Meiz Majdoub

 

Ensuring your child’s future with Registered Education Savings Plan

by Meiz Majdoub

Massive tuition costs and related expenses make college education today an almost unachievable dream.  However, with a little bit of organized planning you can ensure that funding doesn’t prove to be a roadblock between your child and a well-earned higher education that you and he/she have been dreaming about every since his/her first day in kindergarten.  This is where a Registered Education Savings Plan (RESP) has you covered.

How a RESP works. Once you set it up for your child, you become the subscriber and he/she the beneficiary. In fact, anyone can open a RESP for a child, parents, guardians, grandparents, other relatives or friends.  You can contribute any amount to the plan over a period of maximum 31 years and the plan can remain open for a maximum of 35 years, with the contribution cap subject to a limit of $50,000 per beneficiary.  To be a beneficiary to this plan, the individual needs to be a Canadian resident and with a Social Insurance number.

BENEFITS.  First of course is the relief of having built a college fund nest for your child.  A RESP can reduce the amount of loan required by your child for his/her higher education.  Lesser debt means lesser burden for your child.  Many students work through their student life to repay student loans.  Having a RESP may eliminate the need to take up a job while going through college.  Additionally, registered education savings plans in Canada have the unique benefit of having the right to use the Canada Education Grants Scheme (CESGS), Canada Learning Bond (CLB), or any provincial registered education saving plan.  Under the CEGS scheme, government contributes an amount to the RESP plan: amount being dependent on the amount contributed by the subscriber and the family’s income level.  In any case payment under the scheme is a least 20% of the total annual contributions.  For families with lower income, it may even be up to 40% on the first $500 and 20% on the balance amount.  The maximum lifetime government contribution is $7200 per child under this scheme.

A RESP plan is tax sheltered.  It means that it grows with tax-free compounding while you are contributing.  Your children will be withdrawing the money later for tuition, they will receive the grant and interest earned as income at a much lower tax rate, since students generally have less income and are in a lower tax bracket.  

The Investment company pays the contributions and the income earned on those contributions to the beneficiaries, termed as education assistance payments (EAPs).  If for some reason RESP contributions do not get availed of and not paid out to the beneficiary (No Post Secondary Schooling), there are several options:

  1. Transfer the Money to another beneficiary
  2. Transfer the money to your RRSP- You may be able to transfer up to $50,000 tax-free from the RESP to your RRSP if:
    1. The RESP has been open for at least 10 years
    2. All beneficiaries are at least 21 and not currently pursuing higher education, and
    3. You’re a Canadian resident, and
    4. You have enough contribution room in your RRSP.
  3. Close the Plan, here’s what happens to the money
    1. Your contributions are returned to you. You don’t have to pay tax on any contributions that are withdrawn.
    2. You must return any grants to the government- ie, the 20% portion (CESG) this money can only be used to pay for post-secondary education.
    3. You can get your investment earnings out of the plan if it has been open for 10 years and the beneficiaries have not pursued an education by the time they are 31 years old. The plan subscriber has to pay tax on any investment earning taken out of the plan, plus a 20% penalty, except if it is rolled into the Subscribers RRSP.

The reason the plan is prefixed “registered” is because the education savings plan is registered with the Canada Revenue Agency using your Social Insurance number and the government needs to keep track of grants paid out for each beneficiary as per the contribution limited specified under the Income Tax Act.

About the writer

Meiz Majdoub, B.Comm, is a financial professional with over 30 years of experience and is accredited with a CLU, CH.F.C. He is also a member of the Conference for Advance Underwriters (CALU). and the Estate Planning Council Of Ottawa. He  has helped individuals, organizations and corporations attain their goals in the areas of Financial & Estate Planning, Insurance, Living Benefits and Employee/ Group Benefits. He can be reached at: 613-749-4007, or [email protected]