RESP
You want to do the best you can for your children, and that includes setting them up for a successful future. Post-secondary education costs are rising, quickly, so it’s important now to start thinking about how you’re going to support your children during this time in their life. One of the best ways to set them up for success is to start investing in an RESP plan, or Registered Education Savings Plan.
If you have children – or one on the way – you may be starting to think about how you are going to pay for their education after high school. Since the cost of post-secondary school is getting increase rapidly, many parents wisely start saving for their child education as early as they born.
Although there are many vehicles that you may use to save for a child’s education, by far one of the most effective is a Registered Education Savings Plan (RESP). Chances are you have heard of an RESP, but you may not be exactly sure how this work.
What is an RESP?
This plan is a flexible, tax-deferred investment that offers growth and government of Canada assistance to help you secure your children’s future. When you open a Registered Education Savings Plan -RESP, you will receive grants from the federal and provincial governments, which could be up to 40% of the amount invested over time until the individual child is 18 years old. You can contribute up to $50,000 per beneficiary child over a lifetime, and you can contribute that all at once or over time – there isn’t an annual limit to contributions. It is important to note, though, that when your child goes to withdraw the money for educational purposes they will be taxed on any interest that has accumulated on the investment.
RESP is a registered savings account that a parent or other family member may use to save for a child’s education. The money invested in a RESP grows tax free, and when it is withdrawn, it is minimal taxed in most cases as child’s income bracket (which is usually low).
Additionally, when you invest in an RESP, you can also be eligible for government Basic grants, and some additional grants (depending on family income level). As long as the child attends an accredited post-secondary education program, he/she can be eligible to get all the grants and growth on those grants as well In addition to the contributions.
RESP Contributions
The promoter will be eligible to make contributions to the beneficiary only if:
The promoter receives the beneficiaries’ Social Insurance Number (SIN) before the contribution is made. Also, the beneficiary must be a resident of the country.
The contribution is made by transfer from RESP to another if the person was a beneficiary before the transfer was made.
Contribution Rules
Ideally, you can make a contribution to the family plans of the beneficiary who are under thirty-one years of age. Even if the beneficiary is over thirty-one years at the time of transfer, they can transfer the contribution from one family plan to another. As long as the contract is amended and held, you can take advantage of your RESP contracts on the new age limits rule. You have to ensure that the amendment is applicable for 2008 and the following tax years.
The best part about Registered Education Savings Plan is that the contributions cannot be deducted from your income on your income tax and benefit return. Additionally, the interest you paid on money you borrowed to contribute to the RESP cannot be deducted as well.
Contribution Limits
From the year 2007 onwards, there is no annual limit for contributions made to your RESP. However, the lifetime limit for a beneficiary is $50,000. Payments that are made to the RESP under a provincial program by the government or the Canada Education Savings ACT (CSA) will be excluded when deciding if the lifetime contribution limit has exceeded.
Tax on RESP Excess Contributions
Any surplus contribution that arises at the end of the month after the subscribers have made all the contributions to the beneficiaries’ RESP will be added. Still, it should not exceed the lifetime limit. As mentioned above, payments to the CSA or any other government education savings plan will not be included to identify if the beneficiary has an excess contribution.
Every beneficiaries’ subscriber is liable to pay monthly 1% tax on their share of the excess contribution, which is not withdrawn by month-end. Surplus contribution is present until the beneficiary withdraws it, and tax must be paid within ninety days after the end of the year.
The Canadian government must be notified of the share of the surplus contribution of the beneficiaries’ RESP. If there is an excess contribution, the T1E-OVP form must be filled out.
Waiver of Liability
After all the factors have been reviewed, including if the tax occurred because of an error, all or part of the tax amount can be cancelled or waived off. For this request to be considered, you must write a letter addressing:
- The reason for the tax liability appearing?
- Why should this be considered as a reasonable error?
- Why is it fair to waive or cancel a portion or the entire tax amount?
There is a contribution limit on the beneficiaries’ contribution to all Registered Education Savings Plan (RESPs).
The annual limit for every beneficiary is:
- For 1996, it is $2,000
- For 1997 up to 2006, it is $4,000
- For 2007 and the following years, there is no limit
The lifetime limit for every beneficiary is:
- For 1996 to 2006, it is $42,000
- For 2007 and the following years, it is $50,000
Grants and Bonds
One of the biggest reasons why people choose Registered Education Savings Plans(RESPs) over other forms of savings vehicles is that the Canadian Government offers incentives in the form of grants and bonds to contribute to an RESP. Here is what you need to know:
- Canadian Education Savings Grant (CESG) – regardless of family income, a beneficiary is eligible to receive the CESG on contributions made up until the year they turn 18. The amount of the CESG is 20% on contributions up to a maximum of $500 per year and a lifetime maximum of $7200 per beneficiary.
- Canada Learning Bond – for lower income families, there is an additional incentive up to $2000 per beneficiary.
Can you write off RESPs?
Any investments made will be an income tax benefit for the person who made the contribution.
How are RESPs taxed?
If the child decides to continue their education after school:
- The amount will grow and remain tax-free if it is not withdrawn.
- There will be no tax deduction for the money deposited in an RESP.
- You will only be taxed when you withdraw the money to pay for your children’s post-secondary education.
- The beneficiary will be taxed, and since children do not have an income, the amount in the Registered Education Savings Plans (RESPs) can be withdrawn tax-free.
If the child decides not to continue their education after school:
The annual limit for every beneficiary is:
- The contributed amount will not be taxable, but the money earned through interest in the plan will be taxable. An additional 20% will be levied apart from the standard income tax level.
- The money you have put in the RESP will be returned.
- If there was a government grant as part of the RESP, it could be transferred to a sibling or returned to the government.
Would you like to start saving for your children’s or grandchildren’s education in an RESP? Contact us today to get started.