The ABCs of RESPs

May 1, 2019

 
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THE ABCs of RESPs

The Registered Education Savings Plan (RESP) is an excellent way to save and invest for the future education costs of a child, whether one is a parent, grandparent, relative, or family friend.

There are almost no downsides to an RESP.  In our opinion, one of the biggest hurdles faced by advisors and clients alike is the complex nature of the plan.  This article will help you understand RESPs and provide some tips on using them effectively.


WHAT ARE THE BENEFITS OF RESPs?

Benefit #1. Grants and Bonds from the Government

The overwhelming benefit of the RESP is the grants available from the federal government. This is why one should always consider an RESP over any other savings method for education.  Please note that all government contributions belong to the beneficiary and can only be accessed when the beneficiary attends post-secondary.  If the beneficiary does not attend, grants must be repaid to the government.

There are 3 separate sources of government funds available for BC-based RESPs:

Canadian Education Savings Grant (CESG)

The federal government provides a 20% Canadian Education Savings Grant (CESG) on all contributions up to $500 in grants per year, per beneficiary (with a contribution of $2,500) or if there’s catch up room, up to $1,000 in grants per year per beneficiary (with a contribution of $5,000).

CESG limits are per beneficiary, not at the plan level.  With two or more children on the same RESP plan (see family RESP), the amount of grants available into a single plan is higher.

Grant room is carried forward from the year of birth even if no RESP was opened at that time.  For instance, if a child was born in 2017 but the RESP was only opened in 2019, the child is still allotted $500 in available CESG for each of the three years since birth (2017,2018, & 2019).  It will however, take at least 2 years to catch up on those grants since the maximum the government will pay in any year is $1,000.

CESG grants are available from the year of birth until the year in which the beneficiary turns 15.  There are additional qualifications that must be met if the child is to receive grants for the years they turn 16 or 17.  Please see section below on ‘Special Rules for Grants at Age 16 & 17’

The lifetime maximum CESG that an RESP  beneficiary can receive is $7,200.  This requires total contributions of $36,000 from plan inception to age 17.

There is also an ‘Enhanced CESG’ amount of up to $100 extra per beneficiary (on a $500 contribution) for families with a net income lower than $45,916.

 

Special Rules for CESG at Ages 16 & 17

Special rules exist for CESG grants for the year in which the beneficiary turns 16 and 17.  In order to qualify for grants in those two years, at least one of the following conditions must be met:

a)  At least $100 contributed for the beneficiary during any 4 prior years before the end of the year in which the beneficiary turns 15.

b)  At least $2,000 in total contributions for the beneficiary.


Canada Learning Bond:

The Canada Learning Bond is available to RESP beneficiaries from lower income households, based on the number of children in the family.  For families with three or less children, if the net family income is $46,605 or less (2019), the beneficiary qualifies for the CLB.

The CLB pays $500 in the year the plan is opened, and $100 every future qualifying year up to age 15, up to a lifetime maximum of $2,000 per beneficiary.  Contributions are not required in order to receive the bond.

For more information, see https://www.canada.ca/en/employment-social-development/services/learning-bond.html


BC Training and Education Savings Grant (BCTESG)

The BCTESG is a one-time $1,200 grant available only to residents of British Columbia born on or after January 1st, 2006.  No contribution is required to secure the grant as it is based on age only.

To qualify, the beneficiary and the custodial parent must be residents of British Columbia at the time of application.

The first day of eligibility to apply is the child’s 6th birthday, and the last day to apply is the day before the child turns 9.

There is a special provision this year (2019) for children born in 2006, who initially weren’t eligible to receive the grant when it was first introduced.  Subscribers to an RESP for children born in 2006 have until August 14th of 2019 to claim the $1,200 grant.

For more information on eligibility and dates, see the BC government’s website: https://www2.gov.bc.ca/gov/content/education-training/k-12/support/scholarships/bc-training-and-education-savings-grant?keyword=training&keyword=and&keyword=education&keyword=grant


Benefit # 2. Tax-Deferred Growth

Much like an RRSP, contributions made to an RESP remain sheltered from tax every year.  Unlike an RRSP, you do not receive a tax-deduction on your income when making contributions.

Since contributions to an RESP are made with after-tax funds, those contributions will never be taxable in the future.  It’s only the government grants/bonds, as well as the investment growth, that will be taxable when removed from the plan for education purposes.

From a tax perspective, the RESP has two components: a tax-free amount of contributions using after-tax funds, and a taxable portion composed of grants, bonds, and investment growth.

Benefit # 3: Minimal Tax on Withdrawal (and possibly tax-free)

Even though RESP assets are owned and controlled by the plan owner, when it comes time to remove assets for educational purposes, any of the taxable growth in the plan is attributed to the beneficiary.

Students generally have low income, and Canadians pay no taxes on the first $12,069 of income (2019). This means that it may be possible to remove all taxable growth and grants from the plan with no taxes owing.  It depends on the income level of the student, as well as the size of the taxable portion of the RESP.  See our ‘Case Example’ at the end of this article

 


Who can open an RESP?

Almost anyone can open an individual RESP plan as long as they are a resident of Canada.  It is not a requirement to be related to the child in question.  This makes RESP a great option for family members who may want to set aside money for a grandchild, niece or nephew.

 Although the plan can be opened independently of the child’s parents, the primary caregiver must sign a form (called an Annex A) to authorize the government to access information about his/her income in determining Canada Learning Bond eligibility and enhanced CESG.

 

How long can an RESP stay open?

RESP plans can stay open for 35 years from the year of opening, and contributions can be made into the plan up until the 31st year.

 

Should I open a Family RESP Plan or an individual plan?

An individual RESP plan has only one beneficiary.  One does not have to be related to the beneficiary to open an individual plan.  For a family with only one child, an individual plan is probably the best option.  If you’re not a parent or grandparent, an individual plan is the only option (uncles and aunts don’t qualify).

 A family RESP has two or more beneficiaries on the plan.  The beneficiaries must be related by blood or adoption to the subscriber (parent of grandparent).  The beneficiaries do not need to be siblings (for instance, they could be cousins and the plan owner a grandparent) however only family plans with siblings will qualify for the CLB and additional CESG amount).

For a parent with more than one child, the family plan is a great solution.  The major benefit to the family plan is that grants and investment growth are not necessarily lost if one sibling doesn’t attend post-secondary.  You can simply leave the plan as is and use the grants and growth for the other sibling.

However you want to be mindful of the CESG limit of $7,200 per beneficiary.  For instance, if a family plan with 2 beneficiaries had $10,000 in CESG and one of the beneficiaries does not attend post-secondary, there’s $2,800 of CESG that cannot be used by the other beneficiary and will need to be returned to the government.

As a best practice, we recommend either tracking contributions and grants allocated to each child, or periodically checking with your plan administrator to get a running total of grants received by each beneficiary.

If it’s really important for you to track exact dollar contributions and grants received on a per beneficiary level, opening up individual plans for each beneficiary may be your best bet.  With a family plan, you may not know just by glancing at the account how much in grants and contributions have been allocated to each beneficiary unless you keep detailed records or contact the plan administrator.  If you’d like to be able to know how much is set aside for each beneficiary by glancing at your statement, individual plans may be the best option for you.


We’ve welcomed a second child to the family, can I / should I convert our individual RESP into a family RESP?

You can open a new family RESP plan and have both beneficiaries on the plan.  See ‘Should I open a Family RESP or an Individual RESP.’

 

What if I have two individual RESP plans for my children, but one of them doesn’t attend post-secondary?  Can I still transfer the assets including the grants to my other child?

Yes you can, so long as the receiving RESP beneficiary is under 21 years of age and is a sibling, or both beneficiaries are related to the plan owner by blood (parent, grandparent). For instance, a grandparent could transfer individual plans between cousins, since both the receiving and transferring plans have beneficiaries related to the plan owner by blood.

 

Should my spouse and I open a joint RESP or have it in only in one of our names?

I would generally encourage a joint RESP where either spouse can provide instruction to the plan.  This gives either parent authorization to act on the plan, and ensures continuity of the plan in the event that one of the plan owners where to pass away.  The other plan owner would continue to own the plan through a joint- with-right-of-survivorship structure.

 

What happens if the owner of an RESP passes away?

Like any personally owned asset, it will be determined by the plan owner’s will.  A plan owner should include this as part of their estate planning process, possibly making provisions in their will to name a successor owner for the RESP to ensure continuity of the plan.  We recommend discussing with your plan administrator, as well as discussing with your estate planning professional.

What are the contribution limits?

Plans opened today have no annual contribution limit. The total lifetime maximum contribution per beneficiary is $50,000. 

 

Withdrawals from an RESP for Education Purposes:

Proof of Enrollment

When it comes time to begin redeeming funds from the RESP for education purposes, the plan owner must provide ‘proof of enrollment’ that the beneficiary is attending post-secondary.

To keep things as simple as possible, I generally recommend the student contact their registrar’s office and request a proof of enrollment letter specifically for the purposes of making an RESP withdrawal.  Most registrar offices are very familiar with what information needs to be included in the letter.

The proof of enrollment must contain:

  • Educational institution’s name

  • Name of student

  • Semester in which student is enrolled (e.g.: Winter 2016)

  • Full time (10 hours a week – 3 consecutive weeks duration) or part time (12 hours per month – 3 consecutive weeks duration) status supported by an educational institution document.

  • Start date of semester and length of semester

  • Total Program Length

  • Current year of Program

  • Educational institution’s postal code

What are my withdrawal options?

The RESP plan is divided into two pools that can be withdrawn for education: Educational Assistance Payments (EAP) & Post-Secondary Education amounts (PSE).

The EAP pool is the taxable portion of the plan, composed of government grants, bonds, and investment growth earned over time.

There is a maximum $5,000 of taxable EAP that can be withdrawn in the first 13 weeks of full-time enrollment (roughly one semester) and $2,500 of taxable EAP for the first 13 weeks of part-time enrollment.  After 13 weeks has elapsed and the beneficiary is still enrolled in post-secondary, there is no further limit to how much EAP can be withdrawn.

Keep in mind that since this is taxable income, you may wish to be strategic about how much EAP you realize for the beneficiary in any particular year.

You have up to 6 months from the time of enrollment to request an EAP payment for the beneficiary when enrolled in post-secondary.

The Post-Secondary Education (PSE) pool tracks the original capital that was contributed to the plan and is eligible for tax-free withdrawal upon enrollment.  So long as the beneficiary has proven that they are enrolled in post-secondary, there is no limit to how much of the original capital can be withdrawn.

 Within the limits described above, you are free to withdraw from either pool as much as needed. 

 

My child is enrolled in post-secondary.  Should I take EAP or PSE payment first?

We generally recommend taking the taxable portion (EAP) of the RESP first, but that has to be balanced with the income expectation of the student in that year.  Assuming the child will have little or no income that year, it’s best to get the taxable income out of the plan first. That way, if the student doesn’t continue to pursue education going forward, there’s less headache involved in collapsing a plan with no EAP remaining.

 

Do scholarships and/or bursaries affect eligibility for taking EAP payments?

No, if your child receives a bursary or scholarship, it does not affect the RESP.

 

Do I have to prove or show receipts for any withdrawals from the RESP for educational purposes?

No, the plan is very flexible in that sense.  All you need to demonstrate is that the beneficiary is enrolled in either part-time or full-time studies at a qualifying post-secondary institution.  Withdrawals do not need to be justified with receipts.  You could redeem an entire RESP fund for educational purposes in the first year of education, even if the plan assets where much larger than the tuition costs.

 

What Qualifies as an eligible post-secondary institution for the purposes of a withdrawal?

The list of eligible institutions includes universities, community colleges, and trade schools. Check the government’s master list of eligible institutions: https://www.canada.ca/en/employment-social-development/programs/designated-schools.html

 

Do the RESP withdrawal rules apply if the child is attending post-secondary outside of Canada?

Yes, the only difference is what qualifies as a post-secondary institution.  For students studying outside of Canada, ‘post secondary’ is restricted to universities or institutions that pass the CRA test of ‘university outside of Canada.’ 

 You can read a definition here: https://www.canada.ca/content/dam/cra-arc/formspubs/pub/rc190/rc190-18e.pdf

 Master List of Recognized International Post-Secondary Institutions: http://tools.canlearn.ca/cslgs-scpse/cln-cln/reea-mdl/reea-mdl-1-eng.do?nom-name=inter

 

What happens if the beneficiary is not attending post-secondary?

There are a few options available:

  1.  Do nothing and wait: Remember that the RESP can stay open for 35 years from inception date.  If there’s a possibility the beneficiary may attend post-secondary later, there’s no need to rush and close the plan.

  2. Replace the beneficiary: In an individual plan, you may have the option of transferring the assets to another beneficiary.  In a family plan, you can allocate the assets to the other beneficiary, paying attention to ensure there is no over-allocation of grants subject to the $7,200 limit.

  3. Collapse the plan.  In this instance, grants are returned to the federal government, your original contributions are returned tax-free, and one takes an ‘Accumulated Income Payment’ (AIP) for the taxable growth in the plan.  To choose this option, the RESP plan must have been opened for at least 10 years, and the beneficiaries must be over the age of 21.  The AIP payment will be taxed as regular income plus an additional 20% tax.

  4. If there is RRSP room available, it is possible to roll the taxable portion of the RESP directly into your RRSP, thereby avoiding realizing the income and continuing to benefit from tax-deferred growth.  RRSP room must be available to make such a transfer.  This is an indirect transfer, meaning you would claim the AIP amount as income for the year, but the contribution to your RRSP would offset that income inclusion.

RESP to RDSP rollover:

If the RESP beneficiary is also the beneficiary of an Registered Disability Savings Plan, it is also possible to rollover the taxable portion of the RESP plan to the RDSP.  If you or someone you know if exploring this option, we recommend contact your plan provider for more details.

 

Important Tips on RESP:

Don’t contribute any funds to the RESP if you think there’s a possibility you’ll need to access the funds in the short term.  You can always access your original contributions for non-educational purposes, however doing so will trigger a repayment of grants to the federal government, with that grant room being permanently lost.  It’s best to only contribute funds that you know you’ll never need.

Don’t overcontribute to the RESP.  There is a $50,000 lifetime maximum contribution allowed per beneficiary. Any additional contributions will be subject to a 1% per month penalty on the overcontributed amount.  This could also arise by combining or transferring individual plans.

We recommend one individual RESP per beneficiary, or one family RESP per sibling group, to avoid confusion.  For instance, sometimes a child may be the beneficiary of multiple plans which makes tracking grants tricky and increases the likelihood of accidently paying too much EAP to the beneficiary. 


CASE EXAMPLE: THE POWER OF RESP

Here’s a case example that really illustrates the potential power of the RESP.

James & Jillian Smith opened an RESP for their daughter Emily in the year of her birth.  For 14 years, they contributed $2,500 to the plan to receive the maximum $500 in CESG grants.  By the 15th year, Emily received the maximum $7,200 and contributions ceased.

Emily is now 18 and beginning post-secondary education.  She will not be earning any income during her studies for the next 4 years.

She will need $10,000 per year for her tuition costs.  She will be living at home while attending post-secondary and will have no room and board costs.

Here is a summary of contributions, grants, and growth earned in the plan over the years, assuming a 5% net return on all assets within the plan.

Case Example.jpg

Since the plan has $44,323 in taxable income, the Smith’s plan on redeeming ¼ of that ($11,080 of EAP) each of the 4 years Emily will be enrolled. 

Since this amount is below the $12,069 basic personal exemption, Emily will not owe any income tax on these amounts.

The Smith’s have effectively contributed $36,000 to the RESP over the life of the plan, and with grants and growth, are able to redeem $44,323 tax free in Emily’s name.  Since Emily only needs approx.. $40,000 for education, the Smith’s will collapse the plan in year 4, and take back their original $36,000 in contributions to put towards their retirement savings.

They have fully paid for their daughter’s education without having to spend any of their original contributions.  The grants and growth from their contributions, combined with a tax-free withdrawal, were sufficient to cover her education costs.

 

Warm Regards,

Joe Basque, BA, CFP® | Financial Planner & Investment Advisor
HollisWealth®, a division of Industrial Alliance Securities Inc.
j.basque@westmountwealth.com

This information has been prepared by Joe Basque who is an Investment Advisor for HollisWealth®. Opinions expressed in this article are those of the Investment Advisor only and do not necessarily reflect those of HollisWealth.  HollisWealth® is a division of Industrial Alliance Securities Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.