RESP

What is Registered Education Saving Plan (RESP)

A Registered Education Savings Plan (RESP) is an education savings plan that has been registered under the Income Tax Act and offers significant advantages to families saving for their child's future education expenses.

An RESP allows the growth income earned on contributions to remain tax deferred until your child enters a post-secondary program (within 25 years) and the money is withdrawn. A nominated child can be eligible for government grants up to $9,200.

Only when the student begins to use the Plan for education does the investment income become taxable and it is taxed in the hands of the student, who typically has little other income. Accordingly, he or she pays little or even no tax on RESP income. Virtually all full-time or part-time post-secondary education is eligible for assistance through RESPs, as long as the buyer meets the basic government requirements.

What is the Canada Education Savings Grant (CESG)?

The Canada Education Savings Grant (CESG) was introduced in 1998 to provide an incentive for individuals to save for the post-secondary education of children through Registered Education Savings Plans (RESPs). There are annual and lifetime limits on the amount of grant that will be paid in the name of any child.

Amount of CESG:

The CESG is a government grant that adds up to 20% (or $400) of your contribution into a Registered Education Savings Plan (RESP) per child annually, to a lifetime maximum of $7,200 or when the child turns 17 years old, whichever comes first.

The Income Tax Act permits annual Registered Education Savings Plan contributions up to a maximum of $4,000 per child and since unused contribution room is carried forward, it is possible to obtain a maximum of $800 CESG in a year.

The Enhanced Canada Education Savings Grant is available to families with a net income of $35,595* or less (2005.) These families are eligible to receive up to $100 more CESG yearly for each of their children. The Government will add up to 20% ($100) of enhanced CESG on the first $500 contributed yearly by a family to an RESP.

Families with a net income between $35,595 and $71,190* (2005.) are eligible to receive an additional 10% enhanced CESG, on the first $500 yearly (above the regular 20% CESG). This provides up to $50 more for each child's RESP. Income eligibility for enhanced grants is index adjusted every year.

The enhancements have no carry forward provision. The grant itself is not counted in calculating the annual and lifetime RESP contribution limits.

* The income eligibility levels are indexed annually for enhanced grants

Canada Learning Bond (CLB)

Introduced as a new Federal Government program, the Canada Learning Bond, in the March 23, 2004 Budget, is designed to help lower income families save for their children's post-secondary education.

Highlights:
Families entitled to the National Child Benefit (NCB) supplement are eligible for the CLB to be added to RESPs for their children. The CLB is available to children born on or after January 1, 2004. Initial CLB is $500 per child for the first qualifying year and subsequent CLB is $100 for each year of qualification until and including the year the child turns 15 years of age.

Types of RESPs

Group Plans vs. Self Directed Plans
RESPs may be group plans or self directed plans. Group plans, or "pooled trust plans", are administered through scholarship trust organizations and will typically pool assets for investment on your behalf in government backed securities only, including T-Bills, GICs, etc. By contrast, self directed plans generally offer more flexibility, allowing you yourself to select from a range of investments, including mutual funds, GICs, and more, thereby increasing the growth potential for assets in the plan.

In addition to offering greater investment selection, self directed plans are generally more flexible in varying the amount and timing of withdrawals for education purposes. Some group plans may limit the subscriber’s ability to change beneficiary if a one child decides not to pursue a post secondary education. Some Group plans may restrict returning investment income to subscriber in case Nominee is not Pursuing Post-Secondary Education.

Finally, all plans may be different in enrollment and management fees. Only thorough analysis may indicate suitability of one or another RESP for the individual. Please contact me for further information.

Individual Plans vs. Family Plans
Both self directed and group plans can be broken down into individual plans and family plans, the key differences being that individual plans cannot have more than one beneficiary, whereas family plans can while also allowing for the allocation of accumulated income in proportions according the needs of each named child.

Individual plans do allow for greater flexibility in naming the beneficiary, though. In an individual plan, the beneficiary named does not have to be related to you and can be of any age, whereas in the case of family plans, named beneficiaries must be under age 21 and must be related by blood or adoption.

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