Why an RESP?

The government wants to give you money! With all the concerns about the cost of post-secondary education, you might be surprised to learn that 40% of parents surveyed recently by Ipsos-Reid have not heard of the Canada Education Savings Grant (CESG). The CESG is a federal subsidy for Registered Education Savings Plans (RESPs), where Ottawa matches 20% of your contribution, adding up to $500 to the value of your RESP, per child per year, to a lifetime maximum of $7,200. Additional rules and requirements apply, but the RESP/CESG combination is a powerful education savings tool.

How it works

You set up an RESP to save money for your child's education. Your deposits - and their earnings - are used for your child's tuition and living expenses. As of 2007, there is no annual limit for contributions to RESPs. The lifetime limit on the amounts that can be contributed to all RESPs for each beneficiary is $50,000.

No matter what your family income is, Human Resources and Social Development Canada (HRSDC) pays a basic CESG of 20% of annual contributions you make to all eligible RESPs for a qualifying beneficiary to a maximum CESG of $500 in respect of each beneficiary ($1,000 in CESG if there is unused grant room from a previous year), and a lifetime limit of $7,200.

The money you deposit is not tax-deductible; however, any growth will be tax-deferred. When the money is paid out for your child's education, it is your child who is taxed, not the parent. Many students may have little to no income; therefore the tax consequences may be minimized.

There are special rules for beneficiaries in the years they become age 16 or 17. RESPs for beneficiaries aged 16 and 17 will be eligible only if at least one of the following conditions is met:

• A minimum of $2,000 of contributions has been made to, and not withdrawn from, RESPs in respect of the beneficiary before the year in which the beneficiary attains 16 years of age; or
• A minimum of $100 in annual contributions has been made to, and not withdrawn from, RESPs in respect of the beneficiary in at least any four years before the year in which the beneficiary attains 16 years of age.

This means that you must start to save in RESPs for your child before the end of the calendar year in which they turn 15 years of age in order to be eligible for the grant. 

Setting up a plan

When you open a RESP, you decide what level of involvement you would like in the investment decision making process. Potential investments may include:

• Cash
• Canadian stock*
• Foreign stock*
• Mutual funds*
• Guaranteed Investment Certificates (GICs)
• Corporate and/or Government bonds*

In the RESP you decide when and how much you want to contribute to the plan; providing you stay under the lifetime limits. You can pay lump sums whenever you want, or you can create a payment schedule.

If your plan has good growth, your child could pay for tuition with the grant money and the earnings of your investment. You could take out your deposits tax-free.

Who can be a beneficiary?

A subscriber is not restricted in choosing a beneficiary for an RESP. However, in a family plan, each beneficiary must meet both of the following conditions:

• The beneficiary must be connected by blood relationship or adoption to each living subscriber, or have been similarly connected to a deceased original subscriber; and
• The beneficiary must not have reached 21 years of age when he or she is named and contributions are made in the plan for his benefits. In the case of a transfer from one family plan to another, and if the beneficiary is 21 years of age or older, the beneficiary must have been a beneficiary under the old plan.

Qualifying Programs

A qualifying educational program is an educational program which lasts at least three consecutive weeks, and which requires a student to spend no less than 10 hours per week on courses or work in the program. For an Education Assistance Payment (EAP) to be paid to a student in a program at a university, college, or other designated educational institution in Canada, the program has to be at the post-secondary school level. The program will not qualify if it is taken at a time during which the student is receiving employment income (excluding part-time or temporary employment to finance studies) and the program is taken in connection with, or as part of the student's employment.

A post-secondary educational institution includes:

• A university, college, or other designated educational institution in Canada;
• An educational institution in Canada certified by the Minister of Human Resources Development Canada as offering non-credit courses that develop or improve skills in an occupation; and
• A university, college, or other educational institution outside Canada that has courses at the post-secondary school level, as long as the student is enrolled in a course that lasts at least 13 consecutive weeks.

What happens if the beneficiary does not go to school?

Here are some alternatives should this occur:

• You may wish to leave money in the plan for a few years in case the beneficiary changes his or her mind, if the plan allows you to do this;
• You may name a new beneficiary;
• You may use the  Accumulated Income Payment (AIP) route if the following conditions are met:
• the beneficiary is at least 21 years of age,
• the plan has been in existence for at least 10 years, and there are no other eligible beneficiaries, and
• the subscriber is a resident of Canada.

The RESP earnings can be paid out to a subscriber in the form of an Accumulated Income Payment (AIP).

What happens to the assets following termination of a plan?

The assets of an RESP can only be used for the following purposes:

• The payment of educational assistance payments;
• The payment after 1997 of accumulated income payments;
• The refund of Canadian Education Savings Grant to the Department of Human Resources;
• A payment to a designated educational institution;
• A transfer to another RESP.  



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*Mutual funds are offered through Credential Asset Management Inc. and mutual funds and other securities are offered through Credential Securities Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, cash balances, mutual funds and other securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions. Mutual funds and other securities are not guaranteed, their values change frequently and past performance may not be repeated. Credential Securities Inc. is a Member — Canadian Investor Protection Fund.