Mike of Four Pillars blog commented that the RESP information on the Government of Canada website that I referred to in yesterday’s post has not been updated with RESP changes introduced in the 2007 Federal Budget. As the RESP rules are confusing and widely misinterpreted at the best of times, I hope to provide comprehensive information in this post. You can also refer to Mike’s recent post for examples.
Unlike RRSPs, contributions to a RESP are not tax deductible. You can contribute a maximum of $50,000. The investment returns within a RESP are not taxed until money in withdrawn from the plan. There is no annual contribution limit. You can contribute the entire $50,000 lifetime maximum in one year, though the matching Canada Education Savings Grant (CESG) has an annual limit.
Canada Education Savings Grant (CESG)
- The Government of Canada matches 20% of your contributions by paying the CES grant directly into your RESP account, irrespective of your household income. In prior years, the maximum CESG was $400 per child for every annual contribution. In the 2007 federal budget, the limit was increased to $500 for 2007 and later years.
- Unused grants accumulate and will be paid for future contributions. Prior to 2007, the maximum CESG per year was $800, provided you have unused grants. In 2007 and later years, the maximum CESG per year is $1,000.
- The lifetime maximum CES grant that a child can receive is $7,200.
- Lower income families are eligible to receive slightly higher CESG and may also be eligible for the Canada Learning Bond.
You can start withdrawing from a RESP when your child starts full or part-time studies in a qualifying education program. Since contributions made to the RESP plan were taxed already, they are not taxed on withdrawal. Grants paid by the Government into the plan and the growth of the funds within the plan is taxed at the hands of the beneficiary. Special rules apply when a child does not attend post-secondary education.
While an individual RESP account can be set up by anyone, only a family member can set up and contribute to a family RESP. The family plan is identical to individual plans except that more than one child can be the beneficiary of the plan. There is some confusion on how family RESP plans are set up (see the comments section in yesterday’s post).
Group plans or pooled RESPs are available from a number of vendors. In my opinion, a self-directed RESP is vastly superior and flexible compared to these plans.