Apr

9

Registered Education Savings Plan

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RESPRegistered Education Savings Plan

The Purpose of the RESP is to allow income to accumulate on a tax deferred basis and then be used by a child to attend post-secondary education.

  • Contributions are not deductible; Max. RESP period: 35 years, i.e., plan must be terminated by the end of the 35th year (40 years if beneficiary is eligible for the disability tax credit).
  • Income earned in the plan is not taxable until paid to the student
  • Plan can be redirected to another sibling under age 21
  • If not used by child (or redirected) for post secondary schooling, contributions are returned to parent tax free. The CESG (see below) must be refunded to the federal government. The contributor will also be allowed to transfer up to $50K of the income earned in the plan to his (or spousal) RRSP if there’s enough contribution room (the amount withdrawn would be included in income, but then offset by a deduction of up to $50K to the RRSP). If there is insufficient room, the excess is taxable and there will be an additional tax of 20% of the RESP income that can’t be transferred. This additional 20% tax is designed to compensate for the deferral of tax while the income remained in the RESP.
  • A total contribution of $50,000 per beneficiary is allowed. There is no longer an annual contribution limitation.
  • Access to RESP assistance for part-time post-secondary students allowing these students to access up to $2,500 of their income and grants for each 13-week semester of study. Students will be required to spend at least 12 hours a month on courses, in a course lasting at least 3 consecutive weeks. 40 Canada Education Savings Grants:
  • Computed as a % on the 1st $2,500 of annual contribution ending in the year the beneficiary reaches age 17. The annual grant is usually capped at $500, computed by reference to the table below. The maximum CUMULATIVE CESG grant is $7,200 ($36,000 x 20%). If contribution is not made in a particular year, entitlement to the grant can be carried forward 1 year – therefore have 1 year grace to catch up.
  • If the RESP is not used by the child to attend post-secondary studies the RESP trustee will be required to make a CESG repayment equal to 20% of the withdrawal that has benefited from the grant. Contributions that were made and did not benefit from the CESG will not be subject to the 20% repayment. Family Income 2015 Annual Grant (as a % of the Contribution) < $42,708 40% on the 1st $500 + 20% on the excess Between 42,708 – 85,414 30% on the 1st $500 + 20% on the excess > $85,414 20% of the contribution

For more information on RESPs, please contact me for a free consultation.

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