CESG – Doug Carroll

5undamentals – RESP – Registered Education Savings Plan

Discuss these 5 fundamentals with your advisor to learn how they apply to you, and whether there are further details, qualifications or exceptions to consider.

1. What is a Registered Education Savings Plan (RESP)?

Purpose – The RESP is designed to help families and friends save for a child’s post-secondary education. It offers 3 main financial benefits: 1) Government money added to your contributions, 2) Tax-sheltered growth of all money in the plan, and 3) Tax eventually borne by the student-beneficiary, not contributors.

Post-secondary education – Qualifying education programs include apprenticeship programs, CEGEPs, trade schools, colleges and universities, in Canada or abroad. Employment and Social Development Canada (ESDC) keeps a master list of designated educational institutions on its website.

Plan type – An individual plan has one beneficiary. A family plan may include one or more of a parent, sibling, child or grandchild of a subscriber, whether by blood, adoption or step-relationship. A group plan is a collection of individual non-family plans administered based on age-determined groups.

How long a plan may stay open – There is no minimum or maximum age to open an individual plan, and you can even set one up for yourself. Contributions to a plan may be made up to 31 years after opening, and it may stay open for 35 years. If the beneficiary qualifies for the disability tax credit in year 31, contributions are allowed through 35 years, and it may stay open for 40 years.

2. Parties to the arrangement

Parties – The subscriber enters into a contract with a promoter to save for the education of a beneficiary.

Subscriber – There is generally no restriction on who may be a subscriber, other than being an individual (ie., not a corporation or trust). This person must provide a Social Insurance Number (SIN) to the promoter in order for the plan to be registered with the Canada Revenue Agency (CRA).

Beneficiary – Beneficiaries must be residents of Canada with a SIN when the designation is made by the subscriber. Beneficiaries of family plans created after 1998 must be under 21 when designated.

Promoter – A promoter is an organization that offers RESPs to the public. In order to do so, the promoter must first obtain written approval of a specimen plan from the CRA Registered Plans Directorate.

3. Contributions and tax treatment

Lifetime limits – From 1996 to 2006, the lifetime contribution limit was $42,000 for each beneficiary. Since 2007, the lifetime limit is $50,000. This dollar limit may be spread across any number of plans.

Annual limits – An annual contribution limit of $2,000 applied in 1996, and $4,000 from 1997 to 2006. Since 2007, there is no annual limit, but there are limits to the amount of government assistance that may be received annually (see below), which could influence your contribution timing decision.

Qualified investments – RESPs may generally invest in the same kinds of deposits and marketable securities allowed for RRSPs and other registered plans.

Tax treatment –

Coming in – RESP contributions are after-tax, meaning there is no tax deduction for placing funds into a plan. Government assistance is not taxable when credited to a plan.
Within – While in the plan, there is no tax on income or growth, whether on your contributions or on any government assistance.
Coming out – When taken out for the beneficiary’s education, all income and government assistance are taxable to the student-beneficiary. The later withdrawal of the portion that is your own contributions is not taxable. (See below, “Funds coming out of a plan”)

Excess contribution tax – If the lifetime limit is exceeded across all plans for a beneficiary, each subscriber for that beneficiary is liable to pay a 1% per-month tax on his or her share of the excess contribution that is not withdrawn by the end of the month.

4. Government assistance

Basic Canada Education Savings Grants (CESG) – The basic CESG is up to $500 annually, paid by matching 20% of your contributions up to $2,500. Unused room carries forward to claim on top of a future year’s room, to a combined annual maximum of $1,000. Room is earned whether or not an RESP is open. The lifetime maximum is $7,200. Any CESG must claimed before the beneficiary turns 18.

CESG for age 16 & 17 – CESG grants are only available for ages 16 & 17 if you’ve put in at least $2,000 by the end of the year your child turns 15, or at least $100 in any 4 years by then.

Additional CESG (A-CESG) – On the first $500 of contributions, A-CESG is paid if the beneficiary’s primary caregiver is in the first two federal tax brackets, being $48,535 and $97,069 for 2020 income. It’s an additional 20% match up to $100 if in the first bracket, or 10% up to $50 if in the second bracket.

Canada learning bond (CLB) – For an eligible child in a low-income family, the CLB provides $500 for the first year of eligibility and $100 annually to age 15, for up to $2,000 total. Eligibility depends on income of the primary caregiver and any cohabiting spouse/common law partner (CLP), and the number of children in the home. No personal contributions are required in order to receive the CLB.

Provincial support – Some provinces contribute to RESPs using matching and/or age-related criteria.

5. Dealing with the accumulated plan

Funds coming out of a plan – The subscriber may choose how much and what type of draw is to be taken from the RESP. The when depends on the criteria for each type of draw.

Education assistance payment (EAP) – An EAP is any payment to a beneficiary to further his or her post-secondary education. It comprises the income and any allocation of government assistance, and is fully taxable to the beneficiary. A maximum of $5,000 may be taken in the first 13 weeks of a full-time program, though ESDC will consider requests beyond this level on a case-by-case basis. There is no dollar limit thereafter, but for requests over an indexed annual threshold ($24,432 in 2020), the promoter must seek the review/consent of ESDC.
Refund of contributions – RESP contributions can be returned to the subscriber at any time without tax consequences. However, they may trigger a repayment of government assistance, which should be confirmed with ESDC before initiating.
Accumulated income payment (AIP) – This is a payment of the income to the subscriber, generally only if all beneficiaries have reached age 21, with none eligible for an EAP, and the plan having existed at least 10 years. An additional 20% tax applies (effectively matching the matching grant rate), which may be avoided by allocating the AIP to a subscriber or spousal RRSP. Once any AIP is taken, the plan must normally be closed by March of the following year.
Rollover to Registered Disability Savings Plan (RDSP) – If at any time the beneficiary qualifies for the RDSP, a tax-free rollover of the RESP income may be possible. Government assistance from the RESP will not roll to the RDSP (so must be returned to ESDC, or province per its rules), and the amount rolled over will not qualify for RDSP government assistance.
Payments to a designation educational institution – If funds remain in the plan and the subscriber does not qualify under the foregoing draw options, a payment may be made to a Canadian designated educational institution. The subscriber is neither taxed on the amount, nor allowed a donation receipt.

Sole subscriber, lifetime transfer – During lifetime, a sole subscriber may only transfer a plan to a spouse/CLP, which must be as part of a division of assets under a written agreement or court order.

Joint subscriber, transfer at death – After 1997, only spouses may be joint subscribers. They’re bound by the promoter’s contract while both are living, and upon a death the survivor becomes the sole subscriber.

Sole subscriber at death – On death, the plan becomes the property of the estate, to be dealt with in one of three ways: 1) You may direct in your Will to transfer to a successor subscriber, not necessarily a spouse/CLP, 2) The plan may continue with your estate as subscriber, or 3) The plan may be wound down with the net proceeds directed as either a specific legacy or as part of the estate residue.

Steady/Study as she goes – Supporting education savings

In August the federal government released the Canada Education Savings Program (CESP) 2009 Review.

This is the umbrella under which is housed the familiar Canada Education Savings Grant (CESG), and the apparently not-so-familiar Canada Learning Bond (CLB). (More on the CLB below.)

Overall, past performance metrics for the CESP seem quite positive, and the trajectory for the future appears similarly on neutral to favourable ground.

RESP – Contributions and asset growth

While annual RESP contributions increased in 2009 to just over $3.1B, that is less than a 1% increase over 2008. At the same time, the number of RESP beneficiaries increased at a slower rate in 2009 (about 6.8%), than the average for the preceding 3 years (9.2%). Not surprisingly then, annual contributions per beneficiary dropped (by 1.5%) last year for the first time since 2001, falling to an average of $1,423.

When the CESP was introduced in 1998, Canadians held $4B in RESP assets. By the end of 2009, those assets had grown to $25.9B, and apart from the 2008 downturn when there was a 3% decline, RESP assets have increased every year since CESP inception.

Of course a 3% drop is a mere blip in comparison to the way general investment and retirement portfolios may have fared in 2008. Consider though that the asset tally includes existing assets from the prior year plus contributions and CESP supplements. Respectively, those additions in 2008 were $3.1B and $599M. If one carves out these additions, existing assets declined by about 19% that year.

And though one might expect fairly conservative approaches to RESP investment, I am reminded of a friend who stuck it out with the markets through the downturn. With one child having started university in 2009, and another commencing this September, he is now lamenting not having glided to conservatism in these lead-up years. He may work a bit longer to pay the education tab now, but presumably their success will be the payback.

CESG – Dollars and participation rates up

Total CESG payments have increased every year since CESP inception, up 2% from 2008 to 2009 at $612M. Over its history, the CESG has contributed almost $5.1B toward education savings.

The average age of new beneficiaries has decreased every year since CESP inception in 1998 when the average child was almost 8 years old. For 2009, average age is 3.6 years, which the Review suggests is evidence that the program has encouraged families to begin saving early for post-secondary education.

It is estimated that over 40% of children up to age 17 participated in the CESG in 2009, with peak participation occurring in the 5-9 age range at over 45%. There is no explanation or suggestion for this phenomenon, though greater promotion in recent years may explain higher participation of younger children. As to the very young, as a parent who is just getting the last of 3 out of diapers, I think I know where some of the money (and distraction) goes early on.

CLB – Money left on the table

While much of the report is rosy, one troubling aspect is the low participation rate for the Canada Learning Bond. Acknowledging that participation rates have increased by about 5% annually from 2005 inception up to 2009, a rate of 19.3% is unfortunately low.

To summarize the CLB, it is aimed at children from low-income families, using entitlement to the National Child Benefit Supplement (NCBS) as the qualification criterion. It pays an initial $500 directly to a child’s RESP, and another $100 for each year of continuing eligibility to age 15 – and does not require matching parent contributions.

So, if qualification is independently determined, and the parent need not be out-of-pocket … why don’t we see 100% participation? I can’t answer that, but I do have a suggestion.

This is not a mere statistical estimate of qualification: The NCBS, as part of the Canada Child Tax Benefit (CCTB) program, is monitored using parents and children’s social insurance numbers. This is tracked and shared with those parents on CRA’s “My Account” secure web-server.

So here is the suggestion:

Maybe the government could credit the CLB amounts to the appropriate My Account location for children of NCBS entitled families. Credits would earn no income, but could be wired to a financial institution once an RESP is actually opened. If no RESP is ever opened, then the credit could be triggered in future if and when the child claims a tuition credit or provides similar evidence of qualifying post-secondary education.

It may not be quite that simple, but I don’t think it’s much more complicated.

Tax talk on the dock – 5 planning points for an investing skeptic

I had the opportunity to catch up with an old friend by a dock earlier in the summer.

He is a true entrepreneur who took a calculated risk, established a successful business, sold to a multinational, had a brief retirement (at age 40) and a few years later is looking for the next challenge.

With those buyout funds in hand, he observed the recent economic turmoil with much skepticism about market investing. Actually he was a skeptic well back in time, and those funds never left the safety of his bank account. Even so, he knows he can’t remain on the sidelines forever.

So as summer comes to a close, here is what we threw about, apart from the horseshoes and mosquito swatter.

Run a business, if you are so inclined

My friend firmly believes that true wealth is built through active business management. And given his track record, I can’t disagree that a well-run enterprise can net impressive results – emphasizing the requirement to be well-run.

In actuality, he is something of a zealot when he extols the virtues of running a business, and more specifically the benefits of running a business through a small business corporation. He is living proof of the value of the small business rate, spousal income splitting and the lifetime capital gains exemption. Heck, he almost bubbles over in recalling the joys of a well orchestrated salary-dividend mix.

However, running a business is more than merely a financial decision, whether tax-driven or otherwise. In many ways, it’s a lifestyle choice, and has to be undertaken with that aspect clearly in focus.

Kill the mortgage

There is perhaps no more clearly predictable rate of return on applied money than to eliminate a big debt like a mortgage. Somewhat ironically, that kind of arithmetic certainty dovetails well with the more nebulously measured emotional comfort of being mortgage-free. Hey, it’s your home.

In his case, he had already achieved this prior to the business buyout.

That’s not to say that he was pursuing mortgage retirement to the exclusion of retirement savings. Rather, he placed more proportional emphasis on the mortgage than any raw calculus might explain.

Now being free of that debt burden, he is committed to becoming more knowledgeable and effective in fashioning his retirement income plan.

Getting 20% upfront on your RESPs

As people within the financial service sector, sometimes we forget that those outside the field have things on their mind other than the nuances we see much more regularly.

For instance, my friend was not even aware of the 20% Canada Education Savings Grant he was receiving on his RESP contributions. Thus, he was only contributing paltry amounts well below the $2,500 limit upon which the current year’s entitlement would be maxed out.

On the positive side, now that it is possible to pick up past years’ unused room, he will be able to get up to $1,000 CESG annually by putting in $5,000 for each of the kids until he catches up. Yes, he’s the same skeptic about market investments, but that’s a whopping tax/support benefit left on the table if that CESG is not unclaimed.

It remains to be seen whether he is inclined to make any further use of the RESP tax sheltering room beyond the CESG entitlement thresholds.

We differ on life insurance

While we are roughly on the same page that life insurance is a top priority matter for income replacement purposes, beyond that we diverge a bit.

He waffles on what to do with current life insurance, given the lack of an income replacement need. In not so many words, he defines that need in terms of whether his family would suffer a drop in lifestyle should he be removed from the equation. In that context, I agree that he does not need to replace income.

That said, terminal taxes and final debts loom, distant though they may be in the future. A tax-free death benefit may make sense to service that eventuality. Past premium payments are water under the bridge, and future premiums continue to be priced based on an earlier age.

A consideration of the internal rate of return of continuing premium payments may prove fruitful. That’s the kind of analysis an entrepreneurial business mind can appreciate.

Do the Wills

Actually they have done their Wills, but that was well before the business came to together and was later harvested.

The tax benefits of testamentary trusts may have been a passing topic in those earlier estate planning discussions, but now the benefits are very real – for the couple, the kids, and who knows who or what may come up in summers ahead.