RESP – Page 2 – 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.

Tax and the post-secondary education student

September is back-to-school month. In addition to the excitement and anxiety, those in post-secondary schooling often face fairly substantial expenses.

Fortunately, our tax system allows many avenues of tax relief for post-secondary education students. Here are the most common tax issues for students.

Hitting the books

Education amount

For the federal education amount, a student may claim either the $400 full-time amount or the $120 part-time amount, depending on the parameters of the program in which he or she is enrolled. Either way, the amount is multiplied by 15%, the lowest income-tax bracket rate, for a value of $60 or $18 for each month of full- or part-time enrollment, respectively.

Textbook amount

A student qualified for the education amount may also claim the textbook amount. The monthly amount for full-time students is $65 and for part-time students is $20, being worth about $10 and $3 per month, respectively, once multiplied by the 15% rate.

Tuition credit

Eligible amounts include fees for admission, library access, laboratory usage, athletic facilities, examinations and diplomas. Student association fees do not qualify, nor do any amounts reimbursed, for example, by an employer. The actual amount is again multiplied by the lowest income-tax bracket rate to determine the value of the credit. The amount must total at least $100 per institution in order to claim the credit.

Transfers and carryforwards

If a student does not have enough income to make use of the education, textbook and tuition credits, it may be possible to transfer up to a $5,000 amount (that is, $750 of value) to a spouse, common-law partner, parent or grandparent for that year. Alternatively, such amounts may be carried forward to be used against the student’s future years’ income, but transfers to other individuals in those future years are not allowed.

Work and study

Educational Assistance Payments (EAP)

Amounts paid to a student from a registered education savings plan (RESP) as an EAP will be taxable to the student. These taxable amounts are the earnings and payout of government grant money previously received into the RESP. Amounts drawn from an RESP that are return of contributions are not taxable, whether paid to the student, to an educational institution directly or back to the plan subscriber.

Tax-exempt awards

Scholarship, fellowship and bursary income is tax-free so long as the associated enrolled program is one that entitles the student to claim the education amount.

Getting there and back

Moving expenses

A person who moves at least 40 kilometres to attend a post-secondary institution may be entitled to claim moving expenses, but only as a deduction against the taxable portion of scholarships, research grants and the like.

Transit passes

Though certainly not exclusive to students, public transit passes are obviously used frequently by post-secondary education students. The tax credit for such passes is welcome relief.

GST/HST credit

The commencement of post-secondary education often coincides with the student having turned 19, which is the threshold age to qualify for the GST/HST credit. To obtain the credit, which is in the form of a quarterly payment or direct deposit, the individual must file a tax return and check the appropriate box.

Out into the world

Moving expenses, revisited

Travel to a summer job may qualify for the moving expense deduction, as long as the 40-kilometre requirement is satisfied. The deduction is net of any reimbursement or allowance paid by the employer.

Interest on student loans

On the repayment of student loans, an amount may be claimed for the interest paid. This applies to loans under the Canada Student Loans Act, the Canada Student Financial Assistance Act and similar provincial/territorial laws. If desired, this claim can be carried forward up to five years from the date the interest is paid.

Lifelong learning plan (LLP) repayments

Generally, LLP repayments to a registered retirement savings plan must commence no later than five years after the first withdrawal and be completed in 10 years. However, LLP repayments often commence earlier. Failure to make a required payment results in the amount being included in income.

Drawing down a RESP – How, how much and when it’s available

It’s December as this is being written, not traditionally when we talk about back-to-school matters.

For parents whose child launched a full-time post-secondary career this past September however, there is an important threshold reached around this time. The upper limit on some Registered Education Savings Plan payments are eased once the beneficiary/student has completed 13 consecutive weeks in a qualifying educational program – which would be roundabout the beginning of December.

Before getting into the details of this threshold, let’s provide some context by looking at how funds are drawn from a RESP.

Accessing RESP money

The extraction of funds from a RESP is covered by a network of qualifying rules, which in turn can affect the continued use of the plan. A payment out of a RESP will generally fall under one of these categories:

Educational Assistance Payment (EAP)

An EAP is defined in the Income Tax Act as an amount, other than a refund of payments (most often a “refund of contributions” described below), paid out of a RESP to or for beneficiaries to assist them to further their education at the post-secondary level. Each payment comprises accumulated income and government grant/assistance money, and is taxable as regular income to the student in the year received.

The Canada Revenue Agency considers an EAP to be a broad term, but does not provide specific guidance on what that may encompass. Instead, CRA’s general approach is that if payments are made in accordance with a particular registered plan, the respective RESP trustee will comply with the ITA requirements.

A full-time student may become entitled to an EAP once enrolled in and attending a qualifying educational program.

Refund of contributions

Plan subscribers (parents most often) are entitled to the return of their own after-tax contributions, which accordingly are not taxed upon receipt. Depending on the plan terms, this could be payable to plan subscribers personally or to the student. If the student is not qualified for an EAP at the time, part of the refund will have to be paid back to the government proportionate to the amount of grant/assistance the plan received.

Accumulated Income Payment (AIP)

In limited circumstances where it is clear that it will not be possible for the RESP to pay any EAPs, the income earned within the plan may be paid out as an AIP. This type of payment is made to the plan subscriber and is subject to regular income tax plus an additional tax of 20%.

Payment to a designated educational institution

In situations where neither an EAP nor an AIP can be made, the plan income must be paid to a Canadian educational institution which would otherwise qualify for EAP purposes. This is basically a forfeiture of the income as the subscriber does not receive a tax slip or a donation receipt.

EAP annual limits and the 13-week threshold

There are limits on the early access to most RESPs. For full-time students, the EAP limit is $5,000 during the first 13 consecutive weeks in a qualifying educational program. If tuition and related payments are higher, on a case-by-case basis the government may approve a higher EAP amount.

After that 13-week threshold has been crossed, there is technically no limit on the amount of EAPs that can be paid, so long as the student continues to be qualified. Of course that doesn’t mean that the floodgates are open; any EAP request will still have to satisfy the requirement of being for a bona fides cost of financing post-secondary education.

Administratively, CRA relies upon RESP trustees to process the bulk of submitted expenses. Since 2008, its administrative approach is to allow the payment of up $20,000 (to be indexed annually by the Consumer Price Index) without the RESP trustee having to assess the reasonableness of specific items, nor to require the production of receipts or a list of expenses. Above that figure, a list of expenses would be necessary as part of the RESP trustee’s diligence or review to assess the reasonableness of the amount. Also bear in mind that CRA may later inquire into those expenses, so receipts should be retained as proof should the need arise.

Finally, be aware that $5,000/13-week rule will apply once more if the student has been away from school for a period of 52 weeks or more.