Invest in your Child

The ABCs of RESPs

The cost of a post-secondary education continues to rise. In fact, 18 years from now, the anticipated cost of four years (away from home) at a typical Canadian university may be in excess of $103,800 (Source - Human Resources Development Canada, 2002).

For more details on the estimated increases in education costs, click here.

Although the expense may seem a little overwhelming, there are ways parents and grandparents can make the most of the savings they may wish to set aside for a student's education.

A common strategy to help ensure you can provide adequately for a child's education is to set up a Registered Education Savings Plan (RESP).

Registered Education Savings Plans

Registered Education Savings Plans (RESPs) were created by the federal government to encourage Canadians to save for a child's education while offering certain tax benefits. Contributions can be made for each beneficiary up to a lifetime maximum of $50,000.

Types of RESPs

• Individual Plans: Under an individual beneficiary plan, the subscriber (contributor) can name one beneficiary. The beneficiary named does not have to be related to the subscriber by blood or adoption, which means that anyone can start a plan for a child and make regular contributions.

• Family Plans: A family beneficiary plan is similar to an individual beneficiary plan, except that subscribers can name more than one beneficiary to the plan, provided they are all related to the subscriber by blood or adoption. The family plan provides the flexibility of sharing the assets within the RESP among the beneficiaries. For example, if you have four children named as beneficiaries and only two pursue post-secondary education, the RESP funds may be transferred to those two children within the plan without penalty.

RESP Advantages

The Canada Education Savings Grant (CESG)

Contributions made to an RESP are eligible to receive a grant from the federal government. The Canada Education Savings Grant (CESG) provides RESP account holders with a grant of up to 20% on the first $2,500 contributed to the plan every year for each beneficiary under the age of 18¹. That works out to a maximum annual grant of $500 per beneficiary for a total lifetime grant of $7,200².

The benefit of tax deferral

While contributions to RESPs are not tax-deductible for the contributor, income earned on the RESP investments remains tax-deferred until withdrawn. Withdrawals by the beneficiary are taxed in the beneficiary's hands.

No restrictions on foreign content

There are no foreign content restrictions in an RESP, which allows you to build a globally diversified portfolio. Since Canada represents only about 2% of the world's total market capitalization, if you are not investing outside of Canada, then you're missing out on 98% of the world's opportunities.

¹ Certain restrictions apply to a beneficiary aged 16 or 17.

² Remember, CESGs are linked to individual beneficiaries, so in a family plan, a maximum of $7,200 per beneficiary can be paid out in CESGs. Since you decide the allocation of payments, if one beneficiary doesn't attend post-secondary school, other beneficiaries can share in the plan as well as any CESGs as long as the $7,200 limit mentioned above is adhered to. Any excess CESGs over the $7,200 limit must be repaid.

RESP Considerations

Age differences between children

If there is a significant age difference between your children, you may want to consider separate RESPs to avoid the risk of the family plan having to be wound up before the youngest child has completed his/her education.

Designating a successor

In the event of your death, the plan can be continued on your behalf by your heirs, executors, administrators or other legal representatives if outlined in your Will.

However, if your Will does not specify a successor, current tax law allows any other person making contributions to the plan to become the new subscriber upon your death. As the new subscriber, they may claim a refund on the capital contribution, leaving only the accumulated income and CESG for the child. If your intention is for the capital in the plan to be used by the beneficiary, then you may want to designate the successor in your Will.

Take Advantage of Tax-Deferred Growth

Rate of return shown is used to illustrate the effects of the compound growth rate and is not intended to reflect future values of an investment or returns on investments.

The life span of the RESP

Contributions can be made to an RESP for 21 years from the date the RESP is opened; the RESP must be collapsed by December 31st of the 25th year following the year the plan was opened.

In the majority of cases, this time limit isn't a problem. However, if your child takes a "break" between high school and post- secondary education, you may be forced to collapse the plan before realizing the full benefit from the funds held within the plan. Any funds that remain in the RESP after the 25-year limit will be subject to withdrawal penalties.