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 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 Further more, when the accumulated income is withdrawn from the plan to pay for education expenses, the student pays the taxes not the contributor.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 If these limits are exceeded, a one per cent per month penalty tax is charged until the over-contributed amount is withdrawn from the plan.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 wih 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 by either.
