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Well, finally I am done with RESP eBook. I had completed writing about 80% before I started my vacation. However, the remaining 20% content and making the eBook took me straight 3 days. I worked on this project last Saturday, Sunday, and Monday and now here I have everything ready for you. I had the option to ask someone else to make this eBook – which would have cost me I think around $500. However, I saved money by doing it by myself. Easy RESP Guide – An RESP eBook is not going to look like a super professional eBook you usually come across; however, it does not look bad either. In this post I am publishing the full content, in case you don’t want to download the eBook; however it is recommended that you download and keep the eBook handy, as it has lots of information you will need for your kids’ education.
I added Chapters 1 and 2 from award-wining book Invest Now to this eBook. If you have not read Invest Now yet, it will give you an idea of Invest Now’s contents.
Here is the eBook link:
Copyright and Disclaimer
Copyright – The contents of this eBook are protected by copyright. No part of this eBook may be reproduced, in whole or in part, without the specific written permission of the author, A Dawn. The author is the sole author of the work, and the sole owner of the copyright.
Disclaimer – Information on this eBook is compiled to the best of author’s knowledge and has been checked for their correctness with extreme care. However, the author assumes no liability whatsoever for possible mistakes and/or incomplete, any inaccurate, delayed, and wrong information, nor for any actions taken in reliance thereon. You bear responsibility for your own investment research and decisions, and should seek the advice of a qualified financial advisor before making any investment decision.
Table of contents refers to actual eBook
Table of Contents
What is an RESP? – 4
Subscriber, Beneficiary, Promoter – 4
You Need To Know This Stuff – 4
Three Types of RESP – 4
RESP General Facts – 5
Canada Education Savings Grant (CESG) – 5
Canada learning Bong (CLB) – 6
Alberta Centennial Savings Plan Grant – 6
Over Contributions – 6
Payments from an RESP – 6
RESP FAQs – 9
Invest Now Bonus Chapters – 12
What Is An RESP?
An RESP is a type of savings account that has been registered with Canada Revenue Agency (CRA). Savings inside an RESP account grow tax free until your child enrols in post-secondary education and a withdrawn is made for education purposes.
Subscriber, Beneficiary, Promoter
The subscriber is the individual who opens RESP account and make deposits for the beneficiary. The beneficiary is the individual who pursues education and receives the contribution and the income earned (The income earned is paid as educational assistance payments = EAP) from the promoter. The promoter is the financial institution (banks, fund companies etc) offering RESP plan to the public. The promoter usually pays the contributions, and the income earned on those contributions, to the beneficiaries.
You Need To Know This Stuff
- As defined by the Income Tax Act, only common-law partners and spouses can be joint subscribers.
- Charities, Churches, Corporations or Trusts can not be subscribers.
- The original subscriber may be replaced/changed for an existing or a transferring new account under certain conditions.
- A beneficiary may be replaced with a new beneficiary. If such happens, contributions made for the former beneficiary will be treated as if contributions had been made for the new beneficiary on the date they were originally made. This may result an overcontribution (if the new beneficiary already has an RESP). However, this rule does not apply if:
Ø The replacement beneficiary is a sibling of the former and is under 21 years of age.
Ø B. Both beneficiaries are connected by blood or adoption to the original subscriber and are under 21 years of age.
If either A or B happen, previous beneficiary’s contributions will not affect new
beneficiary’s annual and lifetime contribution.
Three Types of RESP
There are three general types of RESP: Individual, Family, and Group.
This type of plan is for one beneficiary. Beneficiary does not have to be related by blood or adoption. You can name anyone as the beneficiary. No beneficiary age limit for contributions and age restrictions on the beneficiary when named. Contributions can be made up to and including the 22nd year of plan’s existence.
You can name one or more beneficiaries but they must be related by blood or adoption. There is beneficiary age limit for contributions ( you can not make contributions once the plan reaches 21 years after its opening and/or beneficiary reaches 21 years of age) and age restrictions on the beneficiary when named ( beneficiary has to be under 21). One unique feature this type offers is that CESG grants may be shares among all beneficiaries. However, $7,200 maximum grants per beneficiary still apply.
A group is a group or team RESP where many subscribers are pooling their money together under a group plan dealer or administrator. You can include either single or family RESP in a group plan but it all depends on the dealer. Each dealer can have its own rules.
RESP General Facts
- Contributions made inside an RESP account are not tax deductable. However, contributions grow tax free as long they remain inside the account.
- There is no annual contribution limit
- Lifetime contribution limit is $50,000 per beneficiary
- Missed contributions can not be carried forward. However, unused grant room carries forward for each beneficiary.
- The beneficiary has to be a Canadian resident to open and make contributions in an RESP.
- If beneficiary becomes non-resident, he/she will not accumulate grant room during that period.
- RESP has a lifespan of 26 years; RESP can not stay open more than 26 years.
Canada Education Savings Grant (CESG)
CESG is what makes RESP a very attractive savings vehicle. Regardless your family income, Human Resources and Social Development Canada (HRSDC) pays you 20% of annual contributions to all eligible RESPs to a maximum of $500 CESG. You will receive $1,000 in CESG if you have unused grant room from previous years. Lifetime CESG limit is $7,200.
HRSDC pays additional CESG amount for each quailed beneficiary. This depends on family income and can change if family income changes. Let’s look at the additional CESG rate for an under 18 years of age beneficiary on the first $500 contribution:
- If qualifying net income is $37,885 or less = 40% (extra 20% on the first $500)
- If qualifying net income is more than $37,885 but less than $75,769 = 30% (extra 10% on the first $500)
The CESG is available up to and including the year in which the beneficiary turns 17. Special contribution rules apply for 16 and 17 years old beneficiaries to receive grants. Beneficiaries can only receive CESF if at least on the following conditions met:
- $2,000 or more has been contributed and not withdrawn before the year in which the beneficiary turns 16 years of age; OR
- $100 or more has been contributed and not withdrawn in at least any four years before the year in which beneficiary turns 16 years of age.
All of the above means that to get CESG, you must start to save in RESPs before the end of calendar year in which beneficiary turns 15 years of age. CESG is returned to the government, if the beneficiary does not pursue post-secondary education.
Canada learning Bong (CLB)
Families entitled to Canada Child Tax Benefits and with an income of under $37,885 qualify for CLB. This is applicable for born on or after January 1, 2004. An initial $500 CLB and subsequent annual $100 CLB will be provided until age 15. There are other terms and conditions. Call 1-800-622-6232 for more information.
Alberta Centennial Savings Plan Grant
Alberta RESPs are able to receive $500 initial grant if beneficiaries born on or after January 1, 2005. In addition, beneficiaries who have turned 8, 11 and 14 years of age on or after January 1, 2005 will receive subsequent grants of $100. There are other terms and conditions. Alberta residents can call 1-866-515 2237 for more information.
Over Contribution occurs when lifetime limits are exceeded. CRA does not add CESG payments counting over contribution. An over contribution exits until it is redeemed. CRA charges 1% per month on the over contribution amount. Penalty tax is payable within 90 days after the end of the over contribution year.
Payments from an RESP
I believe that this is one of the most complicated and least understood parts of an RESP. This part can be broadened so much that it gets confusing. I have tried my best to present it in an easy and simple way. RESP payments can be made the following four ways:
EAP (Educational Assistance Payments):
EAP is the amount beneficiary gets from an RESP to help finance the cost of post-secondary education. EAP does not include capital. EAP is made of grants and growth. One of the following conditions must be met to qualify for EAP –
- the student is full-timer in a qualifying educational program (distance education courses, such as correspondence courses may be eligible), or
- the student has attained the age of 16 years and is enrolled part‑time in a specified educational program
A qualifying educational program is a program that is at post-secondary level, lasts at least three consecutive weeks, and requires a student spend no less than 10 hours per week.
A specified educational program is a program that is at post-secondary level, lasts at least three consecutive weeks, and requires no less than 12 hours per month.
A post-secondary educational institution can be the following:
- Canadian designated educational institution such as a college, university etc.
- HRSDC certified educational institution in Canada offering non-credit courses
- Non-Canadian educational institutions may be eligible if the course is at the post-secondary level and lasts at least 13 consecutive weeks.
There are limits on EAP payments. However, on a case-by-case basis, HRSDC may approve amounts above the limit. Please contact your RESP promoter regarding this issue.
EAPs are considered taxable income for the beneficiary and reported in box 42 on s T4A slip.
PSE (Post Secondary Education)
If beneficiary is qualified for EAP, but the subscriber is redeeming only contributions – it is called PSE. PSE is made of contributions. It is not required to repay any grants on PSE withdrawals because beneficiary is pursuing post-secondary education.
There are no limits.
PSE is not taxable because RESP contributions do not generate any tax receipts.
AIP is a payment made to the subscriber which includes earnings from an RESP. AIP is made when beneficiary does not continue post-secondary education, or beneficiary has completed post-secondary education but there is money left in the RESP.
AN RESP can make AIP payment if the following conditions are met:
- Subscriber is a Canadian resident
- the payment is made to, or for, only one subscriber of the RESP; and
Any One of the following three:
- the RESP has been in existence for 10 years and each individual is or was a beneficiary has reached 21 years of age and not eligible to receive EAP
- the RESP has existed for 26 years (31 years for specified plans)
- all the beneficiaries passed away
Special Note: AIP payment must be made to a single person. Once AIP Payment is made, an RESP must be terminated by the end of the February of the next year. AIPs are taxable; however, you may be able to reduce the amount of AIPs subject to tax. I find AIPs are the most complicated in an RESP, and hence I am not going to discuss AIPs in detail. I would suggest you to contact a qualified professional, or call CRA, or HRSDC. I will provide contact information at the end of this article.
When you redeem your own contributions from an RESP, it is called ROC (Return of Contributions). ROC does not include any earnings or grant. Once ROC withdrawal is made, CESG must be paid back to HRSDC. It is possible that (if beneficiary does not pursue education) earnings can be paid to the subscriber as an AIP. However, certain conditions have to be met. Contact a qualified professional, or call CRA, or HRDC to obtain more information on this.
There are no limits.
There are no tax consequences because RESEP contributions are not tax deductible.
- Can an account holder (subscriber) and subscriber be the same on an RESP account?
Yes, this can happen only on a non-family plan. Family plan does not allow this because each beneficiary has to be connected by blood or adoption.
- Can new beneficiaries be added to an existing RESP account?
Yes, this can be done only on a family plan. However, the new beneficiary has to
meet the requirements for a family plan.
- Is it required to have an RESP account to accumulate CESG contribution room?
No. A Canadian resident child born on January 1, 1998 or after, start to
accumulate contribution room whether there is an account opened or not.
However, the maximum grant that can be received in any year is $1000.
- Can assets from an RESP be transferred into an RRSP?
Only AIP assets are allowed to be transferred. However, it has to be lesser than $50,000 and you need to have contribution room in your RRSP.
- Can assets from an RRSP be transferred into an RESP?
No, this is not allowed.
- Can a non-resident beneficiary be eligible to attract CESG?
No, the beneficiary must be a Canadian resident to attract CESG grant.
- Are contributions made in an RESP account tax deductible?
No. RESP contributions are not tax deductible like RRSP.
- Can I open an RESP for myself?
Yes. However, adult beneficiaries are not eligible to receive CESG grants.
- What are the benefits to open an RESP?
It allows you to grow your money tax free for your kids’ education until it is withdrawn for post-secondary education. In addition, you get government grants such as CESG, Canada Learning Bond, Alberta Centennial Education Savings Grant (in Alberta) if eligible.
10. When Should I open an RESP account?
The sooner the better. If you open an RESP account early, you will have time on
your side to grow your money.
11. Where can I open an RESP account?
Most of the financial institutions such as banks, credit unions, discount
brokerage dealers can open an RESP account. It is recommended that you do
your research and pick the one that best suits your needs. Some institutions
charge annual administration fees. Avoid paying unnecessary annual fees. Pick
one with no fees.
12. Do I need a bank account to open an RESP?
13. Do I need a Social Insurance Number (SIN) to open an RESP account?
14. Ate there risks associated with RESP?
It depends on your investment planning and strategies. You may lose your capital
If you choose risky products. Also, there is the risk of losing the growth and
grants if the money is not used by the beneficiary. My best advice on this would
be to contact a reliable financial professional and discuss your questions and
15. Where can I get more information?
Canada Revenue Agency: 1 800 959 8281
Canada Education Savings Program: 1 888 276 3624