Registered Education Savings Plans –(RESP)

A registered education savings plan (RESP) is the best financial vehicle to help one save for one’s child’s post-secondary education. Just like an RRSP, the federal government allows one to accumulate investment growth and income on a tax-sheltered basis, until the funds are withdrawn as scholarships or education assistance payments from the plan. In short, RESPs are to education what RRSPs are to retirement, but the contributions are not tax-deductible.

The federal government introduced the Canada Education Savings Grant (CESG), helping RESPs become an even more popular way to save for post-secondary education. The CESG program grants an extra 20% on top of the annual contributions paid into the plan, up to $500 per year (lifetime maximum of $7,200 total per child), as an additional RESP contribution for anyone investing in Registered Education savings plans for children. The student beneficiary will be taxed on the accumulated income in the plan when it is withdrawn for educational purposes as educational assistance payments.

On an individual plan anyone who has an interest in a child’s future can subscribe to an RESP, whether it is the parents, grandparents, godparents, uncle, aunt or even a friend of the child. Any child can be appointed as the plan beneficiary: one’s child, grandchild, nephew, niece, etc. There are no restrictions on the beneficiary’s relationship to the subscriber. RESPs are available on an individual or family plan basis with each having its respective merits and applications. When a family plan is chosen there must be blood relationship between subscriber and nominated beneficiary.

Contributions can be made monthly or yearly over a 21 year period, but the plan must mature and be fully paid out within 25 years of its start. Allowances were made to allow catch up of unused CESG room.

In the event the beneficiary does not pursue a post-secondary education, one may under certain conditions, designate a new beneficiary, or transfer up to $50,000 of the accumulated investment income into a personal or spousal RRSP when there is room, or withdraw an accumulated income payment, which is subject to tax.

A number of RESP investment product alternatives are available and these include scholarship trusts, segregated and mutual funds, and self directed RESP plans. However, not all qualify for the CESG.