RESPs are an excellent way for families to accumulate money for future education needs. A Registered Education Savings Plan is essentially a tax-deferred savings plan typically opened for a future post-secondary student. The government allows you to contribute up to $4,000 per year per beneficiary and contributions may be made for as long as 21 years, to a lifetime maximum of $42,000 per beneficiary. The maximum life of an RESP contract is 26 years.
RESP contributions are not tax-deductible but the income earned on contributions compounds on a tax-deferred basis. The RESP concept works quite well because it actually gives Canadian's some assistance with saving for the rising cost of post-secondary education.
Withdrawals from an RESP can be used to cover expenses for education-related costs, the income and grant received is taxed in the hands of the beneficiary (the student), not the contributor. Assuming the beneficiary (the student) can withdraw money over a few years and is not in a high tax bracket at the time, the income should attract very little if any tax at all.
In the event the beneficiary does not pursue post-secondary studies, up to $50,000 of the RESP income may be transferred to the contributor's RRSP, provided this person is under 71 years of age and this person has RRSP contribution room available. For more information please refer to the CRA's RESP guide # RC4092.
The Canada Education Savings Grant (CESG), adds up to $500 a year in matching contributions to an RESP account. On the first $2,500 of annual RESP contributions that you make for each child up to and including the year they turn 17, the government will contribute an extra 20% directly to the RESP. The maximum CESG available for any single year is $500 (20% of $2,500). Amounts not used can be carried forward but only to a maximum of $5,000 per beneficiary. The maximum CESG payable in any one year is $1,000, and the maximum lifetime CESG for each beneficiary born after 1997 is $7,200.
Depending on your family income, your child could receive an additional grant for RESP savings that you make after 2004 on behalf of a child:
Your net family income is reported on your Canada Child Tax Benefit statement (commonly known as “baby bonus”, or “family allowance”) that you receive from Canada Revenue Agency each July.
* This amount is updated each year based on the rate of inflation.
If your child was born after December 31st, 2003 and your family receives the National Child Benefit Supplement (NCBS), with your Canada Child Tax Benefit payment, your family may qualify for a $500 payment into an RESP by the federal government under the Canada Learning Bond (CLB) grant program.
The CLB is a grant provided by the Federal government of Canada to help modest-income families save for their child’s post secondary education. In 2007, the supplement is generally available for families with a net annual income below $37,178.
A child, whose family is eligible for the CLB, may also receive an additional $100 per annum for up to 15 years. The parent must apply for the CLB before the child turns 18 to receive future and past benefits. Should the family become ineligible to receive the NCBS, the child is still eligible to receive CLB benefits for previous years when they were eligible.
The CLB grant is intended to benefit the child and can not be accessed by the parent or other siblings. Should the child choose not to proceed with post-secondary education, the CLB is to be repaid to the Federal government.