Registered Education Savings Plans (RESPs)

Canada's Federal Government provides tax assistance through tax deferral on interest earned in registered education savings plans (RESP's). Registered Education Savings Plans grow tax free until your child needs it for tuition, residence and other educational expenses. An RESP allows you to apply for the Canada Education Savings Grant on your child's behalf and you can contribute up to $4,000 a year per beneficiary.

Canada Education Savings Grant (CESG)

The Canada Education Savings Grant is a grant from the Government of Canada paid directly into a Registered Education Savings Plan (RESP). It adds 20 percent to the first $2,000 in contributions made into an RESP on behalf of an eligible beneficiary each year. This means the Grant can be as much as $400 each year per beneficiary. The grant is cumulative to enable families to catch up with missed contributions. It does not affect the contribution limits.

CESG grants are paid to the trustee of the RESP. If your child does not pursue education or training, the grant will be returned to the government. When your child begins to use the RESP for education, the investment income becomes taxable. However, because students typically have little other income, they should pay little or no tax on RESP income.

RESPs vs. In-Trust Accounts

	RESP's	In-Trust Accounts (Informal)
Purpose	Funds for post-secondary Education	Funds for any purpose after child reaches age of majority
Contribution Limits	$4,000/beneficiary per year and $42,000 lifetime	No maximum
Beneficiaries	Single or multiple Multiple must be related by blood or adoption Beneficiaries can be added or changed, but there are restrictions	Multiple allowed is set up as family trusts Family trusts usually set up more formally Beneficiaries cannot be changed
Government Contribution	CESG - 20% of first $2,000 contributed/year to age 17 Special rules apply for grants to 16&17 yr.olds	None
Carry-Forward Contribution	None or unused contribution room Can carry forward unused CESG eligibility to age 17, but max. annual grant with full carry-forward is $800	Not Applicable
Maturity & Payouts	Must mature by the plan's 25th year Subscriber decides how much beneficiary to the child receives and when	Fund control over assets is generally transferred once he or she reaches Age of Majority
Tax Matters & Investment Strategy	Funds tax-sheltered until withdrawal, so tax-effectiveness of investments not the most important consideration	Tax-effective if structured properly and invested in Equity funds. Capital Gains taxes paid by the child. Child can earn up to $6,500 per year and pay no tax. Interest & dividend income attributed to the contributor
Impact if Child Opts Out of Education	Accumulated CESG grants must be repaid Interest/growth can be transferred to another eligible child, rolled into contributor's RRSP subject to a number of conditions, or returned to contributor after paying full taxes + 20% penalty	No adverse consequences