Do you plan to invest for your child's post-secondary education? Do you plan on saving for your children's or your grandchildren's education? Do you like the disciplined approach to savings that a Regular Investment Plan offers? Do you have an informal trust investment or savings account for your child? Do you want to take advantage of the Canada Education Savings Grant (CESG) and tax-deferred growth?

You want to save for your Child's post-secondary education, but you have bills to pay. Tuition fees are on the rise. You know that your child's education will cost significantly more by the time they are ready for a higher education. Financial institutions understand this and they can help with advice on how to plan and save.

Invest for your kids

Saving for your child's education just got easier. Start saving today, while your kids are young, with a Registered Education Savings Plan (RESP). An RESP is one of the best gifts you can give your child. They may not understand today, but they'll thank you tomorrow. An RESP is a tax-deferred investment plan to help you save for your child's post secondary education. Thanks to new legislation, your contributions can be supplemented by the federal government's CESG.

The Key Benefits of an RESP per child are as follows:

1. The RESP will receive an additional 20% of the first $2,000 (or $400) contributed each year.
2. There is a $7,200 lifetime maximum per child up to age 17 under the federal government's Canada Education Savings Grant (CESG).
3. Tax-deferred growth/compounding.
4. Withdrawals of plan earnings and CESGs are taxed at your child's marginal tax rate when your child is enrolled in a post secondary educational institution (principal invested is not taxed when withdrawn).
5. Subscriber's can withdraw principal without tax implications at any time. However, a CESG repayment may be required.

A family plan may be available from your financial institution.

What happens if your child does not pursue a higher education?

If one child does not pursue a higher education, another child named under the plan (a Beneficiary) can use the plan earnings and any CESGs. The CESG lifetime limit of $7,200 per Beneficiary still applies. If this is exceeded upon transfer to the other Beneficiary, the excess must be refunded to the government.

If your child does not pursue a higher education, the subscriber(s) can recover up to $50,000 in plan earnings, and contribute this amount to a Registered Retirement Savings Plan (RRSP).Special conditions apply and are as follows:

1. All beneficiaries must be 21 years old and not seeking a higher education.
2. The RESP has been in effect for 10 years.
3. Normal RRSP contribution limits apply.
4. Subscriber(s) must be a Canadian resident(s).
   

Now that we have gone over the RESP and the benefits, let’s look The Canada Education Savings Grant (CESG). The CESG per child works like this:

1. The federal government contributes 20% of the first $2,000.00 contributed each year ($400.00) up to age 17.
2. There is a lifetime maximum of $7,200. Special CESG eligibility rules apply for children ages 16 or 17.
3. CESG "contribution room" of $2,000 per year can be carried forward (The maximum CESG in any year is $800 per child that is, 20% of $4,000).
4. The CESG is paid monthly and deposited directly into a Money Market Fund account for all RESP, GIC2 and mutual funds.
5. Contribution Limits Up to $4,000 per year, per child, to a lifetime maximum of $42,000 per child. (If someone else has opened an RESP for the same child, all contributions are subject to these limits).
   

What happens if your Child Doesn't Continue School and pursue a higher education? You have several choices, including:

1. Use the earnings and CESG for the education of another qualified beneficiary.
2. Transfer up to $50,000 of the RESP earnings to an RRSP (if contribution room is available). See special conditions under Key Benefits.
3. Withdrawal of the funds earnings will be subject to income tax, plus an additional 20% tax. Note that Repayment of the CESG may be required.

What is the Impact on Your Taxes? Unlike an RRSP, your contributions are not tax-deductible. Any money earned in an RESP accumulates tax-free until it is withdrawn. When your child registers for a qualified education program and withdraws any earnings and the CESG, the child pays taxes on these amounts. If the child has little or no other income, they will likely pay little or no tax.

There are different types of RESP Holdings. You can choose from a wide range of managed Portfolios including Mutual Funds and 1-to-5 year Guaranteed Income Certificates (GIC).
When should you start saving for your children?

Start as soon as possible. Starting when your child is younger is more affordable for you. Contributions can be smaller and it gives your savings more opportunity to grow. By starting later, even if you invest more each year, you may find it difficult to "catch up" and reach your optimum savings goal.

Getting started is easy. Contact your local financial institution, your adviser can answer all your questions about RESP and discuss your investment options.

Please Note that all products and services are subject to the terms of any applicable rules and laws governing their use. Products and their features may change at any time. Therefore, this is a general description only. Consult with your tax professional for details on plan withdrawals. CESG information may change at any time.

Robert King
Branch Manager
Canadian Imperial Bank of Commerce
Country Club Mall
Nanaimo, British Columbia
Canada
1-250-756-3400
Ext 222

This article is based on Canadian tax and investment laws. The following article is the opinion of the writer and not necessarily the opinion of DADS 101 MULTIMEDIA GROUP. Readers are cautioned to obtain their own financial advice from a professional accountant or financial advisor duly qualified in their jurisdiction.

Click here to go home. Click here to go back to investments.