February 1999 volume 3, issue 1 

A Registered Education Savings Plan (RESP) allows you to contribute tax-deferred income to the future education of your children. While the money is in the RESP, it is not taxed. When it is withdrawn and paid out for the post-secondary education costs of your children, the withdrawals are taxed as your child's income. Since, in most cases, your child will be in a lower tax bracket, beneficial tax savings can be realized, while providing an education for your children.

The Canada Education Savings Grant (CESG) makes contributing to an RESP an even more attractive proposition. Under the CESG program, the government will contribute a grant of 20% of annual RESP contributions up to $2,000 for children under the age of 18. This means a maximum grant of $400 per child is possible! A lifetime maximum of $7,200 per child has been set. This additional money, like the rest of the RESP, becomes taxable income for the recipient once it is withdrawn.

Unused CESG contribution room can usually be applied to future years, up to the maximum lifetime grant. There are some restrictions applied to the CESG program, especially for children aged 16-17. These limit the grants to cases in which contributions of at least $2,000 were made before the child turned 16, or if a minimum of $100 per year has been contributed in any four years prior to the child turning 16.

Other changes to the RESP regulations make it possible, if the child does not attend post-secondary school, for the plan subscriber to withdraw the investment income earned within the RESP. The subscriber was always eligible to withdraw the principal contributed, but now investment income earned can be transferred directly into the plan subscriber’s RRSP (provided there is sufficient RRSP carry forward room, up to a maximum of $50,000 and the plan has been in place for at least 10 years). Alternatively the income can be paid out directly to the plan subscriber.

If paid out to the plan subscriber, the investment income will attract tax at the subscriber’s personal tax rate plus a penalty of 20%. This certainly makes for a significant tax rate, however it is better than the old rules where the investment income is just lost.

Taking advantage of the CESG program and the revised rules for RESPs will help you to save taxes while making an important contribution to your children's future.