Income Tax Act s. 146.1, Canada Education Savings Act
What is a Registered Education Savings Plan?
A Registered Education Savings Plan (RESP) is an Education Savings Plan
(ESP) that has been registered with Canada Revenue Agency (CRA), and is
governed by the Income Tax Act and Regulations.
It is a method for parents to save for their children's post-secondary
education, with the earnings in the plan growing tax-free.
The federal
government will also contribute to the RESP, by giving a Canada Education
Savings Grant (CESG), based on the amount of contributions to the RESP by the
subscriber. The CESG is governed by the Canada Education Savings Act and
Regulations.
An RESP must be terminated no later than the last day of the
35th year
following the year in which the plan was entered into, except for
"specified plans", for which the deadline is 40 years.
Specified plan:
a single beneficiary plan
beneficiary is entitled to the disability tax
credit for the tax year ending in the 31st year following the
year in which the plan was entered into
there can be no designation of other beneficiaries
after the end of the year that includes the 35th
anniversary of the plan
The people involved in the RESP are:
subscriber - this is the person who sets up the RESP and contributes to
it
beneficiary - this is the child for whom the RESP is set up,
and who will be the one to use the RESP for education costs. A proposed
legislative change requires that the beneficiary must be a resident of Canada,
and the social insurance number of the beneficiary must be provided to
the promoter. The changes are applicable after 2003. The Bill
containing these proposed revisions, Bill
C-10 from 2007, has not received Royal Assent, and thus has not been
enacted. However, the Department of Finance in 2011 indicated that this bill is
not dead, and is expected to be reintroduced.
promoter - This is the organization with whom the RESP is arranged, who
administers the RESP, and who receives a fee for the administration of the
RESP. There are two types of providers (promoters) for RESPs:
financial institutions such as banks, credit unions
and investment firms
group scholarship providers
When the RESP funds are withdrawn to be used for education,
the CESG and accumulated earnings of the RESP will taxable in the hands of the
student as the funds are withdrawn. The subscriber contributions
withdrawn are not taxable. See our article How are the funds paid out of the RESP, and are they
taxable? This article also explains what happens when the RESP
is not used for educational purposes.
Review of RESP Industry Practices
In August 2008, Human Resources and Social
Development Canada (HRSDC) published a Review
of Registered Education Savings Plan Industry Practices. One
part of the review discusses complaints by consumers about RESPs.
The main complaints are the following, in relation to group
scholarship providers:
high up-front fees of which they were not aware,
resulting in contribution withdrawals less than the contributions paid
investment income cannot be transferred when switching
to a different promoter
their program of study is not eligible under their
plan
their studies are too short in duration
they miss application deadlines
the term of their RESP has expired
of other reasons
It is very important for consumers to understand up front
all the costs, features and restrictions of any RESP in which they plan to
invest. It is also very important to ensure prior to enrolment that any
post-secondary studies are eligible under their plan.
The information on this site is not intended to be a
substitute for professional advice. Each person's situation differs, and
a professional advisor can assist you in using the information on this web
site to your best advantage.
See our Business
Directory for tax, accounting and finance-related firms in your
area.
Please see our legal
disclaimer regarding the use of information on our site, and our Privacy
Policy regarding information that may be collected from visitors to our
site.
