Bick Financial Security Corporation

Registered Education Savings Plan (RESPs)

A Registered Education Savings Plan (RESP) is an effective way to maximize the money available to your children when they enroll in a full-time, post-secondary program. Your contributions are not tax-deductible. However, money inside the plan will grow tax-free until it's withdrawn by your children.

RESPs are a great way to save for your children's education and to realize the following benefits:

Investments compound tax-free as long as they remain in your RESP
You choose your holdings from a wide range of options
Withdrawals are taxed in the hands of the student
The Canada Education Savings Grant (CESG) contributes up to $500 annually

RESP money can be used to cover the student’s tuition, housing, transportation, books, supplies and other incidentals related to the student’s education.

Procedure for Opening a RESP Account

To open an RESP account, you must prepare the following:

Name, address, birth date and SIN number of subscriber(s)
Name(s), birth date(s) and copy of the SIN card(s) for beneficiary/ies
Completed Order for Investment (OFI) form, fund company application and grant application
Leveraging Disclosure document signed by subscriber(s)

Making a Redemption from an RESP

The following information is required to make a redemption from an RESP:

Completed Bick Financial redemption form – prepared by Advisor and signed by account holder(s)
Completed Fund Company redemption form – prepared by Advisor and signed by account holder(s)
Proof of enrollment/verification of attendance

If the Beneficiary of an RESP does Not go on to Post-Secondary Education

If the beneficiary of the RESP does not go on to post-secondary education, the subscriber has 3 options:

1. Name a New Beneficiary

The new beneficiary is 17 or under, has RESP contribution and CESG room available. In an individual plan, the beneficiary can be anyone at all, whether related to the subscriber or not. In fact, in an individual RRSP the beneficiary can even be the subscriber themselves. Since there are no age restrictions on this type of plan, a subscriber who thinks he or she may return to school may want to set up an RESP naming himself or herself as the sole beneficiary. In a family plan, beneficiaries must be related to the subscriber by blood or adoption and cannot be the subscriber themselves. In family plans, contributions can only be made for beneficiaries under age 21. Under both individual and family plans, the subscriber can change beneficiaries at any time.

2. Transfer RESP to Subscriber's RRSP¹

The RESP amount may be transferred to the subscriber's RRSP. In this case, the CESG must be paid back to the government while the principle, the growth on the principle and the growth on the grant can be transferred to the subscriber's RRSP. The subscriber then receives a corresponding income tax deduction, as follows: the principle is withdrawn tax free, the growth on the principle and the growth on the grant is added to taxable income in the year it was contributed to the RRSP (however, the RRSP tax-deduction will more than offset the inclusion as income of the growth on the RESP and CESG).

3. Withdraw the Money in the RESP¹

In this case, the principle, the growth on the principle and the growth on the grant is withdrawn as cash. The principle can be withdrawn tax-free and the CESG amount must be repaid to the government. The two growth amounts will have to be claimed as income by the subscriber and these amounts are subject to additional income tax over and above normal tax rates. If the RESP has more than one subscriber, each of them must include an equal portion of the growth amount as income when they file for that tax year.

3. Transferring a RESP

In order to provide seamless transfer of RESP property between accounts, Human Resources Social Development Canada (HRSDC) has worked with members of the financial services industry to introduce a transfer form, which defines the industry standard information required to transfer RESP property. This form was designed to assist promoters and trustees in the exchange of information in order to retain the Canada Education Savings Grant (CESG) in the account, and serves as a record of the transaction. Use of this HRSDC form is now mandatory. This form must be submitted each time a transfer of property from one RESP promoter to another occurs.

Important Definitions

Accumulated Income Payment (AIP):

Payment to a subscriber from the income earned on money the subscriber has contributed to an RESP. As well, it also includes income earned on funds in the RESP from the CESG or the Canada Learning Bond (CLB). The income payment is taxed to the subscriber.

Additional Canadian Education Savings Grant (CESG):

Additional CESG is a supplement to the basic CESG amount. The additional amount is based on the net family income of the child's primary caregiver. The primary caregiver is the person who receives the Canada Child Tax Benefit for the child. The family income is reported on the primary caregiver's Canada Child Tax Benefit statement provided by Canada Revenue Agency (CRA) each July. The additional CESG amount can change over time as the net family income changes.

Back Tracking:

Effective January 2008, a three-year rule will govern the grant incentive programs; the RESP subscriber will be required to apply for the grant amounts within three years from each transaction date, otherwise, the grant incentive(s) will be forfeited. This includes the CESG and CLB. The grant authorization for any purchases made on or before December 31, 2004 must be submitted by December 31, 2007.

Basic Canadian Education Savings Grant (CESG):

To promote education savings, the federal government introduced the basic CESG in 1998. The Basic CESG is 20% of the annual contributions made to an RESP, to a maximum of $500 per calendar year per beneficiary. In order to be eligible for the basic CESG, the beneficiary must be a Canadian resident at the time of the contribution and the contributions are made before the calendar year the beneficiary turns 18 years old. In addition, certain conditions must be met for the beneficiary to receive the basic CESG in the calendar year the beneficiary turns 16 and/or 17 years old.

Beneficiary:

The beneficiary of an RESP is usually a child, but can be any person named by the subscriber of an RESP to receive money for education after high school from the RESP in the form of Educational Assistance Payments (EAPs).

Canada Learning Bond (CLB):

A special bond paid to RESPs for children born after 2004 and whose families may not normally be able to save for their children’s post-secondary educations. RESP contributions are not required to receive the CLB.

Carry Forward:

If you contributed less than $2,000 (for 2006 and previous years) and/or less than $2,500 (for 2007 and future years), you may make contributions up to a maximum of $5,000/year/child to use up unused allowable contributions and receive up to a maximum $1,000 of basic grant per year. The beneficiary must be eligible to receive the CESG for that calendar year in order to be eligible for the carry forward room. The additional CESG, however, does not carry forward if contributions were not made in a previous eligible year. The combined lifetime limit for the basic and Additional CESG is $7,200 per beneficiary.

Contribution Limits:

The subscriber and beneficiary must be residents of Canada to set up an RESP and must reside in Canada when making the RESP contribution in order to qualify for CESG. The $4,000 maximum annual RESP contribution limit was eliminated in 2007. The maximum lifetime RESP contribution limit will be increased from $42,000 to $50,000. A RESP contribution of up to $50,000 can be made on a child's date of birth or later. RESP contributions can catch up on CESG for a maximum of 3 years back, but RESP contributions over and above CESG eligibility limits will never attract CESG in the future. The maximum annual RESP contribution qualifying for the 20% Canada Education Savings Grant (CESG) will be increased from $2,000 to $2,500, matching the increased maximum CESG per beneficiary for 2007 and subsequent years from $400 to $500.

Educational Assistance Payments (EAP):

Payments of growth and grant made from an RESP are taxable to the beneficiary. EAPs are now available for part time as well as full time studies.

Family Plan:

One or more children can be beneficiaries under a Family Plan; however the children must be related to the subscriber by blood or adoption. Children, grandchildren, brothers and sisters are considered blood relatives, while nieces and nephews are not. Beneficiaries under a Family Plan can be added or replaced at any time and the family plan can be converted to an individual plan. CESG money paid into an RESP may be shared among all beneficiaries under the plan to maximum of $7,200 per beneficiary and the subscriber can choose how much is to be allocated to each beneficiary. However, Family Plans must close after 25 years, regardless of the age of the youngest beneficiary.

Human Resources and Social Development Canada (HRSDC):

The branch of the federal government of Canada that is responsible for monitoring and paying the government grants.

Individual Plan:

Individual plans have only one beneficiary and the plan subscriber is not required to have a blood or adoption relationship with the beneficiary. Subscriber may designate anyone as the beneficiary of the plan, including themselves, a spouse or a common-law partner. There is no age restriction and contributions can be made up to 21 years after the plan is set up. If beneficiary does not attend a post-secondary institution and no other beneficiary has been named, the CESG must be repaid in full.

Subscriber:

The individual who enters into a RESP contract with a Promoter (trustee), and names one or more beneficiaries for whom he or she will make contributions

¹The plan must be open for 10 years, the beneficiaries are/beneficiary is not using the RESP for post secondary education, the youngest is 21 or older and the subscriber is a resident of Canada.