Registered Education Savings Plan (RESP)

Besides your personal contribution to the RESP, the plan also receives additional funds from the Government. These include:

1. Canada Education Savings Grant (CESG)
2. BC Training and Education Savings Grant (BCTESG)
3. Canada Learning Bond (CLB)

Please note that the grants and programs discussed on this page specifically pertain to British Columbia. Grant availability may vary depending on your province of residence.

An RESP functions as a trust designed for saving toward a child’s education. While contributions to the plan are not tax-deductible, the key advantage lies in the tax-deferred accumulation of earnings. When the funds are eventually disbursed to the child, the accumulated income (such as dividends or interest) is taxed in the child’s hands at their lower tax rate.

Essentially, all grants and interest are subject to taxation in the child’s hands. Given that your child is pursuing higher education, their income is likely to be significantly lower than yours. As a result, the tax payable by the child would be negligible or very minimal. Having a dollar taxed in the hands of an individual with lower income is more favorable than having the same money taxed in the hands of someone with higher income.

RESPs are commonly structured as family plans, allowing for the allocation of plan assets among related children or a change in the plan’s beneficiary within the family. Individual plans now offer similar flexibility.

The lifespan of an RESP is capped at 35 years, with contributions permitted only until the beneficiary turns 31. However, for beneficiaries eligible for the disability tax credit, the contribution and termination period extends by 10 years. If the beneficiary qualifies for the Disability Tax Credit, it is advisable to explore the Registered Disability Savings Plan (RDSP) as well.

Who Qualifies?

To be eligible for the $1,200 provided through the B.C. Training and Education Savings Grant, the following conditions must be satisfied:

1. The child must have been born in 2006 or later.
2. Both you and the child must be residents of British Columbia.
3. The child should be the beneficiary of a Registered Education Savings Plan (RESP) with a participating financial institution.

When Can I Apply?

You can initiate the grant application when your child reaches the age of six. Subsequently, you can apply at any time before their ninth birthday.

Given that this is a recent program, if your child celebrated their 6th birthday in 2013, 2014, or 2015, you have an extension until August 14, 2018, or the day before their ninth birthday, whichever is later, to apply for the grant. If your child was born in 2006, you have an extension until August 14, 2019, to secure the grant.

The Canada Learning Bond is a financial contribution from the Government of Canada that is deposited into a Registered Education Savings Plan (RESP) to support your efforts in saving for a child’s post-high school education. The maximum amount the Government can deposit is $2,000. It’s important to note that applying for and receiving the Canada Learning Bond does not impact any other benefits received by you or an eligible child.

Eligibility:

The Canada Learning Bond is accessible to children who meet the following criteria:

1. Born on or after January 1, 2004.
2. Residents of Canada.
3. Possess a valid Social Insurance Number.
4. Belong to low-income families.

Potential Amount:

A child has the opportunity to receive a total of up to $2,000 in a Registered Education Savings Plan (RESP) to assist with funding their post-high school education. This comprises:

– $500 for the first year of eligibility.
– $100 for each subsequent year they remain eligible, until the calendar year they turn 15.

Moreover, the Government of Canada contributes $25 to the RESP to help cover the expenses associated with opening the plan.

It’s worth noting that a child can receive the Canada Learning Bond in an RESP even if you, as the contributor, do not contribute any money to the plan.

Certainly, making withdrawals from your RESP involves several questions and considerations:

1. **Taxation of Withdrawals:**
– Understanding how withdrawals are taxed and who bears the tax liability is crucial.
– Educational Assistance Payments (EAPs) are taxable in the hands of the student, typically subject to lower taxes due to their lower income.

2. **Differences Between Contribution and EAP Withdrawals:**
– Distinguishing between withdrawals of original contributions and EAPs is essential.
– Original contributions are not taxed upon withdrawal, as they were made with after-tax dollars.
– EAPs, comprising investment earnings and government grants, are subject to taxation.

3. **Covered Education Costs:**
– Clarifying what education costs RESP funds can cover is vital for effective financial planning.
– EAPs are designed to support a wide range of post-secondary education expenses, including tuition, books, and living expenses.

4. **EAP Withdrawal Limits:**
– Understanding if there are restrictions on the amount of EAP that can be withdrawn is key.
– While there may be annual and cumulative limits on EAPs, these limits are in place to ensure responsible use of the funds for educational purposes.

5. **Tax Treatment for Withdrawn Funds:**
– Consideration should be given not only to the purpose of the withdrawals but also to how the withdrawn funds are treated for income tax purposes.
– Being mindful of the taxation implications ensures better financial planning and management.

As you navigate the complexities of RESP withdrawals, addressing these questions will contribute to a clearer understanding of the tax implications, withdrawal purposes, and responsible utilization of the funds for educational expenses. Consulting with a financial advisor can further enhance your decision-making process.

Tax Implications of RESP Withdrawals

When considering withdrawals from your Registered Education Savings Plan (RESP), it’s essential to navigate the tax implications associated with different types of withdrawals. Let’s delve into the complexities and key considerations:

 Overview of RESP Contributions

1. After-Tax Contributions:
– Over 20 years, you’ve diligently contributed after-tax dollars to your RESP.
– Government grants, such as the Canada Education Savings Grants (CESGs), were received tax-free, and the RESP’s investment earnings were sheltered from taxation.

2. Taxation upon Withdrawal:
– The Canada Revenue Agency (CRA) mandates tax payments on the previously tax-free grant monies and sheltered income upon withdrawal.

Types of Withdrawals

 1. Refund of Contributions:
– Withdrawal of original after-tax contributions.
– Tax-free and can be made payable to the subscriber or the student.

2. Education Assistance Payment (EAP):
– Taxable withdrawal consisting of government grant funds and tax-sheltered income.
– Classified as taxable income for the student beneficiary.
– Can be made payable to the student or directly to a qualified educational institution.

Tracking and Withdrawal Limits

1. Tracking Contributions:
– The financial institution managing your RESP tracks contributions, government contributions, and accumulated income.
– Detailed breakdown provided for each withdrawal application.

2. Example Scenario:
– After 18 years of $2,500 contributions and annual government grants, the RESP is now approximately $66,949.
– Breakdown:
– $45,000 in after-tax contributions
– $7,200 in CESGs
– $14,749 in accumulated earned income (interest, dividends, and capital gains)
– Allows tax-free withdrawal of up to $45,000, with $7,200 and $14,749 considered taxable for future EAPs.

Withdrawal of Original Contributions vs. EAP

Withdrawals of Original Contributions:
– Known as Refund of Contributions.
– Tax-free and can be withdrawn at any time.
– No restrictions on use of refunded contributions.
– CESG grant repayment required if applicable.

EAP Withdrawals:
– Taxable withdrawals included in the student beneficiary’s income.
– Annual and cumulative limits on EAP amounts.
– Supplementary payments may come from the subscriber’s contributions tax-free.
– EAPs allowed up to six months after ceasing enrollment.

Additional Considerations

1. HRSDC Approval for Higher EAP Amounts:
– Human Resources and Skills Development Canada (HRSDC) may approve higher EAP amounts for specific programs with substantially higher costs.

2. Withdrawal Limit for CESG Funds:
– Lifetime limit of $7,200 for CESG withdrawals by a single student beneficiary across all RESP accounts.
– Not $7,200 per RESP account.

Educational Costs Covered

– Eligible Expenses:
– Tuition, room and board, school supplies, computers, and transportation.
– Governed by HRSDC criteria.

– Group RESP Considerations:
– Guidelines governed by the plan’s contract or prospectus.
– Understanding withdrawal rules crucial before opening an account.

In summary, RESP withdrawals are categorized to ensure tax payment on all contributions, grants, and accumulated income. Detailed tracking by your financial institution aids in understanding the tax implications. Whether opting for a Refund of Contributions or an EAP, navigating these intricacies ensures responsible use of RESP funds for educational purposes.