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Children must not only be able to think for themselves, they must love to think knowledgably while contributing to team efforts within their future families, on the job and in their communities. Inspire your children to identify what hobbies, subjects at school, and books invigorate them. A love for computers, math, music, dance, literature, or a combined interest may yield a clue as to the career your child would find most fulfilling. Children must follow their own path, so don't push them into premature choices, or ask them to reflect your career desires. However, you can help them realize their goals by saving for their education. Below are some frequently asked questions about RESPs.
Who makes the RESP investment - and who benefits?
An RESP has one (or more) subscriber who contributes and one or more beneficiaries who will eventually benefit by receiving payments to help with post-secondary education.
Who can subscribe to an RESP?
Generally, there are no restrictions as to who can be the original subscriber under an RESP. Where you are not the original subscriber for an RESP set up after 1997, you can only become a subscriber in the following situations:
You are a spouse or common-law partner of a subscriber, or
A former spouse or common-law partner, of a subscriber (holding the subscriber's rights under the RESP as a result of a court order or written agreement for dividing property after a breakdown of the relationship); or
The RESP allows one to continue to contribute to the plan after the death of a subscriber. The subscriber's estate can also contribute to the RESP after the subscriber dies.
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Who can be a beneficiary of an RESP?
The Income Tax Act allows RESPs tax-effective flexibility. You can consider an RESP for your children, grandchildren, brother, sister, parent, niece, nephew, even yourself.
What is a Single Beneficiary RESP?
In a single beneficiary RESP, where only one beneficiary exists, the subscriber does not have to be related to the beneficiary. Moreover, the subscriber and the beneficiary could be the same person. This plan makes sense if you only have one child and/or if you want to save for your own education.
What is a Family (multi-beneficiary) RESP?
Family plans allow the subscriber to name more than one beneficiary. Each beneficiary must be related by blood or adoption to each living subscriber or any deceased original subscriber.
For family plans entered into after 1998, each beneficiary must be less than 21 years of age at the time he or she is named as a beneficiary. When one family plan is transferred to another, a beneficiary who is 21 years of age or older can still be named a beneficiary to the new plan.
In a family RESP, there can be more than one beneficiary, offering flexibility. The subscriber must be a parent, adoptive parent, grandparent, sister, or brother of the beneficiaries. The subscriber cannot be a beneficiary in this case. Thus, this plan is preferably suitable where you have more than one child. Even if one of the beneficiaries does not pursue post-secondary education, remaining beneficiaries are still eligible to apply the RESP funds to their education.
Are RESP contributions based on SIN proof?
Subscribers under an RESP have to provide their social insurance number (SIN) before it can be registered. Contributions can be made only if:
The contributor’s SIN is provided before the contribution is made and the beneficiary is a resident in Canada; or
If it is made by way of a transfer from another RESP, wherein the same beneficiary was previously named.
Where the plan was established prior to 1999, the beneficiary's SIN is not necessary - however, these contributions will not be eligible for the CESG.
Are there limits on the amount of money that can be put into an RESP? Yes. There is a lifetime limit on the amount that can be contributed to RESPs. For each beneficiary, the lifetime limit for contributions to all RESPs is $50,000. The amount of money you put into your RESP depends on your specific plan and the amount you choose to invest. Although there are no annual limits on RESPs, the Canada Eduation Savings Grant will only be paid on the first $2,500 of contributions
How much Canada Education Savings Grant (CESG) is available as a free grant?
The Government of Canada has special grant programs to help you save. Because it believes in the value of education as an investment in the future, the Government of Canada will increase the amount you put aside for a child’s education with:
- a Canada Education Savings Grant (CESG) that is 20% - 30% - or 40% added to the money you put into an RESP – depending on your family net income; and
- a Canada Learning Bond (CLB) is an additional grant worth up to $2,000 to help modest-income families start saving for the education after high school of children born after December 31, 2003.
Do I get a tax deduction?
You do not get a tax deduction for the money you put into an RESP, but the money your investment earns while it is in the RESP is not subject to tax until you close your RESP, or until money is taken out to pay for the education of a child named in your plan as a beneficiary.
Money paid out of the RESP as an Educational Assistance Payment is taxed in the hands of the student. Since many students have little or no other income, they can usually withdraw the money tax free.
What happens if the beneficiary of an RESP doesn’t go on to post-secondary school?
If none of the beneficiaries go on to pursue post-secondary education (and no replacement beneficiary has been named), all RESP contributions are returned to the subscriber, while all CESGs must be repaid to the government. This is more than fair considering you don’t lose your earnings made on the invested contributions.
Can you transfer one RESP to another?
Yes you can. Most transfers from one RESP to another RESP will have no tax issues, when the transferring RESP and the receiving RESP have the same beneficiary. As well, there are no tax issues when a beneficiary under the transferring RESP has a brother or sister (under 21 years of age prior to the transfer) who is a beneficiary under the receiving RESP.
Can you roll an RESP into an RRSP?
Investment income can be paid to the subscriber in the form of an Accumulated Income Payment (AIP)—which can be rolled over to the subscriber's RRSP, or to a spousal RRSP without penalty, as long as there is available contribution room. A lifetime limit of $50,000 AIP may be transferred to an RRSP. Conditions to receive an AIP are:
The RESP must have existed for 10 years or longer.
All beneficiaries must be at least 21 years of age and not attending post secondary education.
What if the RESP is not rolled into an RRSP?
Where the accumulated income payment is not fully offset by RRSP deductions, there is a deferral tax of 20% over and above a subscriber's ordinary marginal tax rate. This means for example, if the subscriber were in a 30% tax bracket, the accumulated income would be taxed at approximately 50% if it were taken as a payment.
Can you invest in 100% foreign content in an RESP?
One more benefit: There are no foreign-content rules for RESPs, like there are for an RRSP. This allows for maximum diversity among investments (especially mutual funds) in all the markets of the world.
Is there tax on over-contributions?
Subscribers can together over-contribute to an RESP for a beneficiary where:
At the month-end, the total of all contributions is more than the annual or lifetime limit for that beneficiary (not including payments made to an RESP under the CESG program).
Each subscriber for that beneficiary may be liable to pay a small percentage tax on his or her share of the over-contribution, that is not withdrawn at the end of the month (payable within 90 days of the end of the year in which there is an over-contribution). An over-contribution exists until it is withdrawn.
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