What is a Registered Education Savings Plan (RESP)?
Income Tax Act s. 146.1, Canada Education Savings Act
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. There are also a few provincial
RESP grant programs.
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 specified plan is:
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 legislative change requires that the beneficiary must be a resident of
Canada when designated as a beneficiary,
and the social insurance number of the beneficiary must be provided to
the promoter. The changes were applicable after 2003.
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When the RESP funds are withdrawn to be used for education,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student as the funds are withdrawn.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withdrawn are not taxable.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 were 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
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.
Tax Tip: Ensure prior
to enrolment that post-secondary studies are eligible under your RESP!