What are Registered Education Savings Plans ?
By: Galen Weston

Registered Education Savings Plans are tax-deferred education savings plans through which the federal government provides assistance to subscribers who wish to save money for beneficiaries' post-secondary education. The beneficiary must be enrolled full-time (or part-time if the student has a disability.) in a qualifying educational program at a designated educational institution. Full-time attendance means that the program must be not less than three consecutive weeks with at least 10 course hours per week. Correspondence courses also qualify. The following designated post-secondary educational institutions will generally qualify for the RESP assistance: universities, community colleges, CEGEPs, junior, vocational and technical colleges, as well as many universities outside Canada. Other educational institutions that provide approved post-secondary education may also qualify.

The funds withdrawn from an RESP can be used for the student's living and transportation costs as well as tuition and supplies.
For the education assistance to be paid to a beneficiary, said beneficiary must be in full-time attendance at a post-secondary educational institution, or part-time if the student has a disability. Full-time attendance means that the program must be not less than three consecutive weeks with at least 10 course hours per week. Correspondence courses also qualify.

A subscriber is an individual – typically parents or grandparents of the beneficiary(s) - who enters into the RESP contract with a fund company and makes contributions towards the cost of their education. Spouses may be joint subscribers to an RESP, but a trust is prohibited from being a subscriber. If a subscriber dies when an RESP is in place, the rules provide for a placement subscriber, or for the deceased’s estate to continue making contributions.

Family and Individual Plans.

There are two basic kinds of RESP plans. In an individual plan, the beneficiary can be anyone at all, related to the subscriber or not. In fact, the beneficiary can even be the subscriber. A subscriber who thinks he or she may return to school someday may want to set up an RESP naming himself or herself as the sole beneficiary.

In a family plan, there can be more than one beneficiary but each beneficiary MUST be a blood relative – i.e. children, brothers, sisters, grandchildren, and/or great-grandchildren. In family plans, contributions can only be made for beneficiaries under age 21. Adopted children are eligible under a family plan.
A subscriber can change the beneficiary at any time under either plan, subject to certain restrictions.

RESP Contributions

The most that can be contributed for any beneficiary is $4,000 per year (Note: only $2000 of this amount is considered eligible for the CESG. For information regarding this government grant, see below.), with a lifetime limit of $42,000 per beneficiary.

Contributions to an RESP are not tax-deductible, but the income or growth in the plan remains tax-sheltered until it is paid out in the form of educational assistance, or, as an accumulated income payment back to the subscriber. Contributions are paid out of the fund to the beneficiary tax-free.

Contributions can be made each year for 21 years. The plan must be "collapsed" before the end of the 25th year following the year the plan was entered into. This allows the plan to continue to provide tax-deferred growth while the beneficiary is pursuing post-secondary education.

Canada Education Savings Grant

The Canada Education Savings Grant is the federal government’s own contribution to the RESP. Under the program, the federal government provides CESG grants equal to 20% of the annual contributions made by the subscriber - to a maximum of $400 per year per beneficiary, up to and including age 17 – and is deposited directly into the RESP. The total lifetime CESG grant that will be paid into the RESP of an individual beneficiary is $7,200. The CESG grants made to an RESP do not reduce the annual and lifetime dollar contribution limits described above. The subscriber cannot withdraw the CESG grant under the plan. If the beneficiary does not pursue higher education, the RESP is revoked, or if the RESP is withdrawn for non-educational purposes, the RESP holder is generally required to repay the grant to the government.

To ensure that RESPs are used as regular savings plans over the long term, contributions made for beneficiaries in the year they turn 16 or 17 will only receive a CESG if:

-*A minimum of $2,000 of contributions had been made to an RESP before the year in which the beneficiary turns 16 or

-*A minimum of $100 in annual contributions was made in any four years before the year in which the beneficiary turns 16.

Social Insurance Numbers (SIN) for both the subscriber(s) and the beneficiary MUST be provided when applying for an RESP.

An RESP must be wound up by the end of the 25th year following the year in which it is set up. Contributions are allowed by the subscriber only for the first 21 years after the year in which the plan is set up.

Taxation
Contributions to an RESP are not tax deductible, however, income earned in the RESP is taxed when distributed. The income element of a distribution is taxed in the hands of the beneficiary. Because students typically have little or no income, they pay little or no tax on RESP-sheltered income.

Note that when the income is withdrawn, it is considered to be "Other Income" on a T4A Supplementary slip. As a result, the income withdrawn is not eligible for the dividend tax credit or capital gains treatment. Contributions to an RESP are not tax-deductible. If money were borrowed by the subscriber to make an RESP contribution, the interest paid on the loan would also not be tax-deductible.

Withdrawals

The most common withdrawals from an RESP are in the form of Educational Assistance Payouts – or EAPs. EAPs are any amounts paid out under an RESP to provide assistance to a beneficiary attending a post-secondary educational institution. The timing and amounts of the payouts are up to the subscriber, with the restriction of a $5,000 limit in EAPs per beneficiary during the first 13 weeks of enrolment. In a family plan, if one beneficiary does not attend a post-secondary educational institution, the funds accumulated in his or her name can be transferred to other designated beneficiaries. RESPs also allow EAPs to fund the part-time studies of recipients with a mental or physical disabilities.

A subscriber may withdraw his or her contribution amounts to an RESP at any time without any tax implications. Withdrawals from a plan that has received a CESG require a refund to the government of the CESG amount. Withdrawals of more than $200 of unassisted contributions in the same calendar year will render the beneficiaries ineligible for CESGs for the remainder of the year of withdrawal and the following two years.

Withdrawals of income from the RESP are fully taxable, at the subscribers marginal tax rate. The subscriber has the option of transferring income – to a maximum of $50,000 - to his or her RRSP or to a spousal RRSP contribution room permitting. Any amount in excess of that allowed by contribution room is subject to an additional penalty tax of 20% above the normal tax he or she would pay on the RESP income inclusion. Any withdrawals of accumulated income have the affect of terminating the RESP by March 1st of the year following the year of the earliest withdrawal.

Article Source: http://www.ArticleJoe.com

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