RESPs: The Gift of Education

September 26, 2011

By Heather Compton

RESPs: A Lasting Legacy

What grandparent wouldn’t wish that all the gifts they gave their grandchildren would truly benefit them for a lifetime instead of just limping through this season and then collecting dust in some back closet? Wouldn’t it just add icing to the cake to know that for every dollar you gave to that grandchild the Government of Canada would add a minimum of twenty cents? Harrumph – “there’s no free lunch” you say? I beg to differ; there is a gift you can give that will last beyond your lifetime and it comes with a free lunch. The gift is an education and the free lunch is just part of the bargain of the Registered Education Savings Plan (RESP).

Registered Education Savings Plans (RESPs)

The RESP is a federal government tax-sheltered program designed to assist Canadian parents (and/or grandparents) to save for their (grand) children’s education after high school. Non-tax-deductible contributions may be made annually or as a lump sum to a total maximum value of $50,000 per beneficiary – but it’s best to make those contributions annually. Earnings on the funds invested are sheltered from tax until withdrawn and are paid out as an Educational Assistance Payment, taxable in the student’s hands at their lower or nil tax bracket. If you would happen to suddenly need the money back, the money you have put into the RESP will be returned to you tax-free, because you received no tax deduction on the contribution.  Some of the government grant money may need to be returned however and any earnings and grant money can only be paid out to the student.

Free Lunches

Best of all is the generous “free lunch” in the form of a 20% Canada Education Savings Grant (CESG) that provides a maximum $500 per year (maximum $7200 per beneficiary) until the beneficiary turns 17. That’s why you want to contribute annually, to maximize the grant dollars. There are additional “free lunch” funds available for low to middle income families and from some provinces. The amount of money your grandchild can receive in additional grants depends on the net income of their primary caregiver, normally their parent.

Earning the maximum annual grant would require a $2,500 contribution each year. Now I’m not assuming you have pockets deep enough to contribute $2500 every year for each grandchild! You can contribute small amounts – even $50 will attract $10 in grant funds.

You will want to coordinate with others making RESP contributions for that child so collectively you don’t go over the limits. You’ll also want to look into various RESP issuers so you will understand investment choices and any expenses to operate the plan.

Learning For the Whole Family

My mother gave a very special gift to each of her five grandchildren by contributing to their education costs through a family RESP account, naming all the grandchildren as beneficiaries. In the event one grandchild chose not to pursue an education the contributions and earnings (and under certain circumstances the CESG) could be directed to the benefit of another.

It is my plan to contribute to an RESP in my grandchildren’s early years when my adult children have more competing financial priorities than they have available funds, like RRSP contributions and mortgage payments. I’ll stop when I’ve reached the limit of the resources I’m prepared to commit and allow them to fund their own RESPs for their kids. I see only one barrier – as yet I have no grandchildren!

Canada Learning Bond

There is even more good news. Your grandchild can benefit from education money from the Government of Canada even if you or their parents don’t contribute to an RESP for them! Children born after December 31, 2003 into a family that receives the National Child Benefit Supplement as part of the Canada Child Tax Benefit (we called it the baby bonus in my day) can get $500 now and an extra $100 per year up to age 15 in Canada Learning Bonds to be used for education after high school.

Setting up an RESP for a Grandchild

All of these benefits are out there but first parents must apply for a Social Insurance Number (SIN) for their child and you and/or the parent must open an RESP account. Further details and the fine print on all these programs is available from Human Resources and Skills Development Canada at:

www.hrsdc.gc.ca/eng/learning/education_savings/public/resp.shtml

What better gift can a grandparent give?

About the Authors: Heather Compton has presented seminars on financial and retirement lifestyle issues for over 30 years. She retired as Vice President and Senior Investment Advisor with a major financial services company. Heather and husband Dennis Blas co-present retirement seminars for a variety of corporate clients and are the co-authors of Retirement Rocks! Canadian Boomers Invest in Life. You can find their book online or in independent bookstores. See more of their advice at Retirement Rocks.

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