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Old 08-04-2018, 07:55 AM   #1
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Default Get educated about RESPs

I'm going to try to cover everything you need to know about RESPs in this post, but of course if you have questions or there are things you would like clarified, just ask!


I figure that starting here makes sense as this is the main reason for opening an RESP (although a couple other advantages exist as well). The federal government gives you a grant (CESG: Canada Education Savings Grant) for 20% of the contributions made. This is limited to $500/year if you have started in the first year and are up to date, or $1,000/year if you have years that you have missed. In other words, you can receive grants on contributions of $5,000/year if you have missed years or $2,500/year if you are starting at the outset.

There is also an income tested portion available (the Canada Learning Bond) which might be applicable as well. This is up to $2,000 depending on the income of the primary caregiver.

Some provinces offer some other grants as well, but currently Alberta does not.

There was another question about grants and how they're invested, and there are quite a few cases where this money ends up in cash or a money market type of holding (near cash), but it doesn't have to. You can elect to have it invested as it's earned into an investment fund as well.

Family Plans V. Individual

A Family Plan is one where the beneficiaries are all in one account. So everyone in the plan gets their own grants, but the funds are pooled together. Let's say that you have two kids and you open a family plan. You contribute and specify that you are splitting this 50-50 between them. The funds accrue and one goes to school, while the other embarks on a wildly successful Youtube career and "school is dumb". The student who goes to school can access the money in the account. If they had two individual plans, it's not going to allow for this; and there really isn't a disadvantage to putting them together. You could open a Family Plan from day one and then decide not to have more children. You can also combine the plans at a later date.

What happens if the child doesn't go to school?

First it should be noted that the RESP covers post-secondary school, and the institutions allowed are wide-ranging. The only thing I have seen rejected was a person wanting to take the course to become a real estate agent. I'm sure there are others, but not that I've come across.

But in the event the child doesn't attend, there are a few options. You can transfer this to you RRSP (or either of the owners if you have a joint account) if you have RRSP room. This is a taxable transaction, and that is offset with the RRSP contribution. The government would get their grant back in this case.

You could withdraw these funds entirely, and again the government gets the grant back, and again this is taxable.

What if the child goes to school?

This is fairly straightforward, but worth a quick overview. Basically, you would withdraw what you like from the account for the student. It generally gets paid to them and it is taxable to them. They have tuition/books/school to write off and likely aren't making a large enough income that it becomes an issue. You can specify that you want to withdraw grant money ahead of your contributions, which is sensible because in the event that the student goes through say 2 years of a 4 year program and then does something else, you have your contributions remaining. These plans aren't set where you need to submit receipts or things like that; you prove that they are enrolled in a post-secondary institution and decide how much you want to withdraw from the account.

Differences between providers/institutions

This isn't intended to be a sales pitch, but here are some differences in plans. It should be noted that the government isn't giving any more grant money to any particular plans or things like that.

Trusts: These are plans like the Heritage Trust or Knowledge First (which are actually the same company now). These plans have you pay monthly into the plan, and if you were to stop these contributions, you lose your funds. The participants who pay for the full time receive the grants, contributions from people who do not pay the full time and growth.

Investment Accounts: These accounts are straight-forward accounts that could be opened at the bank or a securities dealer and in them you could hold things like mutual funds, stocks, bonds or other investments. There could be fees payable each year for the account, or costs associated with the investments. You can alter the timing/amount of contributions and have a wide variety of investments to select from.

Hopefully this covers most of the high points, but ask away if I have missed anything!
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Old 08-04-2018, 08:21 AM   #2
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You reference it about two thirds down but one of the most common questions I get so it deserves emphasizing is what can the money be used for. Anything at all! Just prove that you’re in a qualifying program in a qualifying institution and you’re good to go. The student can buy a car or live at home and pay room and board to the parents with the money if he/she so chooses.

Good tutorial on RESPs.
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Old 08-06-2018, 08:18 PM   #3
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Thanks for submitting this. You talk about the withdrawals being taxable, but I think it should be made clear that it is only the grant and return on investment (eg. interest) that is taxable as the original contributions are made with after-tax money.

My question had to do with the return (interest) on the grants if the kid doesn't go to school. I understand the grants need to be returned, but what about the money that was made with those grants. Do they need to be returned? Is it, therefore, important to track that money separately?

I don't know why I'm so concerned about it, as I'm certain my kids will go to a post-secondary school of some kind. It is just the one thing I'm unclear on.
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Old 08-06-2018, 08:40 PM   #4
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Actually, that’s a good point and I should have covered that! In terms of taxation you’re right that it’s only the growth and not your contributions. The same occurs if you shut the plan down without the child going to school, where you’re taxed on the gains. There are a few considerations though.

First, the government grants are gone, and you get your contributions back with out tax. He investment growth can be taken as well if the beneficiaries are over age 21 and not in school, the plan has existed for over ten years and you’re a Canadian resident.

The major drawback here is that a straight withdrawal you pay your regular tax rate plus 20% though, so clearly taking this is a last resort if you are looking at tax! There are other options. The transfer to the RRSP, transfer to another sibling are mentioned above. Another is to donate the holdings (we’re just talking about the investment growth here). This wouldn’t incur tax and at the same time might get you some savings depending on where you donate. In a lot of cases though, the best idea is to wait and see. The plan can remain open and the funds can be used at a later date, and a lot of things happen to young adults that might change their mind!
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