Recent hikes in university tuition fees have outstripped increases in both inflation and the average national wage. For families with young children, this makes paying for post-secondary education a bigger challenge than ever.
While some options for saving, such as the new tax-free savings accounts and in-trust accounts for children, may be less restrictive in dictating how earnings may eventually be used, registered education savings plans have become more attractive over time. They continue to offer unparalleled benefits that compensate for their narrow focus on higher learning.
The main advantages of RESPs are found in two features: the potential tax savings that stem from the ability of earnings to grow tax-free until paid out, and the government incentives they attract. These grants, in particular, help set RESPs apart from savings vehicles that do not specifically target education after high school.
The money in an RESP comes from three main sources: contributions by the plan's subscriber, government grants based on those contributions, and gains that accumulate on both the subscriber and government amounts.
Lifetime contributions to an RESP are limited to $50,000 for each beneficiary. A rule change in 2007 removed the ceiling on how much of this lifetime total may be contributed in a single year.
However, there is an annual limit on the Canada Education Savings Grant, the most universal of government grants generated by RESP contributions. (Grants do not affect overall RESP contribution room.) Under this federal incentive program, the basic CESG payable in each year maxes out at 20% of contributions, up to $500 annually and to a lifetime maximum of $7,200 for each beneficiary.
If it's not used in a given year, CESG entitlement may be carried forward, but the maximum for CESG payable in a single year is $1,000. In most cases, it makes sense to spread out contributions over time in order to attract the maximum grant for the greatest number of years.
Eligibility for an additional CESG depends on family income. The test to determine this is the same income threshold as that used to determine eligibility for the Canada Child Tax Benefit.
For children born in 2004 or later, a similar incentive -- the Canada Learning Bond -- is available to families that qualify for the National Child Benefit. It's not necessary for a subscriber to make an RESP contribution in order to get the CLB, which amounts to $500 in the first year of the plan and $100 in each subsequent year.
In addition, provincial programs in Alberta and, more recently, Quebec, also work to top up the CESG for eligible residents of those provinces. (See table.)
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Funding your child's future |
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Basic CESG (Widely available) |
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Criteria |
Amount of grant |
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Must be beneficiary of an RESP; special conditions apply to beneficiaries who are 16 or 17. |
20% of annual contributions, to a maximum of $500 for each qualifying beneficiary annually. ($1,000 in CESG annually if there is unused grant room from a previous year.) |
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Additional CESG (Based on family income) |
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Criteria |
Amount of grant |
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Must be beneficiary of an RESP and under 18, with family net income within specified thresholds. |
Extra 20% on the first $500 if family has qualifying net income ($38,832 or less for 2009); extra 10% on the first $500 if family has qualifying net income (more than $38,832 and less than $77,769 for 2009). |
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Canada Learning Bond (Based on family income) |
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Criteria |
Amount of grant |
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Must be beneficiary of an RESP, born in 2004 or later, with family income that qualifies for the National Child Benefit Supplement. |
$500 in first year of plan, plus $25 to help cover plan opening cost; then, $100 annually for up to 15 years for each year the family is entitled to the National Child Benefit Supplement. |
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Quebec Education Savings Incentive (Quebec only) |
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Criteria |
Amount of grant |
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RESP contribution to a qualified RESP provider. |
Since Feb. 21, 2007, this refundable tax credit is paid directly into a RESP opened with a qualified RESP provider. Maximum annual amount is $250, with an additional $50 for middle-income and low-income families, and a lifetime maximum of $3,600. |
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Alberta Centennial Education Savings Plan Grant (Alberta only) |
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Criteria |
Amount of grant |
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Must be RESP beneficiary born to Alberta residents in 2005 or later. |
Basic grant of $500 to every child born to Alberta residents in 2005 or later. Additional grants of $100 to children who turn 8, 11 or 14 in 2005 or later. |
Students can start receiving payments from an RESP as soon as they're enrolled in a qualified program. In general, how funds are treated when they're paid out from an RESP depends on where they originated and how they will be used.
Since contributions to an RESP are made with after-tax income, there are no restrictions and tax consequences when the contribution portion of an RESP is paid out -- whether it's used to help pay for education for the intended beneficiary or returned to the subscriber for whatever reason.
| The high cost of higher education In the two most recent academic years, 2009-2010 and 2008-2009, undergraduate full-time university students across Canada faced average tuition-fee increases of 3.6%, with costs averaging $4,917 and $4,747 for those respective periods. Graduate students, meanwhile, saw an even greater year-over-year increase, with a fee hike of 4.7% that brought the average cost to $6,008 for 2009-2010. How significant are these increases? Consider that tuition fees are only one of many expenses contributing to the total cost of a post-secondary education, and that these fee hikes have been outstripping increases in the general cost of living and in average wages. Following an increase of 2.2% in the average wage in Canada in 2009, salaries are expected to increase by just 2.8% in 2010, according to projections by the human-resources consultant Hewitt Associates. Inflation, meanwhile, fell by 0.8% between August 2008 and August 2009, and rose 3.5% in the previous year, according to Statistics Canada. |
There are, however, significant tax considerations when it comes to withdrawing the government grants, earnings from those grants and earnings from contributions.
When the CESG and earnings on contributions are paid out to a beneficiary and used to pay for a qualifying educational program, these payments (known as educational assistance payments (EAPs) are considered taxable income in the hands of the beneficiary. Since most students are eligible to claim various education-related tax credits, any tax liability tends to be largely offset.
Since 2007, EAPs may be used for part-time studies. Further RESP enhancements in 2008 extended the contribution period from 21 years to 31 years from the date a plan is established, and also lengthened the termination date by 10 years. This allows plans to stay open for up to 36 years.
The list of qualified educational programs is quite wide and includes apprenticeships and programs offered by trade schools, CEGEPs, colleges or universities. In general, these programs must last at least three consecutive weeks, with at least 10 hours of instruction or work each week. Part-time programs must include at least 12 hours per month spent on courses, while programs at educational institutions outside Canada must last at least 13 weeks.
Still, if the beneficiary chooses not to pursue post-secondary education, in some cases the RESP may be transferred to another RESP with no tax implications. This is true when the beneficiary of the receiving RESP is a brother or sister, under 21 years of age, of the original beneficiary. Although the CESG may also be used by an eligible sibling, the Canada Learning Bond cannot be transferred and must be repaid to the federal government.
As well, provided that RRSP contribution room is available, a subscriber may transfer up to $50,000 in accumulated income payments (AIPs) -- the official name for income earned from an RESP and repaid to the subscriber -- to a registered retirement savings plan (RRSP) or a spousal RRSP.
Otherwise, there is a tax penalty of 20% (12% for Quebec residents) payable on AIPs, which must also be reported as income for the year in which it's received.
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