Planning For Your Children’s Education

Registered Education Savings Plan (RESP)

There are several ways to fund a child’s post secondary education; one might be to anticipate a child will receive scholarships or use student loans; ‘pay as you go’ although budgeting your cash flow will be more difficult; or start a savings plan now to prepare for the inevitable future expense. The following article will focus on one of these savings plan strategies; a Registered Education Savings Plan (RESP).

Background

An RESP is a tax deferral plan designed to help save for a student’s post-secondary education. It was created as a way for Canadians to save for education without the growth being taxed under the regular attribution rules. Normally, when you give your minor child money, interest or dividends earned on this money is taxed as if you had received the income i.e. it is attributed back to the parent and taxed in their hands. Please note: capital gain income does not attribute back to the parents.

Previously the rules governing an RESP were onerous. If your child did not attend a qualifying institution (i.e. college or university), all of the growth, interest, dividends and capital gains went to the educational institution that you designated on your RESP contract. The good news is that the Canada Customs and Revenue Agency (CRA) has significantly enhanced the RESP rules. In addition to the tax advantages, there are increased savings limits, additional termination options and the Canada Education Savings Grant (CESG).

Rules
Although contributions to an RESP are not tax deductible, all of the income in the plan compounds on a tax deferred basis. Further more, when the accumulated income is withdrawn from the plan to pay for education expenses, the student pays the taxes not the contributor. In most cases, this income would attract little tax because the student’s basic personal exemption and tuition and education credits will offset this tax liability.

Any individual can set up an RESP. This includes grandparents, aunts, uncles, godparents and friends (does not include trust or corporations).

The contributions may be made for up to 21 years, to a lifetime maximum of $50,000 per beneficiary with no annual maximum contribution. If these limits are exceeded, a one per cent per month penalty tax is charged until the over-contributed amount is withdrawn from the plan.

If the child does not proceed with post secondary education, the contributions are returned to the contributor with no tax consequences and the CESG is returned to the government. The accumulated income that has not been paid out to the beneficiary can be returned to the contributor.

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Future Generation Education Expenses

Do you wish to contribute financially to your future grandchildren’s education expenses? Many of us would like to help fund private school or post-secondary schooling, but it can be difficult if we don’t know exactly how many grandchildren there might be, and when they might be born. Here are a number of options that you may wish to consider.

Make an outright gift
You can take the “wait and see” approach and pay your grandchildren’s expenses as they arise. This lets you assess each grandchild’s individual situation while still keeping the assets in your name. If you pay tuition fees directly to an educational institute, there will be no income attribution concerns. However, if you plan to give money directly to a grandchild under 18 years of age and that money subsequently earns interest or other investment income, the tax liability may be attributed back to you. Financial gifts to grandchildren age of 18 and over will not be attributed back to you, and will be taxed at the child’s presumably lower rate of taxation. If the child uses the money to pay tuition, they may also be able to transfer unused tuition and education tax credits to a parent or to you. The outright gift approach makes sense for private school tuition fees, since RESPs can only be used to fund post-secondary education.

Contribute to a Registered Education Savings Plan (RESP)
Once the grandchildren are born, you can apply for a Social Insurance Number for them, and open an RESP. Although contributions to a registered education savings plan are not tax deductible, there is a tax deferral opportunity as the contributions accumulate tax-free within the plan. Upon withdrawal, the payments will be taxable in the hands of your grandchild, provided that your grandchild is enrolled full time in a qualifying educational program at a qualifying post-secondary educational institution. Your grandchild will likely be in a lower tax bracket than you at the time of withdrawal, and will be able to offset some of the tax liability with tuition and education tax credits, lowering the overall tax burden on these funds.

• The total lifetime maximum of RESP contribution is $50,000. Contributions can be made until the beneficiary has reached the age of 21. A penalty of 1% per month is imposed on excess contributions for each month they remain in the plan.
• Income earned by the RESP can be tax sheltered for up to 25 years. Your capital contributions can be withdrawn at any time; however, you cannot withdraw the income of the RESP without tax consequences. For an RESP beneficiary who qualifies for disability tax credit, the maximum period for making RESP contributions has increased from 21 to 25 years, and the termination date of RESP has been extended from 25 to 30 years.
• Under the Canada Education Savings Grant (CESG) program, the federal government will pay a grant of 20% on the first $2,500 of your annual contributions. The maximum annual grant of $500 is payable for each year the beneficiary is under the age of 18 to a maximum of $9,000 per beneficiary.