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	RESPs and Your Child's Education I live in Halifax, home to seven different post-secondary institutions. The one thing you'll notice about the city every fall is the HUGE influx of students, (this year estimated around 20,000). The question I always ask is "how do all these kids parents pay for them to go to school". Tuition at Dalhousie University this year is over $5,600 and that just gets you through the door. When you add in books and living expenses, especially for kids who've come from away, you're talking a minimum of $12,000 per school year. Per KID! It's with this in mind that my column focuses on the RESP program (currently in place through the federal government), and saving for your kids education. What's an RESP RESP stands for registered education savings plan, and has been around for over 30 years. The idea behind this plan is parents can invest money and the income on the money is tax sheltered, until the child takes it out for post secondary education. At that time it becomes taxable to the child, presumably at a lower tax rate then the folks. So when you factor in the tax credits for tuition and education; in all likelihood, the child won't pay any taxes on this money. In 1998 the government introduced the CESG - Canadian education savings grant, to the RESP plan. For every dollar that is contributed to an RESP plan during the year, for a child under age 18, the government will contribute an additional 20 cents, up to a maximum of $400 per year, per child. It's like a 20% return right off the top. Restrictions apply if the kids are 16 and 17. You must get a social insurance number for the child beneficiary, before you can get the CESG, regardless of how old they are. The Subscriber The RESP plan and its numerous rules have gone through a number of changes over the years, but every plan begins with a Subscriber. A subscriber sets up the RESP; it's usually one of the parents, but it can also be one of the grandparents. However for reasons that I'll explain later, that’s usually not a good idea. The subscriber and beneficiary DO NOT have to be related to set up an RESP. These plans are known as "non-family plans" and are set up for a single beneficiary. The related plans can be set up for a single child. For instance when the first child is born. Or it can be set up as a family plan when there is more than one child. Often it is set up as a single when the first child is born, and then converted to a family plan when the second, third, etc. child comes along. This is good idea since under the "family" plans, one sibling's share can be paid out to the other sibling, with no over-contribution penalties. So if one child doesn’t go onto a post secondardy institution, the other can use up that share. All beneficiaries must be named before any of the children turn 21, if the original plan is changed. No more contributions can be made to any plan once any of the beneficiaries turns 21. Other rules of the RESP: The income on all the contributions to an RESP is sheltered from tax for a maximum of 25 years, from the time the family plan is set up. or in the case of a single child plan, 25 years from the date that plan was set up. ALL the money has to be out of the plan by the end of the 25th year. If there is a large gap between your oldest child and your youngest, you should probably set up a separate plan for the younger one. The annual contribution limit for RESP's is $4000 per beneficiary. Total contributions to a family plan cannot exceed $42,000, over the life of the plan. Payments to beneficiaries are only allowed to FULL-TIME students at QUALIFYING post-secondary institutions. What qualifies as post-secondary is actually pretty flexible. Any private college or community college, or trade school, technical school, etc. is fine, and they don’t even have to be in Canada. Just a few years ago, it was Canadian University's, or nothing. Before 1998, all the income from an RESP was lost IF the beneficiary didn’t go to a post-secondary school. The subscriber just got back their principal. Now there are two of what I call "escape hatches" to allow you to use the income from the RESP plan. In order to be eligible for these escape hatches, the plan must be at least 10 years old AND none of the intended beneficiaries have attended a post secondary institution by the age of 21, (these conditions are waived if the child is mentally impaired). The two escape hatches are as follows: Up to $50,000 in RESP INCOME can be rolled over into the subscribers RRSP or a Spousal RRSP, IF they have the contribution space available to do so. It's for this reason that makes having the grandparent as the subscriber a bad idea. The subscriber would get an RRSP contribution for this income amount rolled over. The subscriber (and only the subscriber) can choose to use the income of the RESP for their own post-secondary education uses, ie. go back to school and get an MBA for example. The Worst Case If neither of these can be utilized, and the plan is in its 25th year, then the worst case scenario becomes a reality. All the compounded income that's accumulated in the RESP will be included in the subscriber's income for that year. There will also be a 20 per cent penalty charged, in addition to the regular income taxes that will result. As well all the CESG's and all of the accumulated income on them, has to be repaid to the federal government. It is this last scenario that makes me nervous about these plans. In addition there is no guarantee that the feds wont change the rules, down the road. What also worries me is that the popularity of these plans increased after the government introduced the CESG in 1998. And I'm not sure these same people know all the rules. They may end up learning an expensive lesson in the future.
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