What are Registered Education Savings Plans (RESPs)? Continuing on our “registered plans” in Canada series, we expand on registered education savings plans (RESPs) in this issue.
An RESP is a registered account, introduced by the federal government in 1974, and applied retroactively in 1972 for applicable trusts. It is a flexible investment account with contribution limits that allows an individual to earn tax-deferred investment income and capital gains in the account.
RESPs may also be eligible for government funding through the Canada Education Savings Grant (CESG), Canada Learning Bond (CLB), Alberta Centennial Education Savings Plan Grant (ACESPG), Quebec Education Savings Initiative (QESI) and/or the British Columbia Training and Education Savings Grant (BCTESG).
There are three parties to an RESP; a subscriber (owner), a promoter (plan provider) and a beneficiary. There can be multiple subscribers, promoters and beneficiaries.
Contributions to an RESP are not tax-deductible. There are no annual contribution limits. However, the lifetime contribution limit for total RESP contributions for a single beneficiary is $50,000. Government funding is not included as part of this limit.
We have Jack Quinn and the Tax Review Board in 1972 to thank for having RESPs today. Jack had some funds placed into a trust for his son’s education and sought to exclude $110 from his taxable income for which the government took him to court. RESPs since then have become considerably more generous with increased contribution limits, greater flexibility, the ability to transfer RESP proceeds into an RRSP, the introduction of the CESG, the CLB and the expansion of the CESG for low-income families.
RESPs allow families to save $2,500 per year, per child, get $500 or more from government funding and be able to invest those funds in virtually any type of investment. From an investment standpoint, you will make 20% on your initial contribution and enjoy tax-deferred growth – an awesome starting point.
I encourage families to open RESPs with promoters (plan providers) that will allow them complete investment and portfolio freedom. Many RESP promoters will lock them into a long-term contract or a fixed investment pool; these plans are often referred to as group savings plans. As families and your children grow, your investment approach and portfolio may change. Additionally, some families may look to RESPs as a starting point for introducing their children to investing.
Please watch for further FAQs on RDSPs, and our segue to savings plans in the United States.
If you have questions about Canadian registered plans or want to know if any of these plans are appropriate for your needs, please contact us at 604-888-4200 or Johannes Weinmar, Financial Advisor with Raymond James at johannes [dot] weinmar [at] raymondjames [dot] ca.