We all have dreams, be it a candle light dinner with our beloved one, the necessity of travelling across the world, or a wish to establish our own firm. How do we think of fulfilling our dreams? Obviously, by planning. Planning is an essential ingredient in the recipe of dreams. We all grow up, get educated, get settled, and have kids. In this hectic lifestyle of ours, we hardly have enough time to ponder upon our future. Gradually, when our kids grow up, we feel the need to plan their future. We all want our children to excel in the field they want to. But to be honest, it is not feasible in every case, the reason being lack of planning.
In the present scenario, the number of people showing inclination towards paying the education fee of their children accounts to about 83% of the Canadian population (as surveyed by the Bank of Montreal), but willingness and affordability are two different things. A survey has shown that Canadians leave school with an average debt of $27,000, and according to a report by the BMO, “Currently, a four-year university degree can be expected to cost upwards of $60,000, and that sum could rise to more than $140,000 for a child born this year”. In adversities like these, the RESP (Registered Education Savings Plan) comes to the rescue.
As the name suggests, RESP is an educational plan which enables people to save money for the post-secondary education of their child. It came into existence after the establishment of the Income Tax Act in 1972.
Before understanding the working of an RESP, let’s take a look at some most commonly used terms related to RESP:
Subscriber: The one who invests money in a RESP.
Contribution: The investment made by the subscriber. A contribution is always non-tax deductible.
Beneficiary: One for whom the money is invested.
Promoter: The organizations and companies who run RESPs are called Promoters.
EAP (Educational Assistance Payments): The contribution is used by the promoters to raise income which is paid back to the beneficiary after its enrollment at an educational institution under a qualifying educational program is known as an EAP. It is tax-deductible.
The subscriber in an RESP has to invest the money in the form of contributions. Earlier, the contributions had to be made annually which was limited to $4,000 per year, and the lifetime limit on the investment over each beneficiary was $42,000 per year. The scenario changed in 2006, when it became easier for the subscribers to invest money in a comfortable way as the limitations on annual investments were lifted and the lifetime investment over each beneficiary was raised to $50,000 per year. The contribution along with the EAP is paid back to the beneficiary. EAPs have no tax impact on the subscribers. In case any money is left in an RESP after the completion of the course, the money can still be withdrawn, but the students would then have to pay taxes on that money, and the subscriber would have to pay an additional penalty tax of 20% of the investment income.
The RESP rules are maintained by the Canada Revenue Agency and the administration of education saving incentives and the verification of beneficiary eligibility is done by the ESDC (Employment and Social Development Canada).
RESPs can not only be taken for the people in our family, it can be taken up for any person. In fact, there are 3 categories of an RESP:
An individual RESP is taken up for an individual. That individual can be the subscriber itself. An individual can be named a ‘beneficiary’ after crossing 21 years of age.
While applying for a family RESP, the first thing to be kept in the mind is that the beneficiary in a family RESP must have a blood relationship with the subscriber.
Group RESPs are generally funded by a group of people who are willing to provide a financial aid to any individual.
This is how the RESPs can be helpful for us in securing the bright future of our little children. It can bring a sense of assurity and comfort to the students who have to toil hard for a secure future, and that is the reason we should start investing for our children’s future from today.