RESP Grants Available

Current CCRA rules include important incentives for parents to save for their children's future education in a Registered Education Savings Plan (RESP).

Contributions to a RESP are not tax deductible but the investment earnings are sheltered as they are not subject to tax until withdrawn by the child (or other designated beneficiary) when he or she is pursuing post-secondary education. As the student will likely be in a low income tax bracket, the net tax payable would be lower than if the investment income had been taxed in the parent's hands.

The yearly contribution maximum is $4,000 per year for each beneficiary to a lifetime limit of $42,000. The government has another incentive for you to invest - the Canadian Education Savings Grant (CESG). Contributions to a child's RESP will entitle the RESP to a grant equal to 20% of the lesser of the unused CESG contribution available for the year for the child and the amount of actual contributions made in the year for the child, which cannot exceed $4,000 per year.

Two Types of RESPs

There are two types of RESPs.

A commercial "pooled" fund which usually involves commissions and set-up fees. The pooled approach anticipates some participants will not stay in school and thereby will only be eligible to withdraw the invested capital. Thus more funds will be available to those students who continue their education.

A self-directed plan which allows flexibility to make investment decisions and keeps the funds and earnings within the family unit. This system allows the funds to be switched to another individual in the family should the "primary" beneficiary not pursue post-secondary education.

The CESG

If you have set up a RESP, or are contemplating setting one up, you should consider some additional factors with regards to the CESG.

A child will earn CESG contribution room of $2,000 per year.

CESG amounts will only be paid when the child's social insurance number is provided to the government. If your child does not have a social insurance number, you should apply for one as soon as possible.

The federal government proposes to pay a grant of up to $800 per year into RESPs set up for children under the age of 18. The grant is limited to 20% of contributions and since contributions can not exceed $4,000 per year, the maximum annual grant is $800. Please note that the grant is based on CESG contribution room which is only accumulated at the rate of $2,000 per year.

Contributions made by another family member can qualify for the CESG.

The federal grant is paid directly to the RESP trustee for investment in the RESP.

The maximum CESG that will be paid in respect of any child born after 1997 will be $7,200 (20% of $2,000 for 18 years).

Each family member is eligible for the total grant of $7,200.

Based on the fact that the CESG is calculated at 20% of an annual contribution level of $2,000, most contributors will want to maximize contributions in the early stages of the plan to take advantage of non-taxable growth. If your child does attend a post-secondary school and the CESG has been maximized at $400 each year for the 18 years, the value of the plan will have increased by approximately $14,000 - and that's with investing the CESG at 6% per annum!

But you must take care when using the grant monies paid to a RESP.

Trustees will be required to withhold 20% of all withdrawals from a RESP if the funds are paid to a child who is not enrolled in a qualifying post-secondary program. The balance of the grant will have to be repaid to the government.

In the event that the plan is terminated, or revoked, the CESG must be repaid.

If a beneficiary is replaced by a non-family member, the CESG must be repaid.

Plan RESPs Carefully

If you are interested in investing in RESPs and accumulating the CESG, carefully consider the type of plan you will choose.

The annual deadline for contributions is December 31. If you have questions, you should meet with Logan Katz LLP Chartered Accountants to discuss the best available options for saving for your child's future education.

The above provides general information only. It should not be regarded or relied upon as accounting or taxation advice or opinions. Logan Katz LLP Chartered Accountants would be pleased to provide more information or specific advice on matters of interest to you.

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