Registered Education Savings Plan

A Registered Education Savings Plan, or RESP, is a savings account used by parents to save for their children's post-secondary education in Canada. The principal advantages of RESPs are the access to the Canada Education Savings Grant (CESG) and a source of tax-deferred income.

Tax Benefits

An RESP is a tax shelter, designed to benefit post-secondary students. With an RESP, contributions (comprising the investment's principal) are, or have already been, taxed at the contributor's tax rate, while the interest (and CESG) is taxed on withdrawal at the recipient's tax rate. An RESP recipient is typically a post-secondary student; these individuals generally pay little or no federal income tax, owing to tuition and education tax credits. Thus, with the tax-free principal contribution available for withdrawal, CESG, and nearly-tax-free interest, the student will have a good source of income to fund their post-secondary education.

McTeague private member bill

Liberal MP Dan McTeague tabled a Private Member's Bill that proposed to give parents substantial tax breaks for saving education money; taxpayers who deposited $5,000 into a RESP for their children's post-secondary education would earn a $5,000 tax deduction, similar to the deduction allowed for contributions to a RRSP. Under the Tax-Free Savings Account, introduced in Conservative Finance Minister Jim Flaherty's 2008 budget, there was no deduction for annual contributions. [cite web
url=http://www.thestar.com/comment/article/326697#
title=McTeague's manoeuvre
publisher=The Toronto Star
accessdate=2008-03-10
last=
first=
]

Though McTeague's bill passed through the Canadian House of Commons on March 5, 2008, after Speaker of the House, Liberal Peter Milliken, approved the bill for debate, it is constitutionally decreed that any money measure that does not have "royal recommendation", that is, if it doesn't originate from the Crown, is to be considered unlawful. [ [http://laws.justice.gc.ca/en/const/c1867_e.html#legislative Constitution Act, 1867; IV.54] ] [http://www.theglobeandmail.com/servlet/story/LAC.20080319.REYNOLDS19/TPStory/Business/columnists Reynolds, Neil; "The Globe and Mail": MP's ruse defeated; God save the Queen; March 19, 2008] ] So, any private member's money bill must be regarded as a Motion of Confidence. [Corry, J. A. and Hodgetts, J. E.; "Democratic Government and Politics"; University of Toronto Press; Toronto, 1968] Flaherty served notice to the House of Commons on March 11 that he would introduce a motion to nullify the bill by including a provision to do so in legislation implementing the federal budget, [cite web
url=http://canadianpress.google.com/article/ALeqM5i8MzgDGJrTcpe7JpCF_-ALw9RwJQ
title=Flaherty serves notice of motion to kill Liberal RESP bill
publisher=The Canadian Press
accessdate=2008-03-13
last=
first=
] which is automatically a confidence motion. The RESP bill was the first time since 1840 that the Commons had attempted to force a change to the government's budget.

Canada Education Savings Grant

The Canada Education Savings Grant (CESG) is provided to complement RESP contributions, wherein the government of Canada contributes 20% of the first $2,000 in annual contributions made to an RESP. After changes introduced in the 2007 Canadian federal budget, the government may contribute up to $500 per year to a participating RESP. This income is available upon withdrawal from the RESP by a post-secondary recipient, with a maximum lifetime contribution of $50,000. Any contributions over this amount are subject to taxation.

The government grants introduced in 2005, entitled "Additional CESG", allowed an additional 10% or 20% for a total of an extra 30 or 40 cents on each dollar of the first $500 contributed to an RESP, depending on the family income of the beneficiary's primary caregiver. An application is made through the promoter of the RESP, which is often a bank or group RESP provider.

The government of Canada also provides a Canada Learning Bond (CLB) to encourage low-income families to contribute to an RESP. Families with children born on or after January 1, 2004, and who receive the National Child Benefit, will receive an additional $500 CLB when they open an RESP and $100 for each year they remain eligible.

Early withdrawals

Any contributed to the RESP can be withdrawn at any time by its contributor. In this case, any eligible CESG payments on those contributions must be repaid to the Government. If the student elects to not attend a post-secondary institution, any accumulated interest may be withdrawn by the contributor; this interest is taxed as income unless it is rolled into a registered retirement savings plan (RRSP), subject to individual contribution limits and applicable rules.

Since RRSP contributions are not subject to taxes, the income tax is deferred until retirement.Provisions are available for early withdrawal without penalty should the recipient not be eligible for post-secondary education due to circumstances beyond their control.

Group plans

In group RESPs (otherwise known as Group Scholarship RESPs), individual contributions are pooled with those of other contributors. In a pooled group plan, the interest that is left behind from cancelled RESPs gets paid out with the matured plans. This excess "interest" is also called attrition or tontine. Group Scholarship Plans also have the advantage of being not-for-profit, and any profits made by the organization generally gets paid out with the maturing plans as well. As a result of a group plan's structure, they can be invested in very safe, modest investments and still yield above average returns. Up to this point Group RESP companies have operated without charging their clients a Management Expense Ratio, or MER. The bulk of their management fees are disclosed as a front-end load Enrolment or Membership Fee. A significant portion of an investor's contributions, up to the first 2.5 years, goes toward paying the Enrolment or Membership Fees. Most pooled RESPs offer a refund of an equivalent amount of the Enrolment or Membership Fees after their plans mature.

References

External links

* [http://www.cra-arc.gc.ca/E/pub/tg/rc4092/README.html Canada Revenue Agency]
* [http://www.hrsdc.gc.ca/en/learning/education_savings/index.shtml HRSDC- Canada Education Savings Program]
* [http://www.fcac.gc.ca/eng/default.asp Financial Consumer Agency of Canada]
* [http://www.investored.ca/en/investoranswers/Pages/topic-resp.aspx Investor Education Fund - RESPs]
* [http://www.hrsdc.gc.ca/en/learning/education_savings/public/clb.shtml HRSDC - Canada Learning Bond]
* [http://www.resp-canada.ca RESP Information]


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