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Parents dream of giving their children the best possible post-secondary education. Whether it’s a university, college, vocational school or a technical school education, it costs money. Registered Education Savings Plan (RESP) offers tremendous incentive to begin saving for tomorrow's education cost. It's simply a government registered and approved savings plan.
RESP is an investment vehicle used by parents or grandparents to save for their children or grandchildren's post-secondary education in Canada or out of Canada. It can be opened by guardians, other relatives or friends too. Investment income generated in RESP is tax-sheltered as long as it remains in the plan.
One of the advantages of RESP is the access to the Canada Education Savings Grant (CESG). CESG is an incentive and is provided to complement RESP contributions. There is no annual contribution limit though maximum lifetime contribution limit is $50,000. You will get the Government grant (CESG) of 20% of the first $2,500 in annual contributions made to an RESP. It comes to $500 per year ($1,000 if there is unused grant room from a previous year). An “Additional CESG” is allowed depending on the family income of the child's primary caregiver. It is @ 10% or 20% on each dollar of the first $500 contributed to the RESP of a child who is under 18 years of age, There is a lifetime limit of $7,200 to the RESP for CESG.
There is tax on excess contributions. The subscriber for the beneficiary is liable to pay a tax on his or her share of the excess contribution that is not withdrawn by the end of the month. An excess contribution exists until it is withdrawn. The tax is payable within 90 days after the end of the year in which there is an excess contribution.
The Government of Canada also provides a Canada Learning Bond (CLB) to encourage low-income families to contribute to an RESP. Eligible families with children born on or after January 1, 2004 will receive up to $2000 ($500 when they open an RESP and $100 every year as long as they are eligible, subject to the limit of $2000).
The payment made to the beneficiary (student) out of RESP to finance the cost of post-secondary education is called an educational assistance payment (EAP). An EAP consists of the Canada Education Savings Grant, the Canada Learning Bond, amounts paid under a designated provincial program and the earnings on the money saved in the RESP. If the beneficiary does not pursue post-secondary education, you will only get back your contribution. The CESG is returned to the government and your contribution is returned to you tax free. However, you may have to pay tax on the earnings, if eligible to receive earnings, and you may have to pay the penalty too. You may be able to reduce the taxes you have to pay by transferring your accumulated income to either your RRSP or to your spouse's RRSP.
RESP is a convenient way to save for a child’s future education. The sooner you start to save, the sooner you will be earning interest, and the more your money will grow.
