Registered Education Savings Plans (RESPs) - What you should know

Today was my first day back to work after the holidays: the official kickoff of tax season. This means I start to get phone calls from clients that have met up with friends over the holidays and learned about the greatest tax idea...

A client of mine recently had a baby and called me up to find out how much money he was going to save on his tax return for his RESP he just set up. He was shocked when I told him there was not a deduction. If you're thinking of setting up an RESP for your kids or a relative here's what you should know:

Advantages

• Income generated on your contributions are tax deferred. This means, you do not pay tax on the income that's earned from the contributions while the funds are in the plan(up to 20+ years of untaxed growth)
  
• Up to $7,200 of free money --The Feds give a 20% Canada Education Savings Grant matched up to $400/year. Additional incentives available for low income families and the Province of Alberta.
  
• Payments of accumulated income are usually made to the child when they have little to no income(since they are a student) and therefore minimal taxes are due.
  

Limitations

• Contributions to an RESP do not result in a tax deduction on the contributors return. This is a common misconception and is NOT the case.
  
• Contribution limit is $4000/year for the beneficiary(aka. the child) to a maximum of $42,000 lifetime. This means that if you have grandparents that want to contribute you as a parent, have to share the $4000 each year. Overcontributions are penalized.

How do you get your money out of the plan when needed?

• Payments can be made to the beneficiary to finance a post-secondary education and included on the income of the beneficiary
  
• Payments of inital contributions - to the contributor(parent) or the beneficiary
• Payments of accumulated income - to parent/contributor or child and included as income for tax purposes
  

What if the child does not go onto post-secondary school?

• Your original contributions can be redeemed at no tax cost
• You lose the CESG - $400/year
• You're taxed on the accumulated income on your initial contributions. But, if you have RRSP room available you can carry over up to $50,000 into your RRSP.
  

Requirements to set up

• The child must have a Social Insurance Number(apply early!)
• Must be a resident of Canada

For more information check out CRA's publication for more information.