09 Oct A Hidden Gem: Part Two on RESPs
Grant T. Smith
Last month we spoke about RESPs and the response to my article was astounding! A number of people wrote to thank me for bringing up the topic and several actually opened RESP accounts based on the article. One very thoughtful reader actually sent me a copy of the statement for their newly minted RESP. That support is incredibly cool – THANKS for the notes and responses.
There were some follow-up questions as people indicated a desire to hear a bit more. Here are a few we will tackle today:
- What is the nature of the various plans available?
- What happens if my child does not go to further education?
- Can we plan how to withdraw the funds when post secondary school begins?
All plans are entered into by the subscriber and the promoter. The subscriber is the person, or persons, who decide to save money for someone’s education. The promoter is the institution or bank that runs the plan.
- An individual plan establishes a separate trust. So for example, Mom establishes a plan for daughter. We are not as interested in this type of plan as it is quite restrictive, I would generally suggest a less restrictive option.
- A non-family plan has only one beneficiary and the subscriber could be their own beneficiary. Again this is generally more restrictive than desired.
- A family plan allows for one or more beneficiaries who are related to the subscribers by blood or adoption.
- A group plan is a collection of individual, non-family plans that are administered on the basis of age determined groups.
For our purposes we are interested primarily in family plans as they allow multiple subscribers, as long as the family relationship exists. Each plan is quite specific and it is important to speak with your promoter (or financial institution) about the nature of your specific plan.
What if my child does not go to school?
This is not as big of a problem as you might think. If you have a family plan, amounts can be transferred from a child who does not attend school to a child who does go to school – up to the prescribed limits.
- The contributions made can be returned to the subscriber. As they were not tax deferred, there is no taxable transaction in the refunding.
- Grants and incentives received into the RESP would be returned to the government coffers if they are not yet paid out (more on this to follow).
- Accumulated income (the money that has been earned on the money invested) would be paid out to the contributor and taxed in her/his hands and is subject to an additional tax. This is a bad thing, but really not the worst as the tax is on the earned income – money you did not expect to see in your hands.
Planning the withdrawals
Here is an interesting part of the discussion. The promotors pay out three main types of income:
- Refunds of contributions
- Educational assistance payments (EAP)
- Accumulated income payments (AIP)
These amounts can be dictated and planned. This simply means that when your child first goes to school you should plan with the bank to pay out EAPs first (to use up the governments contributions), then AIPs (to have it income taxed in the student’s hands) and lastly contributions, as they will never create a negative tax contribution.
Lastly, and perhaps most important, is that this discussion is general in nature and does give anyone a complete understanding of all the considerations. It does not make you an expert and does not mean the planner at your bank knows even as much as you. If you have concerns and want detailed support in planning for your child’s education, reach out to someone you trust. (Who knows, maybe your CPA!)