RESPs are an agreement between you, the “subscriber,” and a person or organization, the “promoter.” The subscriber names one or more individual(s) as the plan “beneficiary” who will benefit from the income earned in the RESP. In most cases the beneficiary will be your child or grandchild. RESPs are offered by various companies that act as “promoters.” These companies are typically financial institutions or mutual fund companies and must be registered with the government. 

Under the terms of the plan, you make contributions for your beneficiary over a period of years and the promoter manages the investment contributions and the accumulated income earned on the contributions. If the RESP qualifies for the Canada Education Savings Grant (CESG), the promoter will invest the money from these deposits, as well.  The promoter agrees to pay educational assistance payments (EAP) to the beneficiary when he or she pursues a post-secondary education. They must include the EAP on their income tax for the year in which they receive them. However, they do not have to include the contributions they receive in their income.

RESP contracts are registered with The Canada Revenue Agency and lifetime limits are set by the Income Tax Act.  The subscriber generally makes contributions to the RESP. They cannot deduct their contributions from their income on their tax return. 

RESPs are not tax deductible, but earnings on RESP investments accumulate without tax. This helps your savings grow much faster. Your beneficiary will be taxed when he or she receives the Education Assistance Payment. Since your child will be a student with little or no income, they are likely to be taxed at a much lower rate than you would have been.

The government provides financial incentives for RESP savings in the form of The Canada Education Savings Grant and/or the Canada Learning Bond. More information on these and other incentives are included below.

RESPs can be broken into three types: family, individual or group plans. Your RESP provider can explain these in detail and help you choose the one that is best suited to your needs.

This is a general overview:

Family Plan – With a family plan, you can name one or more children as beneficiaries of the RESP. The children must be related to you. They may be your children — including adopted children — grandchildren, brothers or sisters.

Individual Plan – This is a plan for one person. They do not need to be related to you for you to contribute. There is no age limit for RESPs, so you can set these up for yourself or for another adult. However, the education incentives are available only to children 17 and younger.

Each year when you make RESP contributions to the family or individual plan, the funds are deposited on behalf of the beneficiary. As investment income is earned it is also deposited into the RESP account. When your child enters post-secondary education the accumulated income is paid out as an EAP. The amount of income available is based on the performance of the investments you select.

Group Plan – Group plans are also sometimes referred to as pooled plans or scholarship plans. They combine your savings with those of other people. The amount of money each child gets is based on how much money is in the group account. It is also determined by the total number of students of the same age who are in school that year. You can name only one child in a group plan. The child does not have to be related to you. 

With a group plan, you make regular contributions that are deposited for the benefit of your child, along with the accumulated investment income. For a group plan, the amount and frequency of contributions stay the same as long as the beneficiary has not turned 18. The main difference between a group plan and an individual plan is how each calculates the amount of accumulated income available to the student when he or she goes to college or university. In a group plan, when each plan matures, contributions are returned to the subscribers and the total investment earnings of the plan are transferred to an account for all of the plans that matured in the year. Each year of post-secondary education covered by the plan is given an equal part of the funds transferred from the matured plans, and these equal parts are divided among the beneficiaries who qualify to receive EAPs in each of their post-secondary years of education.

Usually, group plan dealers must put the money submitted into low-risk investments. Generally, you have to sign a contract agreeing to make regular payments into the plan over a certain time period.

Make sure to ask your group plan dealer what happens to your money if the child does not continue with education right after high school, or if the child decides to participate in part-time education. Group plans are offered and administered by group plan dealers and each plan has its own rules. Be sure to read these rules carefully and shop around to find the plan that suits you best.

 Sources:

• http://www.canlearn.ca/eng/saving/resp/brochure/resp.shtml
• http://www.bdo.ca/library/publications/tax/taxbulletins/082004.cfm
• http://www.cra-arc.gc.ca/E/pub/tg/rc4092/rc4092-e.html