The RESP is a cornerstone of education savings for Canadian families given tax deferred plan growth and access to Canada Education Savings Grants (CESGs), Canada Learning Bonds (CLBs) and various provincial education savings programs for plan beneficiaries. Parents, relatives, even friends can open a RESP for a beneficiary. This article summarizes the RESP landscape including implications on death and non-residency.
The RESP is a registered contract between the subscriber establishing the plan and the financial institution or organization (“promotor”). The CRA sets lifetime contribution and plan duration limits. Subscriber contributions and government grants earn income inside the plan. Once a beneficiary is eligible, the promotor pays contributions, and income and grants – known as, Education Assistance Payments (“EAPs”) – to plan beneficiaries.
Tax attributes? RESP contributions are NOT tax deductible. While funded with after-tax dollars, plan assets grow tax free until EAPs are paid to a beneficiary to go to school. EAPs are taxed in the year of receipt to the beneficiary who likely has lower tax rates than the subscriber.
Contribution limits? Annual contribution limits ceased in 2007. Maximum lifetime contributions of $50,000 per beneficiary apply. Overcontributions are subject to 1% per month penalty until removed.
Available grant money? The federal CESG matches 20% of the first $2,500 annual contribution to a maximum of $500 per plan beneficiary annually. If you have unused prior year grant room, this doubles to $1,000 on the same 20% matching basis. The lifetime maximum basic CESG per beneficiary is $7,200. Additional CESG is available for modest income families. Children from modest income families born on or after January 1, 2004 may also access the CLB. The CLB offers $500 initially, plus $100 annually per year of eligibility for up to 15 years. The CLB lifetime maximum is $2,000 per beneficiary. Government grants are not included in the lifetime contribution limit.
Special rules for beneficiaries age 16 or 17? Beneficiaries can attract CESG until the end of the year they turn 17. However, special rules apply to receive grants in the years a beneficiary reaches 16 and 17. To receive grants in these years, one of the following two conditions must be met:
- at least $2,000 is contributed (and not withdrawn) before the year the child turned 15; or
- at least $100 was contributed annually (and not withdrawn) to the RESP in at least four years before the end of the year the child turned 15.
When can you open a RESP? So long as both contributor and beneficiary have a SIN, plans can be opened at birth of a beneficiary, or any time thereafter.
How long can a RESP remain intact? CRA rules state that unless the RESP is a specified plan (i.e. a plan with a beneficiary that qualifies for the disability tax credit), contributions, other than transfers from another RESP, cease at the end of the year that includes the 31st anniversary of plan opening. Plans must close by the end of the year that includes the 35th anniversary of plan opening (40th anniversary for specified plans).
RESP Plan Types:
- Individual – an individual RESP has only one beneficiary. The beneficiary does not have to be related to the subscriber and can be any age when the plan is established (note though, the plan will not attract grants or bonds beyond age 17). Also, a subscriber can be the beneficiary of his/her own individual RESP.
- Family – a family RESP can have multiple beneficiaries. The beneficiaries must be related to the subscriber and under 21 when named. Should any beneficiary not pursue post-secondary education, the funds can be used by the other beneficiaries for school purposes. Siblings, children and grandchildren can be beneficiaries of a family plan. Nieces and nephews are specifically excluded as family plan beneficiaries.
To be eligible for an EAP, the RESP beneficiary must attend a qualifying educational program or be age 16 or older and attend a specified educational program. Each of these terms are described below:
- Qualifying educational program: an educational program at post-secondary school level, that lasts at least three consecutive weeks, and that requires a student to spend no less than 10 hours per week on courses or work in the program.
- Specified educational program is a program at post-secondary school level that lasts at least three consecutive weeks, and that requires a student to spend not less than 12 hours per-month on courses in the program.
A post-secondary educational institution includes all the following:
- a university, college, or other designated educational institution in Canada
- an educational institution in Canada that offers non-credit courses that develop or improve skills in an occupation
- a university outside Canada that has courses at the post-secondary school level at which a beneficiary was enrolled full-time in a course of not less than three consecutive weeks
- a university, college, or other educational institution outside Canada that has courses at the post-secondary school level at which a beneficiary was enrolled in a course of not less than 13 consecutive weeks
EAP maximums? If enrolled full-time, the maximum initial EAP beneficiaries can receive is $5,000. After completing 13 consecutive weeks in program, future EAPs are unlimited so long as the beneficiary continues in a qualifying program. Part-time students are eligible for $2,500 per 13-week enrolment period.
What expenses qualify? The promoter requires proof of program enrolment and a written request to withdraw funds. The promoter has discretion regarding what expenses qualify for EAP. Tuition and other education related expenses generally qualify.
What if the beneficiary doesn’t go to post-secondary school?
- Leave the plan intact – up to the end of the year of 35th anniversary of plan opening.
- Replace the beneficiary – depending on the contract terms, you may be able to name a different beneficiary on an individual plan. Family plans have multiple beneficiaries to maximize possibility of use for education.
- Close the RESP – contributions are returned tax free to the subscriber. Grants are returned to the government. RESP earnings – known as Accumulated Income Payments (AIPs) - are payable to Canadian resident subscribers on a taxable basis if the plan was open for at least 10 years and the beneficiaries are over age 21 and not studying post-secondary, OR the plan was open for 36 years.
An AIP is subject to both regular income tax, based on your table income for the year, plus additional tax of 20% (12% for residents of Quebec). Additional tax is due at the same time as regular income tax payable. You can reduce AIP exposure to tax up to a lifetime maximum of $50,000, if
- you are the original subscriber, or
- you acquired the former subscribers’ rights due to marriage breakdown or,
- you are the spouse of a deceased subscriber AND you meet the following conditions:
- You contribute the AIP to your registered retirement savings plan (RRSP) or a spousal RRSP, pooled registered pension plan (PRPP), or specified pension plan (SPP), in the year the AIP is received or in the first 60 days of the following year;
- RRSP deduction limit allows you to deduct the contribution in the year.
You cannot reduce the AIPs subject to tax if you became a successor subscriber under the plan after the death of the original subscriber. Promoters usually withhold both regular and additional tax on AIPs.
4. Transfer to your RRSP – generally up to $50,000 of AIP can be rolled to your RRSP if:
- The RESP was open for at least 10 years;
- All beneficiaries are at least 21 and not attending post-secondary school; and
- You are a Canadian resident subscriber with available RRSP contribution room.
Withholding tax is not required where the AIP transfers directly to your RRSP (or spousal RRSP), PRPP or SPP and you are able to deduct the contribution in the year it was made. Complete Form T1171, Tax Withholding Waiver on Accumulated Income Payments from RESPs, to request the promoter transfer the AIP directly to your RRSP without withholding tax.
5. Transfer RESP earnings to a Registered Disability Savings Plan (“RDSP”) - possible where the plans have a common beneficiary AND one of the following conditions are met:
- The RESP beneficiary’s disability will prevent pursuit of post- secondary education; or
- The RESP was open for at least 10 years and the beneficiary is at least 21 and not in post-secondary school; or
- The RESP was open for at least 35 years.
In addition to the requirements above, upon rollover, the beneficiary must be Canadian resident, under age 60 and eligible for the disability tax credit. The rollover cannot breach the $200,000 RDSP lifetime contribution limit. The RESP must be closed the year following the year of transfer. RESP contributions are returned to the subscriber. Grants are returned to the government.
What happens on death of plan subscriber? RESP funds remain the subscriber’s property until payments are made to the beneficiary. If you are a sole subscriber, the RESP forms part of your estate on your death. Absent specific provisions in your Will, the RESP falls to your estate residue for distribution according to your will. Plan value is subject to probate. Plan contributions are returned to the estate tax free; plan growth is taxable. Grants are returned to the government.
If your spouse is a joint RESP subscriber, the RESP passes to your surviving spouse subscriber outside your estate without tax consequence or probate. If you are a sole subscriber, you can specify in your will that your executor, trustee or another person acquire subscriber rights under the RESP or may continue plan contributions on behalf of the beneficiary. Designating a successor subscriber in your Will allows the RESP to continue after your death for your RESP beneficiaries. It alleviates tax consequences to your estate from plan discontinuation. Confirm whether your plan promotor allows successor subscribers and any limitations on whom may be designated.
Proceed to designate a successor subscriber with caution. He or she may withdraw from or collapse the plan for their own use. For certainty that the plan will remain available for your RESP beneficiaries after your death, establish a testamentary trust under your will to administer the RESP. Stipulate whether your estate makes a RESP contribution on your death or uses trust funds to continue making contributions. Be sure the trust terms in your will dictate what happens to residual plan funds not exhausted by EAPs.
Non-residency and RESPs? RESP tax sheltering applies only for Canadian residents. If the subscriber becomes non-resident, he or she may be taxed on plan growth. If the beneficiary becomes non-resident, the plan can remain intact, but neither contributions nor grants can be made to the plan. If the beneficiary re-establishes Canadian residency, plan contributions and granting may resume.
If likely the beneficiary will return to Canada, consider keeping the plan intact. If not, consider collapse. RESP funds can be used to attend either Canadian or foreign post-secondary institutions, subject to conditions. A beneficiary does not have to be Canadian resident to receive an EAP. However, grant room does not accumulate while the beneficiary is non-resident. Also, a non-resident beneficiary cannot receive the grant portion of an EAP.
RESPs are a long-term education savings tool. Navigating plan administration, choosing the right plan type and ensuring you maximize grants available to beneficiaries is complex. Choose a promotor with a plan contract and policies that are sufficiently flexible to meet your needs and align with your goals.
Appendix A: Provincial Education Funding Incentives: