RESPs benefit from ongoing enhancements

The political wrangling over the issue of tax deductibility largely overshadowed an important change that occurred around the same time -- the ability to contribute to and keep RESPs open considerably longer.

Wider options and greater flexibility

Previously, contributions could be made to an individual plan for 21 years after the plan was opened, and the plan had to be wound up by Dec. 31 of the 25th year following the year the plan is set up. With the 2008 federal budget, the contribution period has increased to 31 years and the deadline by which a plan must be terminated has been extended to 35 years.

This longer lifespan may be especially beneficial for parents who set up a family RESP with multiple beneficiaries and significant age discrepancies between children. The longer time to maturity means it's less likely that an RESP will have to be terminated before the youngest beneficiary is ready to attend post-secondary school.

As well, an extended age limit means children will have more time to decide about pursuing higher learning, increasing the chances that beneficiaries will put their RESP funds to the intended use.

The 10-year extension follows last year's relaxation of rules governing which programs of study qualify for use of RESP funds. The 2007 federal budget opened up the range of programs for which Education Assistance Payments (EAPs, the technical name for payments from an RESP to the beneficiary in order to finance his or her post-secondary education costs) may be made.

In addition to qualifying full-time education programs, programs that now qualify may be as short as three months in duration and require the student to spend as little as 12 hours per month on courses. Maximum EAP payments are $2,500 for each 13-week semester of part-time study, and $5,000 in the first 13 weeks for full-time study.

Contribution limits and CESG amounts

Unchanged this time around was the lifetime plan contribution limit, which was increased from $42,000 to $50,000 in the 2007 federal budget.

The 2007 budget also raised the maximum annual RESP contribution that qualifies for the basic Canada Education Savings Grant (CESG), from $2,000 to its current level of $2,500, and eliminated the limit on annual contributions.

Introduced in 1998, the current CESG represents a top-up of 20% of annual contributions. That could amount to as much as $500 additional money annually -- 20% of $2,500 since 2007 -- for each child to age 18. (The maximum annual CESG for each calendar year from 1998 to 2006 was $400, or 20% of $2,000.) Any unused CESG contribution room is carried forward, along with the annual RESP contribution room, for use in future years. The maximum grant in one year is $1,000.

The maximum lifetime basic CESG amount is $7,200. The annual grant limit may be claimed retroactively, with unused amounts carried forward and available for use in future years until the end of the year in which the child turns 17, even if the child is not a beneficiary of an RESP. Note that the maximum lifetime amount for the basic CESG remains at $7,200 even if a child is the beneficiary of more than one RESP. The government tallies multiple RESPs for the same beneficiary and also maintains records of CESG payments.

More funds for modest-income families

Recognizing that household income is an important determinant of families' education savings strategies, the federal government provides additions to the CESG for lower-income families. For families with net incomes of $37,885 or less, the first $500 of an annual RESP contribution generates an additional grant of 20%, or $100. For families with income between $37,885 and $75,769, the additional grant is 10%, or $50, on the first $500 annual contribution. Unlike the basic CESG, these additional grants will not be added to grant room available for future years. (Income levels are for 2008.)

Further, children born to families earning $35,000 or less and who qualify for the National Child Benefit are entitled to receive an initial $500 Canada Learning Bond (CLB), as well as additional $100 CLB instalments in subsequent years.

Provincial programs boost grants

Quebec and Alberta residents have even more motivation to plan for their children's future education costs since those provincial governments augment the basic CESG with their own financial incentives to save for education.

The Quebec grant offers up to $250 a year, with an additional $50 for middle-income and low-income earning families. The maximum lifetime Quebec Education Savings Grant is $3,600, half the maximum for its federally funded CESG counterpart.

Alberta residents with a child born or adopted in 2005 or later are eligible for the one-time $500 Alberta Centennial Education Savings (ACES) Grant. The child must be an RESP beneficiary and an application for the grant must be received by the time the child turns six years old. Additionally, grants of $100 are available for children at ages 8, 11 and 14. To qualify the child must be the beneficiary of an RESP with at least $100 invested within one year before application.

While plan providers will apply for the financial incentives on behalf of the subscriber, plan holders should be aware that the government has tweaked the rules for these companies, who must now make timely applications on behalf of their clients. As of Jan. 1, 2008, plan providers have up to three years after the contribution is made to request the CESG, the CLB and the Alberta Grant on behalf of subscribers.

Withdrawals for non-educational purposes

Even with these improvements, there is no guarantee the money accumulated in an RESP will be put to its intended use. While a subscriber may take out contributions from an RESP at any time with no tax implications -- after all, contributions were made in after-tax dollars -- such withdrawals, which are known as a refund of contributions, require that any applicable CESG be repaid to the government.

Aside from the reimbursement of the grants, there are other important considerations for a subscriber when withdrawals from an RESP are not used to pursue a post-secondary educational program. The portion of the withdrawal that represents investment earnings is subject to income tax in the year of withdrawal. The income withdrawal will be taxed at your regular tax rate, and then some. Added to the regular tax payable is a 20% penalty amount. For example, if your regular tax rate resulted in $1,000 in tax payable on a withdrawal of income earned inside an RESP, the 20% tax penalty would bring the total tax bill to $1,200.

There are two relatively simple ways to avoid these tax consequences. First, some plans allow subscribers to name a new beneficiary or beneficiaries by transferring the funds to another RESP should the beneficiaries of the original plan choose not to pursue post-secondary education. Second, a plan subscriber may transfer up to $50,000 from the RESP to his or her RRSP, or to a spousal RRSP, without tax consequences, provided there is sufficient RRSP contribution room.

Calculating CESG: Annual maximum amounts per beneficiary

RESP contribution limit
	1998 to 2006		$4,000
	2007 or later		No annual limit
Basic CESG
	1998 to 2006		Annual amount added to grant room		$400
			Basic CESG annual limit		$800
	2007 or later		Annual amount added to grant room		$500
			Basic CESG annual limit		$1,000
Additional CESG
	2005 or later		Yearly maximum Additional CESG (10% or 20% on the first $500 of contributions		$50 or $100
Total CESG (Basic + Additional)
	2005 to 2006		Yearly maximum payable with carry forward		$900
	2007 or later		Yearly maximum payable with carry forward		$1,100
Source: Human Resources and Social Development Canada