Establishing an RESP

With the high cost of post-secondary education, many parents and other family members recognize the need to save for education well before the expenses become a reality. That’s why the registered education savings plan (RESP) is such a popular savings vehicle. Not only is the tax on the income accumulating in the plan deferred until funds are paid out, the federal government and some provinces may also contribute to the plan.

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What is an RESP?

An RESP is a tax-deferred savings plan designed to allow the subscriber to open an RESP to save for a beneficiary’s post-secondary education. You, as the subscriber, can contribute to the RESP, and the government may provide incentives by also contributing to the plan.

Depending on the type of plan, there could be more than one beneficiary and a beneficiary can be a beneficiary of more than one RESP.

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Contributions to an RESP

Contributions to an RESP are not tax-deductible. The beneficiary of an RESP must be a resident of Canada at the time contributions are made to the plan. There is a $50,000 lifetime contribution limit per RESP beneficiary but no annual contribution limit. If the total contributions made for a single beneficiary exceed that beneficiary’s lifetime limit of $50,000, you, as the subscriber, may be liable to pay a penalty.

Who can be a subscriber?

While parents and grandparents are typically the subscribers to RESPs, there are no restrictions on who can be the original subscriber of an individual RESP (there are restrictions for family plans). A public primary caregiver of a beneficiary under an RESP may also be a subscriber.

Upon death of a subscriber, here are some planning strategies you can consider to help ensure that someone can continue to manage the RESP:

• Have both you and your spouse or common-law partner act as joint subscribers of the RESP. If one of you were to pass away, the survivor will become the sole subscriber;
• Designate a successor subscriber in your Will. This can be an individual, estate, trust or company

Who can be a beneficiary?

You can name someone as a beneficiary of an RESP if, at the time of designation:?

• The intended beneficiary’s SIN is provided to the RESP provider; and
• The intended beneficiary is a resident of Canada.

Replacing a beneficiary

In both individual and family RESPs, you may be able to replace an existing beneficiary with a new beneficiary if your specific RESP contract allows you to name a replacement. Generally, when you replace one RESP beneficiary with a new beneficiary, the CRA treats the contributions for the former beneficiary as if they had been made for the new beneficiary on the date they were originally made.

If the new beneficiary already has an RESP, this may create an over-contribution situation and the subscriber may be subject to a penalty. The CRA will not include any contributions made for the former beneficiary when they determine whether the new beneficiary’s lifetime contribution limit has been exceeded if:

• The new beneficiary is a sibling of the former beneficiary and is under 21 years of age; or?
• Both beneficiaries are connected by a blood relationship or adoption to an original subscriber of the RESP and both are under 21 years of age.

Additionally, if one of the two previously mentioned criteria are not met, a beneficiary replacement may trigger the repayment of certain government incentives. There are also certain government incentives that require the RESP to only have siblings as beneficiaries. These rules are complex and it is important to speak with the RESP provider prior to naming a replacement so that you fully understand the implications of doing so.

Death of a beneficiary

In the unfortunate event that the beneficiary of the RESP passes away before depleting all the funds in the account, you may designate a replacement beneficiary. In a family plan where there are multiple beneficiaries, the RESP assets, including CESG, can be shared between the beneficiaries. So, if one of the beneficiaries passes away, their share of the RESP assets may be utilized by other beneficiaries.

However, each beneficiary can only receive a lifetime maximum CESG of $7,200. Any CESG remaining in the RESP after the plan has been wound up must be returned to the government. If there are no beneficiaries of the plan and you decide to not name a replacement beneficiary, you may choose to withdraw the original contributions and income and growth earned in the RESP. The government incentives may need to be repaid to the government on wind-up of the plan. For more information on withdrawing funds from an RESP, email us for a separate article on this matter.

Types of plans

The following are different types of RESPs:

• Individual RESPs;
• Family RESPs; and
• Group RESPs.

The type of plan is determined according to the arrangement you enter into with the RESP provider; it is not determined by the number of beneficiaries in the plan. For example, you can set up a family plan that has only one beneficiary. An RESP provider may not offer all the different types of RESPs, so it is important to check with the provider to understand your options.

Individual plans

An individual plan is established for one beneficiary and has fewer limitations than a family plan. The beneficiary can be the subscriber and may or may not be related to the subscriber. There is no age limit for beneficiaries of individual plans. If you want to establish a plan for yourself, or someone who is not related to you by blood or adoption, or if the beneficiary is 21 years of age or over when you establish the plan, you can set up an individual plan.

Family plans

Family plans allow more than one beneficiary in the plan. The beneficiaries must be related by a blood relationship or adoption to each living subscriber or to a deceased original subscriber. This means you can include your children, grandchildren, siblings and adopted children in a single family RESP. Nieces and nephews are excluded as beneficiaries of family plans but you can name them as beneficiaries of individual plans.

Group plans

A group RESP may also be known as a pooled RESP or scholarship trust plan. These plans pool together all of the members’ contributions and government grants. The plan provider makes investment choices on behalf of the members and determines contribution schedules. Payouts from these plans will depend on investment returns and the number of beneficiaries in the plan that qualify for post-secondary education in a given year. The plan may stipulate additional requirements regarding how and when payouts can be made.

There may be substantial fees associated with opening up a group RESP. Also, because there’s a contribution schedule set by the provider, if you miss payments, your participation in the plan may be terminated and as a result, you may forfeit the growth earned on your contributions. Group plans can vary greatly depending on the provider and the arrangement; it is very important to understand all of the restrictions and fees associated with a group plan when considering this option.

Which plan is right for you and your family?

If you have several children, a family plan may be easier to administer. Another advantage of a family RESP is that the funds in the plan do not have to be paid equally to the beneficiaries. This can be useful if one of the named beneficiaries doesn’t go on to post-secondary education or if the beneficiaries have different educational costs. For example, if one child stays at home while attending school and another child goes to school out of town, the child living away from home may have significantly higher costs. In contrast, this flexibility is not available to individual plans. The income earned in an individual plan can only be paid to the named beneficiary of the plan. This could be an issue if the named beneficiary is unable to go or decides not to go to post-secondary school, or does not use all of the funds within the plan.

Transfers between RESPs

You can make transfers from one RESP to another without tax implications when:

• The transferring RESP and the receiving RESP have the same beneficiary;
• A beneficiary of the receiving plan is a sibling of a beneficiary of the transferring plan and the receiving plan is a family plan; or
• A beneficiary of the receiving plan is a sibling of a beneficiary of the transferring plan, the receiving plan is an individual plan, and the beneficiary of the receiving plan was under 21 years of age when the receiving plan was opened.

In any other case, transfers may result in an excess contribution.

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Canada Education Savings Grant (CESG)

For many subscribers, the CESG is the most attractive feature of an RESP. No matter what your family income, the government pays a basic CESG of 20% on the first $2,500 of annual contributions or a maximum annual CESG of $500 for each beneficiary. The lifetime limit of CESG is $7,200 per beneficiary. If the beneficiary has unused grant room from a previous year, the maximum CESG that can be received in a particular year is $1,000.

Lower-income families may be eligible for an additional grant of 10% or 20% on the first $500 of RESP contributions annually. Eligibility for the additional grant in a particular year is based on the beneficiary’s primary caregiver’s adjusted income from the second preceding tax year. For the plan to receive the additional CESG, all of the beneficiaries of a family plan have to be siblings. Check to determine if your RESP plan provider supports the additional CESG.

Eligibility for CESG

A beneficiary must be a resident of Canada at the time of the RESP contribution in order to be eligible for CESG. They must also be 15 years of age or less in the year in order to be eligible for CESG. A beneficiary who is turning 16 or 17 during the current calendar year can also qualify for the CESG if one of the following two conditions is met:

• Contributions to all RESPs for the beneficiary are at least $2,000 (and not withdrawn) and were made before the calendar year in which the beneficiary turned 16; or
• Contributions for the beneficiary of at least $100 per calendar year were made in any four years (and not withdrawn) before the calendar year in which the beneficiary turned 16.

If no previous RESP existed for the beneficiary who is turning 16 or 17 in the current calendar year, they will not be eligible to receive the CESG. Any beneficiary who was already 17 years of age at the start of the calendar year will also not be eligible for the CESG.

Accumulating unused grant room

A beneficiary must be a resident of Canada in order to accumulate grant room for any given year. Grant room does not accumulate for years when the beneficiary was not a resident of Canada and it cannot be recovered, even if the beneficiary subsequently becomes a Canadian resident again. The grant room is not pro-rated where the beneficiary was only a Canadian resident for part of the year. Grant room accumulates at a rate of $500 per year ($400 from 1998–2006) until the end of the year the beneficiary reaches the age of 17, whether or not an RESP account has even been opened for them. Each beneficiary has their own grant room, even if the contributions you make on their behalf are combined with those of other beneficiaries in a family RESP.

Using up the unused grant room

When you make a contribution to an RESP of more than $2,500 per year, you may be able to use the carry-forward pool. The maximum grant available in a year is limited to $1,000 or 20% of the first $5,000 of RESP contributions that you make. This will allow you to use up $500 of unused grant room.

Sharing CESG among beneficiaries of a family plan

One of the benefits of a family plan is that accumulated CESG contributions do not have to be paid out equally among beneficiaries. However, keep in mind that the maximum lifetime CESG each beneficiary can receive is $7,200. If a beneficiary doesn’t pursue post-secondary education and is not able to share the accumulated CESG with another beneficiary, that beneficiary’s CESG may have to be returned to the government.

For example, Mr. and Mrs. Smith set up a family plan for their 10-year-old twins. They contribute $5,000 per year for six years, designating $2,500 for each beneficiary. Since they contributed equal amounts to each child, the grant allocated to each child will be $500 per year for a total of $3,000. Assuming a 4% average annual rate of return and that contributions and grant are paid into the plan at the end of the year, the plan will have a total balance of $39,798 at the end of six years, including the CESG. Since the total CESG in this plan does not exceed $7,200, if one child goes to a school that is much more expensive than the other child’s school, all or the majority of the CESG in the plan can be paid out to the child who needs it. There is no requirement to pay out $3,000 of CESG to each child.

The impact on CESG when a large lump-sum contribution is made

There is a $50,000 lifetime contribution limit per RESP beneficiary but no annual maximum contribution limit. So should you contribute $50,000 up front to your RESP to take immediate advantage of the tax deferral opportunity? The issue is that if you contribute $50,000 up front, you will forfeit the ability to receive future CESG, which may otherwise be available if you make annual contributions. The CESG is paid based on 20% of the annual RESP contribution amount, to a maximum of $500, or if there is CESG unused grant room, to a maximum of $1,000. So, if you make a one-time lump-sum contribution of $50,000 to the plan, the maximum CESG the plan could receive is $1,000. Grants are not paid to the plan in future years for past years’ contributions.

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Canada Learning Bond (CLB)

A $500 CLB is available for children of modest-income families born on or after January 1, 2004. These children also qualify for CLB instalments of $100 per year until age 15. The total lifetime maximum CLB payable per child is $2,000. You do not have to make contributions to an RESP in order to receive the CLB. Further, unlike CESGs, CLBs cannot be shared with other beneficiaries. You will have to check to see if the RESP plan provider supports receipt and payment of the CLB.

Eligibility for the CLB is based on the:

• Number of qualified children in the family; and
• Adjusted income of the primary caregiver, which includes the income of a spouse or common-law partner. Like the additional CESG, adjusted income from the second preceding year is used to determine eligibility for the CLB.

Additional government incentives

A number of provincial governments provide additional incentives for their residents who open up an RESP. They are as follows:

• The British Columbia Training and Education Savings Grant (BCTESG)
• The Saskatchewan Advantage Grant for Education Savings (SAGES)
• The Quebec Education Saving Incentive (QESI)

You will have to check to see if the RESP plan provider supports the additional provincial incentives.

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Opportunities and constraints for grandparents

Grandparents may have the desire and the financial means to contribute to an RESP for their grandchildren. It can be a wonderful way to give a meaningful gift. If you are a grandparent, you can establish an RESP yourself (i.e., be the subscriber) and contribute to the RESP for your grandchildren. However, you may want to consider an alternative approach. You could consider gifting the funds to your son or daughter who in turn establishes the RESP for your grandchildren. In both cases, you provide the financial gift and your grandchildren are the beneficiaries of the RESP, but in the latter case, your child (the parent of the beneficiaries) will be the subscriber of the plan.

The advantage of the second approach is that if one of the beneficiaries does not attend post-secondary education, the subscriber may be able to transfer the earnings the RESP to their own registered retirement savings plan (RRSP), within certain limits. The subscriber must be 71 years of age or younger to do this. As RESP plans have a potential life span of 35 years (40 for a specified plan), by the time you realize that one of your grandchildren will not attend school, you may have exceeded the age at which you are eligible to make an RRSP contribution, whereas your son or daughter may still be able to benefit.

The disadvantage of this approach is that you have little or no legal control over the funds. Your son or daughter will have control over the funds and there is no guarantee that they will follow your wishes. Even if the funds are contributed to an RESP, as the subscribers, they will have the ability to withdraw the contributions.

Conclusion

There are many considerations you need to take into account when opening an RESP. The type of plan you choose, how you will fund the RESP and who the subscriber of the plan will be can have a number of implications in the future. To ensure that your own circumstances have been properly considered and that action is taken based on the latest information available, you should obtain professional advice from a qualified tax, legal and/or insurance advisor.