RRSP

 

What is a Registered Education Savings Plan?

RESPs are registered plans used by parents, other relatives or friends to save for their or someone else’s children’s education. Contributions to an RESP are not tax deductible as is a contribution to an RRSP. The income earned within an RESP is not subject to tax until funds are withdrawn by the child to pay for education. This money is then taxed in the child’s hands, not the contributor. It is assumed that a child attending University, College or a technical school would have a very low income and would pay little or no tax on these funds

 

Types of RESP

Individual RESP plans: 

Anyone can open an individual RESP and contribute to it. This can be a parent, a grandparent.

Family RESP plans: 

In a family plan, you can have one or more beneficiaries, although they all have to be related to the contributor (or be formally adopted).

Group RESP plans: 

In a group plan, one single child is the beneficiary, and that child does not have to be related to you. However, since many people are contributing to this plan, the beneficiary shares the pooled earnings of investors with children of the same age.

 

Benefits of RESPs

  1. Save on taxes

 The RESP is what’s called a tax-advantaged account, meaning the CRA will cut Canadians a tax break in order to encourage them to save for higher education, be it an apprenticeship, trade school, or university. Though a deposit will not occasion an immediate tax break for the investor, any and all gains within the account won’t be subject to any income or capital gains taxes as long as the money is in the account. Once it’s withdrawn and used for an approved education expense, which can include tuition, housing, books, or even living expenses while in school, investment gains will be subject to taxes, though since student income is generally very low or non-existent, the student may end up having to pay very little or nothing at all.

  1. Avail of the RESP grant

 Canadian government introduced the Canada Education Savings Grant, a program that promised to match 20% of any RESP contributions up to $2,500 per account child per year (note to non-math majors—that means the government would kick in a maximum $500 per kid.)  Children from low-income families are also eligible to receive money from the Canada Learning Bond, which is basically up to $2,000 that the government can add to a child’s RESP.

  1. Investing your money

RESPs are that funds in an account may be used to invest in any manner of instruments—mutual funds, ETFs, GICs, stocks, bond.

What are the contribution limits?

Beginning in 2007, annual limits for RESP contributions were eliminated. There is however a lifetime cap of $50,000 per beneficiary. Contributions can be made for up to 31 years.

 

 

. RESP withdrawal rules

  • Only the person who set up the account and made contributions can make withdrawals — they’re known as the subscriber. Withdrawals of contributions made by the Subscriber are called Post-Secondary Education Payments (PSE). They may be sent to either the Subscriber or Beneficiary. Withdrawals of the government grant/bond portion (known as the Education Assistance Payments “EAP”) can only be sent to the Beneficiary.
  • The subscriber must provide the financial institution who holds the RESP with a student’s proof of enrollment before being able to access funds.
  • PSE payments aren’t taxable. The student will be taxed on EAP withdrawals, which consist of both investment gains as well as government grant money. The financial company who holds the RESP will issue a T4A tax form in the student’s name for EAP payments only.
  • There is a $5000 limit (or $2500 if the student is enrolled part-time) on EAP contributions during the first 13 weeks of schooling, effectively eliminating the possibility one first year student will be forced to purchase beer for an entire university. There is no limit on the amount of Subscriber (PSE) contributions that can be withdrawn. Once the 13 weeks has passed, any amount of EAP contributions can be withdrawn.

 

For More Information Please Visit:

https://www.canada.ca/en/services/benefits/education/education-savings/re