Registered Education Savings Plan
(RESP)

What is an RESP?

An RESP is an education savings plan registered with the Canada Revenue Agency. Earnings on contributions are tax free until the money is withdrawn for post-secondary education or the plan is closed. Unlike Registered Retirement Savings Plans (RRSPs), contributions to an RESP are not tax deductible.

A good education is a goal most parents have for their children. But the rising cost of post-secondary education has many parents concerned about whether they will be able to afford to send their children to college or university.

Registered Education Savings Plans (RESPs) are an effective way to save because they offer tax free growth benefits and allow you to take advantage of special government grants. The federal government will contribute to the RESP, by giving a Canada Education Savings Grant (CESG), based on the amount of contributions to the RESP by the subscriber.

You can open a plan for a child, yourself or another adult. Although there are no annual limits on contributions made to an RESP, the Canada Education Savings Grant will only be paid on the first $2,500 of contributions made every year. If the child has accumulated grant room, then the Canada Education Savings Grant will be paid on the first $5,000 of contributions made per year.

The total lifetime contribution limit for each beneficiaryis $50,000 and total Canada Education Saving Grant (CESG) is $7200 for each beneficiary. You will have to pay penalty on any contributions over this limit. Each RESP must be terminated no later than the 35th year after the year in which the original plan was opened.

You can withdraw your contributions tax free at any time. However, if this money is not used to pay for post-secondary education costs, any grants on these contributions must be returned to the government.

All CESG money and earnings on contributions and grants are intended for education purposes and are taxable in the student's hands. Since most students have little or no other income, they will likely pay little or no tax.


RESP TIPS

Be Aware, and Beware!

Get the facts about RESPs before you invest. We work hard (Hours and Hours) for making money and when it comes to using it we waste in seconds because we literally do very little or no efforts to understand how these hard earned few bucks can work wonder for us if we use them in the most advantageous way for our self and our family. This takes knowledge, which unfortunately most of us do not have and even do not try to have it, thereby allowing opportunists to deprive us of our wealth and take advantage of our ignorance.

Following are important points to select a suitable RESP Plan

  • Make sure you know what happens if you miss a payment, terminate your plan, or want to transfer the RESP between plans or beneficiaries.
  • Read the prospectus-if you don’t understand it, don’t invest. If you change your mind after reading the prospectus of a scholarship trust plan, you have 60 days to cancel your purchase at no cost to you.
  • Understand how salespersons are paid, and where those payments come from.
  • Know what fees you are expected to pay, and when you will pay them.
  • Don't make investment based on verbal representation-get it in writing.
  • Check the registration and qualification of your investment representative.
  • Don’t fall victim to aggressive marketing techniques-take your time and do your research.
  • Review the rules for the types of post-secondary education that are eligible under the RESP that you choose.
  • How much work is being done to earn the management fees? If your money is being invested in simple low risk instruments like GICs and T-Bills the management fees should be relatively low.

TYPES OF RESP PLANS

There are different kinds of RESPs to choose from, so it's wise to shop around to find the plan that best meets your needs.

Following are the three available types of RESP plans:

  • Self Directed RESP Plans
  • Pooled Individual or Family Scholarship Trust Plans
  • Pooled Group Scholarship Trust Plans

Self Directed RESP Accounts (Most flexible RESP Plans)

A self directed RESP is a registered account at a financial institution or dealer where your contributions can be invested in RESP-eligible securities including GICs, T-Bills, corporate or government bonds, mutual funds, segregated funds, or stocks. You have flexibility and wide range of investment products to choose from.


You can designate one beneficiary with an individual plan, and one or more beneficiary with a family plan.


RISK AND RETURN

Investments like stocks and mutual funds are riskier than T-Bills and GICs because they do not guarantee your investment. GICs products are low risk but tend to have lower returns. Mutual funds may offer potentially greater returns, but they are riskier than GICs because you can lose some or all of your investment if the fund value falls.


COSTS AND CONTROL OF THE PLAN

You the subscriber or plan owner make the investment decisions for the self-directed account. You can spend some time to learn and manage your investment or get the services of an investment advisor to manage your investments for you, but you may pay advisor fees. The fees charged depend on the investments you choose. Expect to pay sales charges if you purchase mutual funds, as well as a management fees. If you purchase securities(stocks), expect to pay transaction costs, unless you are strictly purchasing GICs products.


Flexible contribution schedule

You may invest lump sum or contribute monthly subject to your maximum lifetime or yearly allowable limits for CESG attractions. You may stop or start your contributions any time without any restrictions or penalties and limitations form the promoter.


Cancellation Costs and Restrictions

If your child does not attend an eligible post-secondary school, you receive your contributions back net of any fees .The Earnings on the investments may be rolled into your RRSP provided there is a contribution room, or withdrawn with tax consequences. The CESG (grant) must be repaid to Government.


Pooled Individual or Family Scholarship Trust Plans

A pooled individual scholarship trust plan is a registered account with a scholarship plan dealer, where your contributions are pooled with those of other investors. You decide the amount of the contributions that go to your RESP(s). You can designate one beneficiary with an individual plan, and one or more beneficiary with a family plan.


RISK AND RETURN

Scholarship plans are limited in their investment options. They generally must invest in fixed income securities such as bonds, T-bill and GICs. While low risk, these investments also tend to have lower returns.


COSTS AND CONTROL OF THE PLAN

The pooled plan’s investment managers make the decisions, giving them full control over your investment. You can expect to pay the following fees in scholarship trust plans:

  • Enrolment fees (some cases 100% charged upfront while in others 50% upfront and rest 50% within couple of years of plan opening date)
  • Administration fees
  • Investment management fees
  • Depository fees
  • Trustee fees
  • Custodian fees
  • Transaction fees
  • INDEPENDENT REVIEW COMMITTEE Fee(IRC)

Some fees are paid up front from your contributions, which decrease the total amount you have invested.


Cancellation Costs and Restrictions

If your child does not attend an eligible post-secondary school, you receive your contributions back net of above mentioned fees.The Earnings on the investments may be rolled into your RRSP provided there is a contribution room, or withdrawn with tax consequences. The CESG (grant) must be repaid to Government.


Pooled Group Scholarship Trust Plans

A pooled group scholarship trust plan is a registered account with a scholarship plan dealer, where your contributions are used to purchase plan units. At maturity you share in the pooled earnings of investors with children the same age as yours, if your child goes to on to eligible post-secondary education. Salespeople may get incentives like vacations for selling a certain number of units.The returns for pooled group plans depend on attrition (earnings forfeited from the plan holders who leave plan prematurity). If you drop out of the plan, others benefit because you forfeit your earnings to the plan.


RISK AND RETURN

Pooled group plans can be risky-if you miss a contribution, your account may go into default and you may lose your plan membership. If you miss a contribution and are allowed to stay in the plan, you will have to pay interest on the missed payment. The interest owing can grow over time to an amount that is difficult to repay.

Scholarship plans are limited in their investment options. They generally must invest in fixed income securities such as bonds, T-bill and GICs. While low risk, these investments also tend to have lower returns.


COSTS AND CONTROL OF THE PLAN

The pooled plan’s investment managers make the decisions, giving them full control over your investment. You can expect to pay the following fees in scholarship trust plans:

  • Enrolment fees (some cases 100% charged upfront while in others 50% upfront and rest 50% within couple of years of plan opening date)
  • Administration fees
  • Investment management fees
  • Depository fees
  • Trustee fees
  • INDEPENDENT REVIEW COMMITTEE Fee(IRC)

Some fees are paid up front from your contributions, which decrease the total amount you have invested.


Cancellation Costs and Restrictions

Pooled group plans are riskier than pooled individual plans because you have less flexibility in the way you make payments.

If you terminate your plan, or your child does not pursue post-secondary education according to the rules of the scholarship trust company, you forfeit your earnings. You only get back your contributions, less any fees (Enrolment fees, Administration fees, Investment management fees, Depository fees, Trustee fees, Independent Review Committee Fee). As most of the fees are paid up front, the amount of money you get back may be less than what you put in. The CESG generated by your contributions is either repaid to the federal government, or used to assist other students.


About government grants

From the CESG to provincial incentives in Québec and Alberta, there are lots of ways to boost your education savings with help from the government.


About the Canada Education Savings Grant (CESG)

  • Everyone is eligible for the basic Canada Education Savings Grant (CESG).
  • The basic grant matches 20% of the first $2,500 you contribute to your child’s RESP each year, up to a lifetime maximum of $7,200 per child.
  • That’s $500 more paid directly to your child’s RESP every year!
  • Depending on your income and the province you live in,

You may be eligible for other grants too.

  1. Enhanced CESG
  2. Canada Learning Bond (CLB)
  3. Québec Education Savings Incentive (QESI) – Québec only
  4. Alberta Centennial Education Savings Plan (ACES) – Alberta only

Enhanced CESG

Families with average or lower incomes receive more CESG grant

If your family income is between $37,885 and $75,769

The government will match 30% of the first $500 you contribute each year, and 20% of the next $2,000. That’s up to $550 for your child’s RESP each yearup to the lifetime CESG maximum of $7,200 per child.

If your family income is below $37,885

The government will match 40% of the first $500 you contribute, and 20% of the next $2,000. That’s up to $600 for your child’s RESP each yearup to the lifetime CESG maximum of $7,200 per child


The Canada Learning Bond (CLB)

Families with lower incomes can also receive the Canada Learning Bond.

The CLB adds $500 to your child’s RESP the first year, then $100 each year until your child turns 15 years old, and you don't have to make contributions to receive this grant.

You qualify for the CLB if:

  • your child was born after December 31, 2003, and
  • you receive the National Child Benefit Supplement.

The Québec Education Savings Incentive (QESI) – Québec only

Families in Québec can receive another 10% to 20% on the first $500 they contribute to their child’s RESP each year and 10% on the next $2000, up to a lifetime maximum of $3,600.

The Alberta Centennial Education Savings Plan (ACES) – Alberta only

Families in Alberta can receive an extra $500 when they first open an RESP for their child, then $100 more when the child turns 8, 11 and 14 years old.

You qualify for ACES if your child:

  • was born after December 31, 2004
  • is enrolled in a school in Alberta (each time you’re eligible for a grant), and
  • you contributed at least $100 to your child’s RESP the year before.

Who can get the grant?

  • All children up to age 17 are eligible, as long as they are Canadian residents and an RESP has been opened for them.
  • Special rules apply if your child is between the ages of 15 and 17.

Special Rules for Children Aged 15 to 17

  • All children in Canada (up to the end of the calendar year in which they turn 17) are eligible to receive money from the federal government for their education after high school, as long as a Registered Education Savings Plan (RESP) has been opened for them.
  • In order to continue receiving the Canada Education Savings Grant after age 15, certain contributions must have been made to the RESP (and not withdrawn) by December 31 of the calendar year in which your child turns 15.

They are:

  1. Total contributions of at least $2,000, or
  2. Contributions of at least $100 a year or more in any 4 previous years.

Let’s say your child turns 15 on July 2008. That means by December 31, 2008, you must have either contributed at least $2,000 in total to your child's RESPs, or you must have put in at least $100 annually in any of 4 previous years (they don't have to be consecutive years).

For more information:

  • contact 1 800 O-Canada ( 1 800 622-6232 1 800 622-6232 ).
  • If you use a TTY, call 1 800 926-9105 1 800 926-9105 .
  • Or visit a Service Canada Centre near you

The Parties involved in the RESP are:

Subscriber -Is the person who sets up the RESP and contributes to it (usually parents).

Beneficiary -Is the child for whom the RESP is set up, and who will be the one to use the RESP for education costs.

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.

Agents - Are the people who market RESP plans for promoters and are paid commissions for it from the money paid from subscriber's pocket

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