Ensuring Your Child’s Future With Registered Education Savings Plan

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 ever since his/her first day in kindergarten.This is where a Registered Education Savings Plan (RESP) has you covered.

How a RESP works is that once you set-it up for your child you become the subscriber and he/she the beneficiary. You can contribute any amount to the plan over a period of maximum 31 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.

Now coming to the benefits – first of course is the relief of having built a college fund nest for your child. Additionally, registered education savings plan in Canada have the unique benefit of having the right to use the Canada Education Grants Scheme (CEGS) Canada Learning Bond (CLB), or any provincial registered education savings 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 at 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.

Contributions made to an RESP are not deductible from the taxable income; however, the subsequent investment earnings on RESP are duly tax-deferred. When the earnings are withdrawn by the beneficiary to cover qualifying education expenses, they are taxable to the beneficiary and not to the subscriber.

The promoter, usually a bank/financial services firm, pays the contributions and the income earned on those contributions to the beneficiaries, termed as educational assistance payments (EAPs). If for some reason RESP contributions do not get availed of and not paid out to the beneficiary (say in case your child gets a full scholarship), the promoter pays the amount back to the subscriber at the end of the contract. This payback amount needn't be included in the subscriber’s income statement.

The reason the plan is prefixed ‘registered’ is because the education savings plan needs to be necessarily registered with the Canada Revenue agency and limits set on the amount that can be contributed for each beneficiary as per the contribution limits specified under the Income Tax Act.