Registered Education Savings Plans (RESP)

The Registered Education Savings Plans (RESP) is a type of account designed to help save money for your children’s education. When you transfer money to RESP for your child, your investment is sheltered from Tax as long as it remains in this account. The purpose of this plan is that the funds in this account will be spent by the children while studying at the university or college. Since a student usually has no or little income, the tax paid by him/her when spending the money will be much less than what the parents would pay if they invested the money in their own name. As for the RESP account, it should be noted that the contributions made by parents to this plan/account are from the net income- that is, the money from which the normal tax is deducted- (unlike the participation in the RRSP account that entitles you to reimburse some of the taxes paid that year). As a result, the original amount deposited in the RESP account will not be taxed when used by the children, but only part of the money that is related to capital growth will be taxed.

Follow the example below to better understand the subject:

Mr. A has earned about $ 40,000 a year in earnings/salaries over the past 10 years and has saved $5,000 a year for his little daughter in the RESP.

Imagine that in the province where Mr. A. lives, the average of the provincial and federal income taxes is as follows:

– Under $ 6,000 without tax

– 25% tax for the income up to $ 55,000

– 35% tax for the rest of the income from $55,000 to $90,000

– 45% tax for the rest of the income over $ 90,000

According to above figures, Mr. A must pay 25% tax annually. That means his net income is $ 30,000 (40,000 * 0.75 = 30,000). Out of this $30,000, he deposits a sum of $ 5,000 a year to his little daughter’s RESP account. The $5,000 contributed to the RESP account can be invested in a variety of ways, and the profits from that investment will not be taxed until the little lady starts university and starts withdrawing money. Whenever the little lady reaches the university age and enrolls there, she can withdraw the amounts in this account (including the principal plus the return on investment over the years) and spend it on her education, except that the tax collected on profits gained within this account will be calculated according to the tax bracket (income) of the little lady not parents.

Note that if Mr. A had deposited this amount into his Registered Retirement Savings Plan (RRSP) account instead of saving in the Registered Education Savings Plans (RESP), he could have demanded a tax refund proportionate to $5,000 contribution from the government (but at the same time, he would have to pay taxes whenever he withdrew money from the RRSP).

As opposed to RRSP account, now that he has deposited the money in the Registered Education Savings Plans (RESP), the money deposited in the account no longer qualifies for tax refunds, and as a result, the “original money” is not going to be taxed when the child withdraws money. The return on investment will be taxable during the term of the tax plan (which, as mentioned earlier, will depend on the child tax bracket).

There are generally three types of RESP:

1- Individual

2- Family

3- Group

Individual RESP: is an education savings plan for a specific individual. In this type of plan/account, you do not need to have a family relationship with the person. In fact, you can open this type of account for a child, yourself, or even another adult. In many individual plans, you can also define a replacement (if the main person does not intend to study).

Family RESP: This type of education savings plan is suitable for families with more than one child. If you want to use this plan, you must have a family relationship with the beneficiary (child, adopted child, grandchild, adopted grandchild, brother, sister). For this purpose, such relationships as nephews and nieces, etc. are not acceptable. You can also not participate in this plan for people over 31 years of age. In addition, if one of the beneficiaries is unwilling or unable to use their savings, the amount can be transferred to the other child in the plan.

Group RESP: This type of education savings plan can be opened for only one beneficiary. In fact, the group here implies several individual plans – which are in the same age group- that are put together and the investment is monitored by an institution that has sufficient expertise for the whole group. Eventually, each beneficiary will have an account divided by the total number of people in the plan received according to the total balance. This plan is suitable for people who do not have the time or expertise to manage the capital allocated in the account.

Terms and conditions of participation in the RESP account:

1- The maximum amount that can be contributed to this program is $ 50,000, which can be done all at once or in small amounts.

2- The maximum time span you can contribute to your RESP account is 31 years, and an RESP account opened must be either fully consumed or canceled within 35 years from the date of opening.

Finally, when the beneficiary reaches university age and enrolls in one of the fields, the capital in the student RESP account is paid as Educational Assistance Payments (EAPs) to pay the tuition fees. Payment is usually made against the invoice issued by the university. Depending on the cost of the chosen field of study, you have the choice to withdraw the original deposited money or allow the beneficiary to use only the profit earned during this period for the tuition fee or to allow the beneficiary to use both parts of the money in the account (original contribution plus profits). With a better understanding of this, keep in mind that if you have been contributing to this account since your child’s early ages, it is likely that the profit alone would suffice. For instance, if you contribute during the first 5 years after the birth of a child with a total maximum of $50,000 and invest the entire RESP account in the Canadian Stock Exchange, for example, considering the hypothetical number of about 8% of the annual capital growth from your child’s 5 to18 years of age, your child will have approximately $136,000 at the end of the 18 years of age. Even if you withdraw your $ 50,000, the balance in account will be enough to complete most of the courses available at universities for most common majors.

What happens if the beneficiary does not go to university?

If the beneficiary does not continue his/her university education until the age of 21 and over 10 years passes since the account’s opening, the person who opened the account and contributed to it can cancel the account and withdraw the balance in it. In this case, the profit in the account during this period will be referred to as the accumulated income payments (AIPs) and the profit price tax must be paid as usual. But if the person who opened the account or the spouse- provided they have a enough room to contribute to their RRSP (Retirement Savings Account)- can transfer up to $ 50,000 of this money to the RRSP.

Tip: If you are withdrawing money from your RESP, please note that the account must be completely emptied by March 1 of next year and the account must be canceled.

Tip: Due to the above-mentioned points, it is recommended that people open this account before the age of 11 so that if the child does not continue his/her education by the age of 21 (and does not have a plan to study in the upcoming years), they will be able to cancel the plan and withdraw the money.

 

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