Review RESP Details Before Year End

Year end education planning requires a close look at the Registered Education Saving Plan (RESP) as an option for families saving for their children’s education.  The RESP features a generous Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB) which really sweetens the savings pot thanks to the federal government.

Here are some RESPs  facts to “shake out the cobwebs” and  review with clients as part of a year end tax planning strategy:

RESP Basics. The contribution to an RESP will not provide the investor with a tax deduction in the same way an RRSP does.  The money is contributed with after-tax funds.  However, like the RRSP, the earnings in the RESP accumulate on a tax deferred basis.  They are taxable to the student (often with little or no tax cost) once the student attends school for a qualifying period.

Did you know that since 2007, there is no annual limit for contributions to an RESP, although there is a lifetime savings maximum of $50,000?  It may however, not be smart to sock a lump sum away; that’s because you’ll miss out on the benefits of the CESG – Canada Education Savings Grant.

CESG. There is a further tax incentive for educational savings under the RESP: the Canada Education Savings Grant.  This is added to the RESP each year in which a contribution is made.  It is received on a tax-free basis by the plan but must be repaid if the funds are not used for educational assistance. The CESG is 20% of $2500 or $500.   If you missed contributing last year, it is possible to make a contribution of up to $5000 before December 31, and receive up to $1000 in CESGs.

CLB. For low income earners, this bond provides for additional assistance, which can include $25 to cover the costs of opening the RESP, $500 as an initial deposit and an additional $100 for each calendar year until the child turns 15.  In the past, this was based on the receipt of the National Child Benefit Supplement (NCB).  However, with the introduction of the Canada Child Benefit, the NCB is no longer paid.  The same income limitations apply for the CLB however; that is, for 2016, the CESB will be available to families with net income of approximately $45,000 or less.

Additional RESP Facts. Prior to 2005, RESP contributions had to stop after the 21st year following the year in which the plan was established. For 2005 and subsequent years, the plan must terminate in 30 years if there is only one beneficiary under the RESP and that beneficiary is entitled to the disability tax credit for the 21st year following the year in which the plan is established.  Otherwise the plan must terminate in 35 years.

Minor siblings can substitute as plan beneficiaries if the intended beneficiary does not become a qualifying recipient. (S. 209.9(4)) Transfers may be made between RESPs with no income tax consequences under S. 204.9(5).

Additional education resources include EverGreen Explanatory Notes and Distinguished Advisor Workshops - 2017 January Advanced Tax Update. Please call 1.866.953.4769 today or visit www.knowledgebureau.com.

NEXT TIME:  WATCH OUT FOR PENALTIES UNDER THE RESP.

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