RESPs: A Blog Post
If you are separating from your spouse or common-law partner, and have a joint or individual RESP for your child or children, we recommend you obtain legal advice from MDW Law to ensure your child’s secondary education fund is protected.
What is a Registered Education Savings Plan (RESP)?
A Registered Education Savings Plan (RESP) is a vehicle for loved ones to save for a child’s post-secondary education. It is a contract between a subscriber (mom, dad, other loved one or both mom and dad, for example) and a promoter (a person or organization, like your bank, for example), which allows for the tax-free accumulation of funds for post-secondary education. A RESP can be created for one child, or for a family if there are two or more children who might benefit in the future.
How does it differ from other savings plans?
A RESP differs from other savings plans and education savings plans in that it is registered with the Canada Revenue Agency using the beneficiary’s (the child’s) SIN. Through registration and application, moneys contributed to the RESP are reinforced by government grants.
When you register an education savings plan contract with the CRA, a lifetime limit is attached by the Income Tax Act on the amount that can be contributed for a beneficiary. RESPs have a life-time contribution limit of $50,000, although there is no yearly limit.
Once a beneficiary enrolls in an approved post-secondary pathway, the promotor pays the beneficiary Educational Assistance Payments (EAPs) from the contributions made to the RESP by the subscriber or other loved ones. EAPs can be used for tuition, books, housing, transportation, supplies and other related expenses.
Types of Grants
The types of grants available for application vary per province.
Canadian Education Savings Grant (CESG)
In Nova Scotia, we have the Canadian Education Savings Grant which is provided by Employment and Social Development Canada (ESDC) and is meant to provide incentive for parents, family and friends to save for a child’s post-secondary education. The grant is paid based on the amount that is contributed to the RESP, and is deposited directly into the child’s RESP upon application.
The ESDC pays a basic amount of 20% of total contributions for a qualifying beneficiary up to a total of $500 per year, and a lifetime limit of $7,200.
The ESDC will contribute an additional percentage of the contributions made for those beneficiaries whose family earns less than $89,401.
Canada Learning Bond (CLB)
ESDC provides an additional incentive of up to $2,000 to help lower income families save for their child’s post-secondary education. Like the CESG, the CLB is deposited directly into the child’s RESP. You are entitled to the CLB if your family is also entitled to the national child benefit supplement. The CLB will provide an initial $525 to open the RESP, and an additional $100 for each year the family is entitled to the national child benefit supplement (maximum of 15 years).
What happens if Junior chooses not to go the post-secondary route?
If your child chooses not to attend an approved post-secondary avenue, the subscriber can name a replacement beneficiary. If no replacement beneficiary can be named, or the subscriber chooses not to, the funds are returned to the subscriber, less the government contributions, but including any income that the saved money accumulated.
What happens to the RESP if my spouse and I separate or divorce?
An RESP is for the benefit of the child or children who are named as beneficiaries.
Under the Income Tax Act, a RESP is not required to be divided between the parties following a separation or divorce. If you and your former spouse entered into an RESP contract as joint subscribers while married, you can both remain as joint subscribers post-separation and divorce, and contribute independently.
If you and your spouse are now separated or divorced, you are not eligible to enter an RESP contract as joint subscribers, but you can individually create your own RESP for your child or children, and make contributions.
Grants are allocated based on a “first come, first served” principle. If a child is the beneficiary of more than one RESP, each qualifying contribution will be supplemented by the grant in order of contribution, until the maximum per year and or per lifetime is met.
It is important to note that although there is no yearly limit on the amount that can be contributed to an RESP, the lifetime contribution limit is a total across all plans and is monitored through the beneficiary’s SIN.
If you are separated and your ex-partner is the sole subscriber to your child’s RESP, be sure to talk with a lawyer at MDW Law to ensure that any joint contributions are properly accounted for in dividing your property. This can be particularly important should your child choose not to attend a post-secondary institution.
Contributions to RESPs are not deductible from the subscriber’s income; however, if the contributions are not paid to the beneficiary, subscribers do not have to include the contributions in their income when they are returned to them from the promoter. If the contributions are returned to the subscriber, he or she will be taxed on the income that the RESP accumulated and will be taxed at the regular income tax level, plus 20% (called Accumulated Income Payments or AIPs).
RESPs have a life-time contribution limit of $50,000. Once this contribution limit has been reached (not including any payments to the RESP under the Canadian Education Savings Act), any excess contributions are taxed. Each subscriber for that beneficiary that has exceeded the life-time limit is liable to pay a 1% per month tax on his or her share of the excess contribution until the excess contribution is withdrawn.
Any income that is accumulated is not taxed until the money is paid to the beneficiary.
A beneficiary must include any EAPs received from the promoter in their income for the year that they receive them, but because many students have little to no income, often the student can withdraw these funds tax-free.
If you are separating from your spouse and have concerns about your children’s RESP or other savings, contact us at MDW Law.