WHAT IS RESP?
The Registered Education Savings Plan (RESP) is a plan set-up for child’s higher education and registered with the Canada Revenue Agency (CRA) for the purpose of tax-sheltered growth of investments. RESP registration with CRA is mandatory in order for the plan to enjoy free grant from CESG.
WHAT ARE THE CONTRIBUTION LIMITS?
The contribution limit per child per year is $4,000 to a lifetime maximum of $42,000.
WHAT IS CESG?
It is the Canada Education Savings Grant administered by the Human Resources Development Canada (www.hrdc-drhc.gc.ca).
WHAT IS FREE GOVERNMENT GRANT?
The free CESG is a special grant provided by the Govt. of Canada since January 1, 1998 to help families save for their children’s post-secondary studies. Your contribution amount earns an additional 20% from the federal government, to a maximum of $400 a year, until the end of the calendar year the child turns 17. The CESG applies to any amount on the first $2,000 you save each year, but you can contribute as much as $4,000 a year. The total CESG per child cannot exceed $7,200.
Note: It is expected beginning 2005, the 20% CESG would be enhanced for low-income families. For families with annual incomes up to $35,000, the first $500 contribution would attract 40% CESG and for those with incomes between $35,000 and $70,000 it would be 30%.
CAN I TAKE ADVANTAGE OF CESG FOR PAST YEARS?
Yes. Your child, if resident of Canada, has been accumulating CESG since January 1, 1998. For example, if your child became Canadian resident in 2003 but you set-up RESP in 2004, you can contribute $4,000 in 2004 and avail $800 as CESG ($400 for 2003 and $400 for 2004).
WHY IS IT IMPORTANT TO SET-UP RESP?
Among many compelling reasons, the three most important are:
(1) Cost of university education: According to the Human Resources Development Canada the cost of education would grow at the rate of 3% per year. As a result, children born in 2004 would need $61,000 to complete 4-year post-secondary education if they stay at home. The amount would swell to $112,000 for away-from-home students. The HRDC figures are quite conservative. Historically, the actual education cost has been increasing at the rate of 6.8% and not 3%.
(2) Job Skills: With paradigm shift to knowledge economy, two out of three jobs in Canada require a post-secondary education. In 1999, 167.000 jobs in Canada disappeared for people with no more than a high school education. Meanwhile, 431,000 jobs were created for workers with post-secondary education.
(3) Salary: College and university graduates are more likely than less educated people to find jobs, keep jobs and earn more money. In 2001, the post-secondary educated people earned an average of $61,823, $25,545 more than high school grads.
WHY INVESTING IN RESP IS BETTER THAN SAVING OUTSIDE RESP?
Your savings and CESG grow tax-free in RESP. Investments outside RESP do not earn CESG and income earned will be subject to tax at your marginal tax rate.
WHAT HAPPENS WHEN RESP MATURES?
When it is time for your child to go to university, you can withdraw your savings tax-free. The remaining portion of RESP (consists of growth of your savings, CESG contributions and CESG growth) is withdrawn in one or more installments. These are then taxed in the hands of your child. Since your child may not have any other income he/she may be taxed, if at all, at the lowest rate. The RESP money can be used for studies anywhere in the world.
CAN I TERMINATE RESP?
Yes. RESPs can be terminated at any time. However, depending on the type of RESP there may be some termination fees and CESG money would have to be returned to the Govt.
WHAT HAPPENS IF I BECOME NON-RESIDENT BUT MY NOMINEE REMAINS A RESIDENT?
As a non-resident you can still contribute to the RESP and also enjoy CESG.
WHAT HAPPENS IF MY NOMINEE AND I BECOME NON-RESIDENTS?
The RESP still remains active but any contributions made for a non-resident nominee account would not be eligible for CESG.
WHAT HAPPENS TO EDUCATION ASSISTANCE PAYMENTS (EAPs) WHEN MY NON-RESIDENT NOMINEE PURSUES HIGHER EDUCATION OUTSIDE CANADA?
The nominee would be eligible to receive EAPs but there may be a non-resident withholding tax of up to 25% depending on the country with or without tax treaty with Canada. Both US and India have treaty with Canada to avoid double taxation.
CAN I ROLLOVER MY RESP MONEY TO RRSP?
If your child does not pursue post-secondary education then under certain conditions you can rollover up to $50,000 RESP money into RRSP subject to the availability of RRSP room.