September 11, 2014 Tax Advisory

Now that the leaves are changing, the weather is cooling down and the kids are headed back to school, we thought this might be an appropriate time to talk a bit about RESPs and how they may be useful for you.

What is an RESP Anyways?
A registered education savings plan (RESP) is essentially an agreement between an individual (the “subscriber”) and a person or organization (the “promoter”). Under this agreement, the subscriber, say the parent, makes payments into an account for the beneficiary, say the student. The promoter, say the bank, agrees to pay educational assistance payments (EAPs) to the student in additional to portions of the original contributions. EAPs are basically made up of any money earned on the contributions plus any other financial assistance received for the RESP.

RESP’s have a lifetime contribution limit of $50,000 for all RESPs, per beneficiary.

Why Would I Use an RESP?
A few main advantages to an RESP include:
- puts money away for post-secondary schooling
- the government will give you $500 on the first $2,500 that gets contributed (instant 20% return)
- the earnings on the contributed amounts will be taxed in the student’s hands when the money is withdrawn (lower tax rate usually)
- flexibility of having a joint RESP whereby the funds can go to various individuals (eg. children, grandchildren, nieces, nephews, etc.)

What if the Student Doesn’t Attend a Post-Secondary Institution?
If the RESP isn’t joint, the contributor can transfer the RESP earnings to their own RRSP and claim the applicable deduction. If the contributor doesn’t have any RRSP contribution room, the RESP earnings will likely be taxed in the contributor’s personal hands.

If you would like more information about RESPs, just let us know!

The TGC Team