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What is an RESP?

by Maxine
Posted August 1 2010 12:17am
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An RESP (Registered Education Saving Plan) is a registered savings account with the Government of Canada that allows parents to save money for their child’s education after high school. The interest on the money is not taxed until it is taken out of the account, (unless you contribute more than $50,000).  When the RESP funds are withdrawn to pay for tuition, the money is taxed to the student and not to the parent. Since most students have little or no income they will likely pay little to no taxes on this money.

If your child decides not to continue his or her education past high school, the money in an RESP can be transferred to another beneficiary (a younger child, for example) or, in some cases, it can be transferred into your Registered Retirement Savings Plan. The funds can also be withdrawn, but taxes will have to be paid on the accumulated interest. Any government grants you have received on the money will be returned to the government.

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Why do you need an RESP for your child(ren)?

by Maxine
Posted August 1 2010 12:30am
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As many parents already know, the cost of post-secondary education continues to grow, making it more difficult for you to shoulder the cost of tuition alone and nearly impossible for a student working part-time to pay tuition without additional help.  While you might not be thinking about the costs right now, when your focus is on your new baby or young toddler, the earlier you start saving the more your savings will grow! And with incentives and tax shelters from the government, there are many opportunities to maximize your savings. With estimates putting the cost of post-secondary education well over $100,000 in the not-too-distant future, do you really want to turn down an opportunity to further your child’s education? 

The Government of Canada provides incentive programs, called the Canadian Education Savings Grant and the Canada Learning Bond, through Registered Education Savings Plans (RESPs). These incentives can add a substantial amount of additional funding to your RESP savings. Your child is only eligible for these grants if you open an RESP.

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What do I need to open an RESP for my child(ren)?

by Maxine
Posted August 1 2010 12:33am
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Opening an RESP for your child(ren) is simple. You and your child will need a Social Insurance Number (SIN) and you will need to choose an RESP provider. 

Getting a Social Insurance Number for your baby:

To receive a SIN number for your child you must visit a Service Canada (http://www.servicecanada.gc.ca/eng/sin/apply/proof.shtml) office and provide an official document that proves your child’s identity and status in Canada. For a Canadian citizen, you must provide a Birth Certificate or your Certificate of Canadian citizenship documents. 

If you are a Registered First Nations person and would like to register your status on your SIN record you must also submit a Certificate of Indian Status issued by Indian and Northern Affairs Canada (INAC) with your Birth Certificate.

Please see Service Canada’s detailed website on this topic: http://www.servicecanada.gc.ca/eng/sin/apply/proof.shtml

If you have all the correct documentation you can receive a SIN when you visit the Service Canada office and your card will be mailed to you at a later date.

You can also apply by mail if you do not live near a Service Canada office or cannot schedule a visit. This will mean sending original copies of your supporting documents and an application in the mail. You can find the address and download the application here: http://www.servicecanada.gc.ca/eng/sin/apply/how.shtml 

In Alberta, British Columbia, Ontario and Nova Scotia parents can apply for newborn registration when their child is born. This means that you can register for your child’s SIN at the same time that you apply for their registration of birth. This convenient option will save parents from filling out multiple applications, and avoids additional visits to Service Canada. You can find more details about this program here: http://www.servicecanada.gc.ca/eng/sin/apply/newborn.shtml

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How do RESPs work?

by Maxine
Posted August 1 2010 12:35am
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RESPs are an agreement between you, the “subscriber,” and a person or organization, the “promoter.” The subscriber names one or more individual(s) as the plan “beneficiary” who will benefit from the income earned in the RESP. In most cases the beneficiary will be your child or grandchild. RESPs are offered by various companies that act as “promoters.” These companies are typically financial institutions or mutual fund companies and must be registered with the government. 

Under the terms of the plan, you make contributions for your beneficiary over a period of years and the promoter manages the investment contributions and the accumulated income earned on the contributions. If the RESP qualifies for the Canada Education Savings Grant (CESG), the promoter will invest the money from these deposits, as well.  The promoter agrees to pay educational assistance payments (EAP) to the beneficiary when he or she pursues a post-secondary education. They must include the EAP on their income tax for the year in which they receive them. However, they do not have to include the contributions they receive in their income.

RESP contracts are registered with The Canada Revenue Agency and lifetime limits are set by the Income Tax Act.  The subscriber generally makes contributions to the RESP. They cannot deduct their contributions from their income on their tax return. 

RESPs are not tax deductible, but earnings on RESP investments accumulate without tax. This helps your savings grow much faster. Your beneficiary will be taxed when he or she receives the Education Assistance Payment. Since your child will be a student with little or no income, they are likely to be taxed at a much lower rate than you would have been.

The government provides financial incentives for RESP savings in the form of The Canada Education Savings Grant and/or the Canada Learning Bond. More information on these and other incentives are included below.

RESPs can be broken into three types: family, individual or group plans. Your RESP provider can explain these in detail and help you choose the one that is best suited to your needs.

This is a general overview:

Family Plan – With a family plan, you can name one or more children as beneficiaries of the RESP. The children must be related to you. They may be your children — including adopted children — grandchildren, brothers or sisters.

Individual Plan – This is a plan for one person. They do not need to be related to you for you to contribute. There is no age limit for RESPs, so you can set these up for yourself or for another adult. However, the education incentives are available only to children 17 and younger.

Each year when you make RESP contributions to the family or individual plan, the funds are deposited on behalf of the beneficiary. As investment income is earned it is also deposited into the RESP account. When your child enters post-secondary education the accumulated income is paid out as an EAP. The amount of income available is based on the performance of the investments you select.

Group Plan – Group plans are also sometimes referred to as pooled plans or scholarship plans. They combine your savings with those of other people. The amount of money each child gets is based on how much money is in the group account. It is also determined by the total number of students of the same age who are in school that year. You can name only one child in a group plan. The child does not have to be related to you. 

With a group plan, you make regular contributions that are deposited for the benefit of your child, along with the accumulated investment income. For a group plan, the amount and frequency of contributions stay the same as long as the beneficiary has not turned 18. The main difference between a group plan and an individual plan is how each calculates the amount of accumulated income available to the student when he or she goes to college or university. In a group plan, when each plan matures, contributions are returned to the subscribers and the total investment earnings of the plan are transferred to an account for all of the plans that matured in the year. Each year of post-secondary education covered by the plan is given an equal part of the funds transferred from the matured plans, and these equal parts are divided among the beneficiaries who qualify to receive EAPs in each of their post-secondary years of education.

Usually, group plan dealers must put the money submitted into low-risk investments. Generally, you have to sign a contract agreeing to make regular payments into the plan over a certain time period.

Make sure to ask your group plan dealer what happens to your money if the child does not continue with education right after high school, or if the child decides to participate in part-time education. Group plans are offered and administered by group plan dealers and each plan has its own rules. Be sure to read these rules carefully and shop around to find the plan that suits you best.

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