution limit per beneficiary is $50,000. These contributions are not tax-deductible, but the deferred taxation of earnings remains a powerful incentive.

Government Grants

Canada Education Savings Grant (CESG):

• Overview: The Canadian government provides the CESG to encourage education savings by offering direct monetary contributions to the RESP.
• Basic CESG: The government contributes 20% on the first $2,500 contributed annually to an RESP, up to a maximum of $500 per year per beneficiary. The lifetime maximum CESG per beneficiary is $7,200.

Additional CESG:

• For families with lower incomes, the government may add an extra 10% or 20% to the first $500 contributed, enhancing the grant’s impact.

Canada Learning Bond (CLB):

• Targeting children of low-income families, the CLB provides $500 for the RESP of an eligible child, with additional annual instalments of $100, up to the age of 15, amounting to a potential total of $2,000.

These government contributions significantly boost the savings potential of the RESP, beyond what individual contributions alone could achieve.

Setting up an RESP

Who Can Contribute?

RESPs can be established for a child by parents, grandparents, other relatives, or friends. The subscriber is the person who opens the RESP, and the beneficiary is the future student whose education will be funded.

Types of RESPs:

1. Individual Plans: Suitable for one beneficiary, generally flexible without age restrictions on the beneficiary.
2. Family Plans: Allow multiple beneficiaries who must be related to the subscriber by blood or adoption. Ideal for families planning to share the accumulated savings among siblings.
3. Group Plans: Offered by scholarship plan dealers, group plans pool contributions with others and provide a specified amount in educational assistance payments if specific terms and requirements are met.

Withdrawal and Taxation

Educational Assistance Payments (EAPs):

When a beneficiary enrolls in a qualified educational program, withdrawals from the RESP can commence. These withdrawals, which include the CESG and investment income, are known as Educational Assistance Payments (EAPs). EAPs are taxable in the hands of the student, typically resulting in minimal tax due because of the student’s lower income level.

Refund of Contributions:

Contributors can withdraw their initial contributions tax-free at any time since these contributions were made with after-tax dollars.

Early Withdrawals and Consequences:

Early, non-qualified withdrawals can result in the return of grants to the government and taxation to the contributor as excess contributions.

Diagram: Structure of an RESP

    graph LR
	A[Subscriber] -->|Contributes| B((RESP))
	B --> C[Investment Income]
	B --> D[Government Grants]
	E[Beneficiary] <--|Receives Payments| C
	E <--|Receives Payments| D

Additional Resources

• Government of Canada: RESP Overview
• Financial Consumer Agency of Canada: RESPs
• Canada Revenue Agency: RESP Information for Individuals

Conclusion

The RESP is an effective tool for saving for a child’s future educational needs, benefiting from government incentives like the CESG, as well as growth through tax-sheltering within the plan. Understanding its features and applying it strategically can significantly ease the financial burden of post-secondary education, making higher education more attainable without substantial debt burdens. Through careful planning and utilization of available contributions, reserves, and government programs, urban and suburban families alike can ensure educational security for their next generation.

Glossary

• Beneficiary: The future student who will benefit from the RESP.
• Subscriber: The individual who opens and contributes to the RESP.
• Educational Assistance Payments (EAPs): Payments made from the investment income and grants within a RESP to fund the beneficiary’s education.
• Canada Education Savings Grant (CESG): A government grant to boost RESP savings up to a lifetime maximum of $7,200 per beneficiary.

This structured insight into RESPs should assist you in a deeper understanding of how they work for your Canadian Securities Course examination and professional application.