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Savings Plan for Students and Future Students

Savings Plan for Students and Future Students
Savings Plan for Students and Future Students
Registered Education Savings Plans (RESPs) - Be Aware, and Beware!RESP topicsOther methods of saving for your child's education What is a Registered Education Savings Plan?The risks and restrictions of RESPs.Beware of fees!How much can be contributedCanada Education Savings Grant (CESG) - How much will the government contribute?Canada Learning Bond (CLB)Alberta Centennial Education Savings (ACES) PlanWhat Types of RESPs Are Available? What happens if we miss a payment or cancel the RESP? How are the funds paid out of the RESP, and are they taxable? Educational assistance payments (EAP) - what educational programs qualify, and what expenses qualify? Other resources What is a Registered Education Savings Plan (RESP)?A Registered Education Savings Plan (RESP) is an Education Savings Plan (ESP) that has been registered with Canada Revenue Agency (CRA), and is governed by the Income Tax Act and Regulations.  It is a method for parents to save for their children's post-secondary education, with the earnings in the plan growing tax-free. The federal government will also contribute to the RESP, by giving a Canada Education Savings Grant (CESG), based on the amount of contributions to the RESP by the subscriber.  The CESG is governed by the Canada Education Savings Act and Regulations.An RESP must be terminated no later than the last day of the 35th year following the year in which the plan was entered into, except for "specified plans", for which the deadline is 40 years.Specified plan:a single beneficiary planbeneficiary is entitled to the disability tax credit  for the tax year ending in the 31st year following the year in which the plan was entered intothere can be no designation of other beneficiaries after the end of the year that includes the 35 anniversary of the planThe people involved in the RESP are:
  1. subscriber - this is the person who sets up the RESP and contributes to it
  2. beneficiary - this is the child for whom the RESP is set up, and who will be the one to use the RESP for education costs.  A proposed legislative change requires that the beneficiary must be a resident of Canada, and the social insurance number of the beneficiary must be provided to the promoter.  The changes are applicable after 2003.  The Bill containing these proposed revisions, Bill C-10 from 2007, has not received Royal Assent, and thus has not been enacted.  However, the Department of Finance in 2011 indicated that this bill is not dead, and is expected to be reintroduced.
  3. promoter - This is the organization with whom the RESP is arranged, who administers the RESP, and who receives a fee for the administration of the RESP.  There are two types of providers (promoters) for RESPs:
    1. financial institutions such as banks, credit unions and investment firms
    2. group scholarship providers
When the RESP funds are withdrawn to be used for education, the CESG and accumulated earnings of the RESP will taxable in the hands of the student as the funds are withdrawn.  The subscriber contributions withdrawn are not taxable.  See our article How are the funds paid out of the RESP, and are they taxable?  This article also explains what happens when the RESP is not used for educational purposes.  Review of RESP Industry PracticesIn August 2008, Human Resources and Social Development Canada (HRSDC) published a Review of Registered Education Savings Plan Industry Practices.  One part of the review discusses complaints by consumers about RESPs.  The main complaints are the following, in relation to group scholarship providers: high up-front fees of which they were not aware, resulting in contribution withdrawals less than the contributions paidinvestment income cannot be transferred when switching to a different promotercannot get all or part of the accumulated investment income from the RESP, because: their program of study is not eligible under their plantheir studies are too short in durationthey miss application deadlinesthe term of their RESP has expiredof other reasonswebbot bot="PurpleText" PREVIEW="start of Ad RESP 300x250 BTF Channel RESP 300x250 BTF " webbot bot="PurpleText" PREVIEW="End of Ad"  
The risks and restrictions of RESPsWith a Registered Education Savings Plan (RESP) comes both risk and restrictions.The greatest risk is that your child will not take part in qualifying post-secondary education.  This will result in paying back the federal grant portion of the RESP, and could result in forfeiture of the earnings in the RESP.  At best, the earnings can be transferred to an RRSP (maximum amount $50,000) if: there is contribution room available,the RESP has existed for at least 10 years, andthe beneficiary is at least 21 years old and not pursuing post-secondary education.If no RRSP contribution room is available, the earnings can be returned to the subscriber, again only if the RESP has existed for at least 10 years, and the beneficiary is at least 21 years old.  This will attract tax at the subscriber's marginal tax rate, plus an additional tax of 20%.  If the RESP is held in a pooled group scholarship plan, the earnings may be completely lost, with the subscriber getting back less money than was originally contributed, due to fees paid to the promoter.RESPs are restricted to being used for qualifying post-secondary education.  With many plans, there is a set payment schedule which must be followed.  If the payment schedule is not followed, interest may be charged, or the plan may be terminated.Tip:  If you are still determined to start an RESP, make sure you read and understand all the details first! Beware of fees on RESPsIt is very important to understand exactly what fees are going to be paid out of the RESP to the promoter, and when the fees are taken.  Normally the fees are paid before the RESP earns any income, and a subscriber could lose all contributions to the fees if payments to the RESP are discontinued.  Fees may also be charged on each payment out of the RESP. In 2003, a compliance review of scholarship plan dealers was performed by the Canadian Securities Administrators.  The entire report can be accessed on the Ontario Securities Commission website, titled Industry Report on Scholarship Plan Dealers (pdf file).  The following is a quotation from Section 2.2 (Inadequate Disclosure) of the compliance report:The following weaknesses were noted with respect to the disclosure provided to clients:- Sales representatives lacked adequate knowledge of the product being sold to clients, and its associated costs.
- Enrolment fees were misrepresented in some cases, leading clients to believe that the potential for loss was nil.
- Enrolment fees and the related consequences of terminations were not always discussed with clients.
- The 60 day grace period was not always explained to clients.
- In some cases, there was no mention of other types of fees incurred by the plans.
Tip:  Make sure you understand what fees will be paid by the RESP, and the timing of the fees. How much can be contributed to an RESP?Income Tax Act s. 204.9(1)There is no longer an annual limit for contributions to a registered education savings plan (RESP), and the lifetime limit is $50,000.  Prior to 2007, there was an annual contribution limit of $4,000 per beneficiary (Income Tax Act s.146.1), and the lifetime limit was $42,000.  Contributions can be made for 31 years (previously 21 years) following the year in which the plan is started.  For specified plans, the limit is 35 years. Contributions to an RESP are not tax deductible. If excess contributions are made, there is a penalty of 1% per month.  Excess contributions can cause a plan's registration to be revoked. Although there is no longer an annual limit on contributions, there is still an annual limit on the amount of Canada Education Savings Grant (CESG).  The minimum investment required to receive the maximum lifetime CESG of $7,200 at the rate of 20% of contributions would be 14 annual contributions of $2,500, plus one contribution of $1,000. Canada Education Savings Grant - How much will the government contribute?Canada Education Savings Act s.5The federal government will contribute a Canada Education Savings Grant (CESG) of 20% of contributions to the RESP by the subscriber, to an annual limit of $500 (grant room), and to a lifetime limit of $7,200.  The annual limit was increased to $500 from $400 effective 2007, but the lifetime limit was not increased. To be a recipient of the CESG, the RESP beneficiary must be a resident of Canada at the time the RESP contribution is made, and must have a valid social insurance number.Low and middle income families are eligible for an increased CESG percentage on the first $500 of contributions in a year to a child's RESP.  This started in January 2005.  The percentage is increased from 20% (CESG = $100 on first $500 of contributions) to40% for families with incomes up to $37,178 for 2007 (CESG = $200 on first $500 of contributions)30% for families with incomes between $37,178 and $74,357 for 2007 (CESG = $150 on first $500 of contributions)These income levels are indexed, and correspond to the federal tax brackets, which can be found on the Canadian federal tax rates page.Starting January 1, 1998, even if no RESP had been started for a child, every child who is a Canadian citizen started to accumulate CESG available of$400 per year for the years 1998 to 2006, and$500 per year for years after 2006.The grant will not be received by the child until RESP contributions are made.  This means that if an RESP is started  in 2007 when a child is 3 years old, CESG "grant room" available of $1,300 has accumulated (2 years x $400 plus 1 year x $500).  If the subscriber contributes $5,000 to the RESP in the 2007,  then the government will contribute $1,000 (20% x $5,000).  The actual maximum CESG contribution per year is the lesser of 20% of the RESP contribution, or$1,000 for years after 2006$800 for years before 2007.CESG will not be paid in any year after the beneficiary turns 17 years of age.  CESG will be paid in the years in which the beneficiary turns 16 or 17 only if:  a minimum of $2,000 in contributions has been made to, and not withdrawn from, RESPs for the beneficiary before the year in which the beneficiary turns 16 years of age, ORa minimum of $100 in contributions has been made to, and not withdrawn from, RESPs for the beneficiary in at least any 4 years before the year in which the beneficiary turns 16 years of age.Some children will be eligible to receive Canada Learning Bond (CLB) grants.Children of Alberta residents may be eligible to receive Alberta Centennial Education Savings (ACES) Plan grants.  Canada Learning Bond (CLB)Canada Education Savings Act s. 6The Canada Learning Bond is a Government of Canada grant which is paid directly into a child's RESP.  It is available to families who are receiving the National Child Benefit (NCB) as a supplement to their Canada Child Tax Benefit (CCTB), for children born after 2003.  The initial CLB payment is $500.  The child can receive annual $100 CLB payments up to age 15, for each year in which the family is entitled to the NCB supplement.  The maximum CLB that can be received by a child is $2,000.Your RESP provider will apply for the CLB on your behalf.For more information, see the following resources:Service Canada - Canada Learning BondGovernment of Canada CanLearn - Canada Learning BondCanada Revenue Agency (CRA) - Canada Learning Bond  What Types of RESPs Are Available?RESPs can be:non-family plans, which can have only one beneficiary.  The subscriber is not governed by a payment schedule, but can make payments as desired, up to the annual limits.  The beneficiary does not have to be related by blood or adoption to the subscriber.  These plans can be self-directed plans with a financial institution.  family plans, which can have one or more beneficiaries, all of whom must be connected by blood or adoption to the subscriber.  The subscriber is not governed by a payment schedule, but can make payments as desired, up to the annual plans, which are usually offered by scholarship plan dealers.  There are normally fixed payment schedules and higher fees associated with these plans.  They are often restricted to investing in low-risk securities, which historically have a lower return on investment.   What happens if we miss a payment or cancel the RESP?Consequences of missed payments or RESP cancellation depend on the type of RESP (See What types of RESPs are available?), and the individual contract.  It is extremely important to understand the terms of the RESP contract before signing. Possibleconsequences of missed payments, depending on plan:interest may be chargedmembership in the plan may be terminatedConsequences of cancellation of the RESP:Canada Education Savings Grants (CESGs) must be repaidsubscriber contributions may be returned to the subscriber tax-free, after all fees are deductedFurther consequences of cancellation, depending on the type of plan:earnings may be forfeitedearnings may be paid to the contributor as Accumulated Income Payments (AIP), with tax paid at marginal tax rates plus 20%earnings may be rolled  into the contributor's RRSP, if contribution room is available, thus avoiding the taxesfor more information see How are funds paid out of the RESP, and are they taxable?.Tip:  Make sure you understand the terms of the RESP contract before signing!   How are the funds paid out of the RESP, and are they taxable?An RESP consists of the following:contributions made by the subscribercontributions of government grants, including Canada Education Savings Grants (CESG)Canada Learning Bond (CLB) grantsAlberta Centennial Education Savings (ACES) Plan grantsaccumulated earnings on all contributions After administration and other fees are paid to the promoter out of the RESP contributions by the subscriber, how the funds are paid out depends on whether or not the beneficiary pursues post-secondary education.If the beneficiary uses the funds for qualifying educational programs, the tax consequences are as follows:The subscriber contribution portion of payments to the beneficiary or subscriber is not taxable, and there is no restriction on how these funds are used.The CESG and accumulated earnings on all contributions are paid out to the beneficiary as Educational Assistance Payments (EAP), and are considered taxable income to the beneficiary.  However, the beneficiary may claim tuition tax credits and education tax credits to offset the income. If the RESP is not going to be used by the beneficiary for qualifying educational programs:the assets of the RESP can be transferred to another RESP under certain circumstancessubscriber contributions can be refunded tax-free to the subscriber or beneficiary, after all fees are paid to the promoter out of these contributions.CESG must be repaid.earnings are forfeited with some plans, orearnings may be paid out to the subscriber, under certain conditions, as Accumulated Income Payments (AIP). The subscriber must be resident in CanadaAIP are subject to regular income tax plus an additional 20% taxboth taxes may be avoided if the AIPs are transferred to the RRSP of the subscriber or the subscriber's spouse.  There must be sufficient contribution room in the RRSP, and the transfer is limited to a maximum of $50,000.Accumulated Income Payments (AIP)Income Tax Act s. 146.1(1), 146.1(7.1), 146.1(2)(d.1), 146.1(2.2)Accumulated Income Payments (AIP) can only be made if any one of the three following conditions apply:the plan has existed for 10 years and each individual (other than a deceased individual) who is or was a beneficiary has reached 21 years of age and is not eligible to receive an educational assistance payment ; the plan has existed for 26 years, unless the plan is a specified plan (in general a non-family plan where the beneficiary is entitled to the disability tax credit for the beneficiary's tax year ending in the 22 year of existence of the plan) in which case the plan has existed for 31 years; all the beneficiaries under the plan are deceased. RESP beneficiaries with disabilitiesCRA may waive the conditions for AIP payments if it is reasonable to expect that a beneficiary under the plan will not be able to pursue post-secondary education because he or she suffers from a severe and prolonged mental impairment. See also - links to all information on related to persons with disabilities.  Educational Assistance Payments (EAPs)Income Tax Act s. 146.1(1), 146.1(2)(g), 146.1(2)(g.1)An educational assistance payment (EAP) means any amount, other than a refund of contributions, paid out of an education savings plan to or for an individual to assist in furthering their education at a post-secondary level.    Certain conditions must be met for payments to qualify as EAPs.  If a payment is made that does not qualify as an EAP, it will then be taxed as an accumulated income payment (AIP). Full time educational programsThe individual must be enrolled as a student in a qualifying educational program at a post-secondary educational institution.  A qualifying educational program means a program of at least 3 weeks duration, which requires that each student spend at least 10 hours per week on courses or work in the program.  A program at a foreign educational institution must last at least 13 weeks.  However, the 2011 Federal Budget proposed to reduce this duration requirement to 3 weeks, beginning in 2011, when the beneficiary is enrolled at a university in full-time attendance.  Qualifying educational programs include apprenticeships and programs offered by trade schools, colleges and universities. The maximum EAP amount payable to an individual during the first 13 consecutive weeks of a qualifying program is $5,000.  Once 13 consecutive weeks has been completed, there is no limit on the amount of EAPs that can be paid, as long as the individual continues to qualify for the payments.  If there is a 12 month period during which the individual has not been enrolled as a student for 13 consecutive weeks, the $5,000 maximum will again apply. Part time educational programsThe individual must be at least 16, and be enrolled as a student in a specified educational program at a post-secondary educational institution.  A specified educational program means a program of at least 3 weeks duration, which requires that each student spend at least 12 hours per month on courses or work in the program. The maximum EAP payable to part time students is $2,500 for each 13 week semester.  What expenses qualify to be paid by EAPs?The Income Tax Act is not specific in what expenses can be paid using EAPs.  The Canada Revenue Agency (CRA) frequently asked questions (FAQ) on RESPs indicates that the amount that can be paid during the first 13 weeks of a full time educational program is the lesser of the actual expenses or $5,000.  However, there is no legislation that makes this requirement.  The legislation requires that the EAP assist the student in furthering their post-secondary education.  The promoter, who is responsible for making the payments, is required to ensure that the student is enrolled in a qualifying program, but is not required to collect expense receipts from the student.  
  RESP resources on other websitesService CanadaRegistered Education Savings Plans webbot bot="PurpleText" PREVIEW="start of Ad RESP 160 x 600 Channel RESP Text " webbot bot="PurpleText" PREVIEW="end of Google ad code" Government of Canada CanLearn websiteEducation Savings for Your Child - Registered Education Savings Plan (RESP), Canada Education Savings Grant (CESG), Canada Learning Bond (CLB) 
Tax tip:  Pay down debt so that you are debt free before your children need money for post-secondary education.  Therefore, instead of making loan payments you can use the money for your children's education. 
It is very important for consumers to understand up front all the costs, features and restrictions of any RESP in which they plan to invest.  It is also very important to ensure prior to enrolment that any post-secondary studies are eligible under their plan. 


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