Read this article to understand Registered Education Savings plans in Canada, how they work and how they might be able to benefit you and your family.

What is a Registered Education Savings Plan?

A Registered Education Savings Plan, commonly abbreviated as RESP, is a form of investment where Canadian parents can save for their children’s higher, or postsecondary, education.

The government of Canada considers RESP as a contract between a subscriber (an individual, often a parent) and the promoter (another person, organization or a government entity). The subscriber enters into a contract where he or she names beneficiaries (children who will become future students). The subscriber agrees to make contributions towards the beneficiaries, which are called educational assistance payments (EAPs). The beneficiaries can use the EAPs for enrolling in and studying at a university or a college later in life.

There are two types of RESPs in Canada: family plans and specified plans. Family plans allow subscribers to add more than one beneficiary, as long as each beneficiary is related by blood or by legal adoption. The beneficiary under a family plan must be less than 21 years to be named as such. On the other hand, only one beneficiary is allowed under a specified plan. The beneficiary under specified plan does not necessarily have to be related to the subscriber by blood. Therefore, specified plans are sometimes called non-family plans. Beneficiaries can also claim disability tax credit after a selected number of years. Beneficiaries who are already named in family plans cannot be named again under specified plans.

RESPs are managed and supervised by the Canada Revenue agency. The agency’s website lists detailed information regarding RESPs.

How Does It Work?

RESPs work quite simply. First, a subscriber enters into a one type of RESP contract and names a beneficiary or several beneficiaries when allowed. The subscriber enters into the contract with a promoter, which can be an individual or an entity that will be in charge of repaying the contributions to the beneficiaries.

The subscriber than starts making contributions to the RESP. These contributions are subject to income tax law and there is a limit of how many contributions a subscriber can make.  The promoter will administer the contributions made to the RESP and make sure all payments are made according to the terms in the contract. The contributions to the plan can also include government grants provided by the Canada Education Savings Grant (CESG), Canada Learning Bond (CLB) or any recognized provincial education savings program. The subscriber cannot claim income tax deductibles on the contributions paid to the RESP.

When the time comes, the promoter will pay the contributions to the beneficiaries as educational assistance payments (EAPs). If needed, the promoter may pay the contributions in accumulated chunks. The beneficiaries who receive EAPs should include the amount received per year as income tax. The beneficiaries do not have the specifically disclose the contributions received in income tax files.

If the beneficiary is unable to or is ineligible to receive the EAPs, then the promoter will return the contributions back to the subscriber free of income tax.

Benefits of a Registered Education Savings Plan

The following are some of the benefits of RESPs:

  • RESPs are tax shelters. The contributions may not be tax deductible, but they are sheltered from taxation as long as the amounts remain in the plan.
  • RESPs make it easy to contribute to funds regularly. So, funds are readily available.
  • Subscribers and beneficiaries will get access to Canada Education Savings Grant (CESG).
  • RESPs are highly flexible. The contributions to be withdrawn can be altered any time. Also, beneficiaries can use payments for a variety of educations costs including covering for textbook purchases or for buying educational accessories like lab gear.
  • The federal government can make contributions to the plan.
  • The beneficiary students pay little to no taxes on the contributions they receive as income.

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