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What is an RESP?

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Registered Education Savings Plans (RESPs) -> The basic information

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:

bullet a single beneficiary plan
bullet 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
bullet 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:

  1. subscriber - this is the person who sets up the RESP and contributes to it
  2. 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.
  3. 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:
    1. financial institutions such as banks, credit unions and investment firms
    2. 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When the RESP funds are withdrawn to be used for education, the CESG and accumulated earnings of the RESP will taxable in the hands of the student as the funds are withdrawn.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:

bullet high up-front fees of which they were not aware, resulting in contribution withdrawals less than the contributions paid
bullet investment income cannot be transferred when switching to a different promoter
bullet cannot get all or part of the accumulated investment income from the RESP, because:
bullet their program of study is not eligible under their plan
bullet their studies are too short in duration
bullet they miss application deadlines
bullet the term of their RESP has expired
bullet 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!

Revised: September 20, 2017

 

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