Tag: Schooling

5undamentals – RESP – Registered Education Savings Plan

Published version: Linkedin

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.

Education finance goes back to school

The continuing case for RESPs

It’s back-to-school time, bringing with it both excitement and anxiety as children and their parents return to their routines.

But when it comes to saving for higher education, this year is arguably anything but routine. Familiar education supports have been eliminated as part of the introduction of the Canada Child Benefit (CCB), and the latest release of tuition data shows the steady continuing rise in the cost of post-secondary education.

It’s a reminder that parents need a long-term plan for how they will pay for their children’s education. In turn, it should reinforce the value proposition offered by registered education savings plans (RESPs) and matching Canada education savings grants (CESGs).

CCB and education supports

From last year’s election campaign through to this year’s federal budget, most of the media coverage of the CCB has focused on what it’s replacing: the Canada Child Tax Benefit, National Child Benefit supplement and Universal Child Care Benefit. (For a more detailed rundown on the CCB generally, see our blog post “What does the Canada Child Benefit mean for parents?”)

As well, the family tax cut has been eliminated, and the children’s fitness and arts credits are halved for 2016 and eliminated thereafter.

On the education front specifically, the tuition tax credit remains, but the education tax credit and textbook tax credit are eliminated after 2016. For full-time students, those credits are respectively worth $400 and $65 for each month a student is in school. For example, the value for a student in school eight months in a year would be: [$465 x 8] = $3,720 x 15% credit rate = $558.

If a student does not use the entire education, textbook and tuition credits to reduce his/her tax owing, any remaining amount may be transferred to a parent, grandparent or spouse. After 2016, this will only apply to the tuition credit, but the cap on the transferrable amount will continue to be $5,000.

As part of the CCB package, Canada Student Grants are to increase by 50%, from $2,000 to $3,000 per year for students from low-income families and from $800 to $1,200 per year for students from middle-income families. Those income thresholds depend on number of children and province. Currently for a one-child family, low income is about $20,000 to $25,000, and middle income ranges from $38,000 to $48,000.

Tuition costs on a steady rise

Each September, Statistics Canada releases the results of its annual survey of tuition and living accommodation for colleges and universities. The average tuition for a full-time undergraduate student in 2016/17 is $6,373, 2.8% higher than the 2015/2016 average of $6,201. This is a weighted average by students in each program. Strip out the higher costs of dentistry, medicine, law and pharmacy and the range is between $4,580 and $7,825.

Beyond the absolute numbers and the current-year change, the most instructive part of the survey is the long-term trend. Looking back across the 11 years available in the data series, the average cost of tuition has risen almost 4% annually on average, for a cumulative rise of 45%.

Table: Rising cost of post-secondary education

Figures are also tracked for compulsory school fees (admission fees, student association fees, athletic levies, etc.), which have similarly risen by about 4% annually, from $608 in 2004 to $873 in 2016.

If these trends continue, a child born in 2006 who begins post-secondary education at age 18 in 2024 will face first-year tuition and additional compulsory fees in excess of $9,700, almost double what it would have been at birth. And this does not include accommodation, transportation or groceries – let alone discretionary expenses.

Saving for education using RESPs

In law, the Latin phrase res ipsa loquitur means “the facts speak for themselves.” In making the case for the need to save prudently for a child’s future education, it is reasonable to say that these numbers speak volumes.

It is clear that funding a child’s education has become more costly and more complicated. Those who lost out in the CCB changes will foot more of the ever-inflating bill personally, and those who gained must understand that the greater amount they are getting in those early years is intended in part to help them save for later.

The three key features of RESPs should figure prominently in all plans:

  • Investment returns grow tax-sheltered
  • Matching 20% CESGs accelerate those investment returns
  • Income and grants can be taxed to an attending student on withdrawal

More information is available in our “Registered Education Savings Plan” InfoPage and our quick-reference InfoCard.

Borrowing retirement savings to upgrade skills – An overview of the RRSP LLP

One of the most important lessons a person can learn on entering the workforce is that it’s as important to save as it is to earn in the first place.  In effect, you are paying your future self now, commonly through the use of a registered retirement savings plan (RRSP).

But the route from worker to retiree is not always a straight line.  Whether due to an involuntary work displacement or a conscious decision to pursue a new direction, many people return to school to upgrade their skills and improve their future prospects.

While public programs may be available for some of those retraining costs, it is usually up to the individual to shoulder the bulk of the burden.  Fortunately, our tax system allows RRSP savers to help themselves in such circumstances, through the Lifelong Learning Plan (LLP).

LLP suspends tax on withdrawals

Put simply, under the LLP a withdrawal from an RRSP is not taxable in the year of withdrawal.  No interest is charged at any time, and so long as the total amount is paid back to an RRSP within the prescribed time requirements, no tax will apply (other than under the normal RRSP rules applicable on later withdrawals).

Qualified participants

The LLP can be used to help finance a person’s own education or that of a spouse or common law partner.  It is not available for a child’s education.

The RRSP owner must be resident in Canada, though the educational institution may be elsewhere so long as it qualifies for the education amount tax credit.  The student must be enrolled in a post-secondary program, attended on a full-time basis (or part-time if the student meets disability conditions).  Full time generally means at least 10 hours per week over at least three months.

The LLP can be used if the student is already enrolled, but not if the program is complete.  If the student is not yet enrolled, a written commitment from the institution must be received no later than March of the year after the RRSP withdrawal.  Participation may continue to no later than the end of the year in which the student reaches the age of 71.

Financial limits

The maximum annual withdrawal limit for the LLP is $10,000, with a total limit of $20,000.  These apply on a per-person basis, so that spouses have effectively double the amounts available if desired, and can use the funds on either or both.

For each withdrawal, the RRSP owner confirms qualification and withdrawal amount by completing Part 1 of Canada Revenue Agency (CRA) Form RC96 titled Lifelong Learning Plan (LLP) – Request to Withdraw Funds from an RRSP.  This is then filed with the RRSP issuer, who completes Part 2 verifying qualification (to the extent of its knowledge), provides a copy of the completed form back to the RRSP owner and keeps the original for its files.

No tax is withheld or due, but the RRSP issuer will provide a T4RSP slip to the RRSP owner showing the amount in Box 25 “LLP withdrawal.”  Once the LLP is opened, an LLP Statement of Account will be appended to the RRSP owner showing the amount.

Continuing deferral and eventual repayment

So long as the qualifying conditions remain satisfied and the 10-year repayment period (described in the following paragraph) has not begun, RRSP withdrawals may continue until January of the fourth calendar year after the year of the first withdrawal.

Repayments must be made over the course of no more than 10 years.  A minimum of one-tenth of the total withdrawal is due each year, though more may be repaid if the RRSP owner wishes.  This time period will be shortened if the RRSP holder dies, turns 71 or becomes a non-resident.

Repayment must begin no later than the fifth year after the first LLP withdrawal, but may be required sooner.  That means that if a first withdrawal is made in 2014, the first repayment must begin no later than 2019, though the payment may be made as late as the first 60 days of 2020.

As to repayments beginning sooner, the CRA monitors the tax returns of LLP students, specifically line 323 of Schedule 11.  If the student is not entitled to claim the education amount in two consecutive years, the 10-year repayment period begins in that second year.

Note also that once an LLP balance is repaid in full, the LLP may be used again.  In fact, there is no limit to how many times it may be used over a lifetime, and may even be used while there remains a balance in an RRSP Home Buyers’ Plan (HBP), though that could present a strain on finances.

Failure to repay

Be aware that if the RRSP owner pays less than the calculated annual repayment, the underpaid amount will be included as taxable income that year.  As no money will have been received by the RRSP owner at that time (it having been spent in a prior year on education), the cash to pay the associated tax will have to come from other sources.  This can be a significant financial drain for a very long period of time.

As with the HBP, LLP participants should carefully plan from the earliest stages to assure that the commitment is understood and manageable, and will not inadvertently result in a permanent depletion of RRSP savings.