Tag: CESG

Three new R’s of education finance: RESPs, redress & realignment

The Registered Education Savings Plan (RESP) has the ability to tax-shelter income and the potential to shift eventual realization to a lower-tax-bracket student beneficiary.  

What’s more, the federal Canada Education Savings Grant (CESG) program and its provincial counterparts offer additional support to the RESP, a kind of immediate return just for the sake of participating.

Unfortunately, some misalignment of key legislation could have threatened the availability of these supports – but a couple of recent fixes should get things back in line.

Provincial support – Redress

Federal supports paid into RESPs do not use up a beneficiary’s RESP contribution room, nor do they themselves attract or reduce further federal support. For provincial support initiatives to be similarly treated, until recently they had to be either prescribed – that is, specifically listed under federal law – or directly administered by the federal government.

The 2010 Federal Budget redressed this concern by clarifying that all payments made to an RESP through a program funded, directly or indirectly, by a province or administered by a province, will be treated the same way as federal supports.

Editor’s note: As of September 2010, Invesco Trimark will have completed all compliance requirements for participation in the Quebec Education Savings Initiative (QESI), one such provincial initiative benefiting from this clarification. 

Additional CESG – Realignment    

Basic CESG is based on subscriber contributions, whereas additional CESG also depends on net family income (NFI), which looks back to the previous year’s income or possibly two years back. Both basic and additional CESG are subject to maximum dollar amounts.

In the 2009 Federal Budget, the two lowest personal income tax brackets were directly increased, rather than applying the otherwise calculated indexation factor. A problem became apparent in calculating additional CESG, as the federal CESG Act referenced the expected indexed calculation, not the actual new brackets. 

The 2010 Federal Budget amended the methodology to realign net family income for CESG to the revised brackets. Without this adjustment, a family that had previously qualified for additional CESG might not qualify in future because of this issue. 

With this realignment, the additional CESG rate of:

  • 20% is available on 2009 contributions where 2007/2008 NFI is up to $40,726, and on 2010 contributions where 2008/2009 NFI is up to $40,970
  • 10% is available on 2009 contributions where 2007/2008 NFI ranges from $40,726 to $81,452, and on 2010 contributions where 2008/2009 NFI ranges from $40,970 to $81,941

Speaking up for RESP subscribers

As an aside, a member of our RESP department discovered the discrepancies shortly following the 2009 Federal Budget and communicated this to Human Resources and Skills Development Canada (HRSDC). While we can’t claim responsibility for the ensuing changes, we are pleased that our voices were heard and our concerns were addressed on behalf of RESP subscribers. 

Understanding RESPs: An education in itself

A registered education savings plan (RESP) offers tremendous opportunity to house education funding in a tax-beneficial vehicle. However, unless you are dealing with them on a regular basis, RESPs can be confusing.  

From eligibility criteria to grant support qualification to withdrawal procedures, the rules are stringent and potentially unforgiving if you’re not careful.  

Planning for education can be a moving target

In fact, for most parents, the bridge from first knowledge to first withdrawal is measured in years or even decades. Consider my friends’ daughter who will begin university in September 2009. Since she was born in 1990, 

Either or both of the annual and lifetime contribution limits have been raised on five occasions

The Canada Education Savings Grant has been modified as to both amounts and carryforwards, and the companion Canada Learning Bond has been introduced

Withdrawal commencement and plan durations have been extended and qualifying program definitions have been revised; and 

Further benefits lie ahead for her younger siblings through the newly available Quebec Education Savings Incentive, the family being in Quebec, obviously (Note that Alberta also provides provincial support through the Alberta Centennial Education Savings Grant) 

Though these changes have injected a degree of havoc in the parents’ planning, the havoc has certainly been welcome in terms of enhanced savings growth. The challenge now, as they commented to me recently, is to shift gears to learn and manoeuvre a new set of rules (new to them, that is) governing the drawdown of those funds. 

But it’s not just parents who are challenged.  

We’re here to help you figure it all out

Even conscientious advisors can be hard-pressed to maintain top-of-mind awareness.  Understanding RESPs can be an education in itself, and an advisor’s desire and need to keep current could be very time-consuming – and that’s even before considering all the “acronyms” you must keep track of.

To provide some assistance we have developed a new RESP InfoCard that complements the text treatment in our RESP InfoPage. This back-to-back format tool provides quick reference to key information like age and time constraints, up-to-date financial data and technical rule compliance.

And of course, if you are looking for clarification or expansion on these and other tax and estate issues, our InfoService team is always available to you at the end of the phone line or via e-mail.