REGISTERED EDUCATION SAVING PLAN (RESP)

By: pooja kapoor


Registered education savings plans originated as tax – splitting device, but have been taken over and regularized by a series of government revisions into an incentive program to encourage individuals to accumulate saving to provide for the post – secondary education of named “beneficiaries”, typically children or grandchildren. There is, however, no relationship requirements imposed between the contributor and beneficiary, so that you may set up an RESP for any relative or deserving beneficiary. However, individuals such as aunts or uncles who are not considered under the Income Tax Act to be connected to the children by blood or adoption but want to save for a number of children through RESPs may do only through separate individual plans. To provide subscribers of separate individual plans with the same flexibility to allocate assets among siblings that exist under family plans, bill C- 13, which passed into law effective March 1, 2011, allows certain transfers between individual RESPs for siblings without penalty.

The benefits of an RESP arise through three mechanisms:

Tax deferral, in that income earned on the (non- deductible) contributions you make to the plan is not subject to tax as it is earned; accordingly, income accumulates more rapidly in the plan than it would in the hands of the contributor;

Income splitting, in that when amounts are paid out of the plan for the post – secondary education of a beneficiary they will be taxed to the beneficiary, whose tax rate is typically lower at that time than the contributor’s tax rate; and

Incentive grants, in that the government will actually match contributions with 20% grants paid to the plan on contributions of up to $2,500 per year, effective for 2012 and future years the government will grant an additional grant of up to 20% on the first $ 500 of contribution.

As a contributor (subscriber) to an RESP, you are not entitled to a deduction in respect of your contribution; however, the interest income (or other investment income) earned in the plan on your contribution is not taxed in your hands. Rather, the investment income earned in the plan is accumulated free of tax and will be taxed in the student’s (child’s) hands only when the child receives funds from the plan.

Annual contributions (by all subscribers combined) on behalf of a particular beneficiary to an RESP have been eliminated. However, there is a lifetime limit of $50,000 per beneficiary. Excess contributions can be withdrawn.

Generally speaking, an RESP is permitted to make an educational assistance payment (EAP) to an individual only if, at the time of the payment, the individual is enrolled as a student in either a qualifying educational program (which is generally a full – time program) or a specified educational program (which is a part – time program) at a post – secondary educational institution. Individuals enrolled in a qualifying educational program may receive up to $5,000 of EAPs during their first 13 – week period of study. Thereafter, there is no dollar limit on the amount of EAPs. Students enrolled in a specified educational program may receive up to $2,500 of EAPs during each 13 – week period of study. For 2008 and later taxation years, the requirement that EAPs be made only during periods of enrolment is relaxed by providing a six – months grace period for making EAPs. An RESP may now provide for the payment of an EAP to an individual for up to six months after the individual ceased to be enrolled as a student in a qualifying educational program or a specified educational program, as the case may be. However, this additional flexibility will apply only where the payment would have qualified under the normal rules for EAPs if it had been made immediately before the individual’s enrollment creased. Thus, for example, an individual who received a $2,00 EAP while enrolled in a 10 – week specified educational program would be entitled to receive up to $500 of additional EAPs during the six – month period following the end of the program (that is, without having to enroll in another program). These amendments apply to the 2008 and subsequent taxation year, but they do not apply in respect of cessations of enrolment that occurred before 2008.

The benefits of RESPs must be weighed carefully – not simply in tax terms, but with an understanding of plan provisions in the event that beneficiaries do not ultimately attend designated schools with in the anticipated time frame.

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