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An RESP is a tax-deferred education vehicle for building wealth to fund a child’s post-secondary education. There are two types of RESP plans.
With the Individual RESP, anyone can be the subscriber and only one child may be the beneficiary. With the Family RESP, there can be multiple beneficiaries but they all have to be related to the subscriber. The beneficiaries must be either the son, daughter, brother, sister, grandchild, great grandchild or adopted child of the subscriber.
As of 2007, there is no longer an annual limit, so you can contribute any amount up to a lifetime maximum of $50,000 to each beneficiary’s RESP. Below is a table of increasing contribution limits to reflect the higher education costs.
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| YEAR
|
ANNUAL LIMIT
|
LIFETIME LIMIT
|
| 1990 – 1995 |
$1,500 |
$31,5000 |
| 1996
|
$2,000
|
$42,000,000
|
| 1997 - 2006
|
$4,000
|
$42,000,000
|
| 2007 and Later |
None
|
$50,000,000
|
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You are able to contribute $4,000 per calendar year, per beneficiary for the first 21 years up to a lifetime maximum of $50,000. Should the contributor exceed these contribution limits, he/she will face a penalty of 1% a month on the excess contributions.
The Canada Education Savings Grant (CESG) is a 20% addition from the Government of Canada to the first $2,500 of contributions made every year into an RESP. The maximum total of grant contributions will be $7,200. As of January 2005, the government enhanced the CESG to encourage lower-income families to save more. For families with net incomes of less than $37,884 and $75,769 the additional grant is 10% on the first $500 of contributions
|
| Net Family Income
|
Additional CESG
|
Basic CESG
|
Total
|
| Below $37,884 |
First $500 x 20% = $100 |
$2,500 x 20% = $500 |
$600 |
| $37,884 - $75,769
|
First $500 x 10% = $50 |
$2,500 x 20% = $500
|
$550
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| Over $75,769
|
none |
$2,500 x 20% = $500
|
$500
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| 2007 and Later |
None
|
$50,000,000
|
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In order for grant to be received, the beneficiary must be a Canadian resident, be under the age of 18, and must have a social insurance number (SIN).
An RESP is set up of a potential life of 25 years. This consists of 21 years of contributions plus a withdrawal period of 5 years. Therefore, the plan must be terminated at the end of its 25th year.
All the contributions belong to the contributor; therefore the contributions may be withdrawn at any time. Since all contributions were made with after-tax dollars there are no tax consequences upon withdrawal. All the earnings on the contributions are taxed upon withdrawal and that is only on the income earned and not the original capital invested. All the withdrawn earnings such as dividends, interest, and capital gains, are taxable in the hands of the beneficiary.
If the beneficiary does not pursue higher education, the contributors are allowed to withdraw the plan income subject to tax, if the contributors are Canadian residents and the plan has been in place for 10 years. The CESG is returned, however the income earned from the CESG stays with the subscriber. The contributors also have the choice to contribute the plan income to their own individual RRSP subject to a maximum of $50,000 provided that they have the contribution room. If there is no contribution room available, there will be an additional 20% penalty tax on top of the contributor’s marginal tax rate.
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