Weekly Tax Tips
Contribute to your RESP
Date: 27 Jan 2012
You can start saving now for your children’s education by making contributions to a Registered Education Savings Plan (RESP). Earnings on RESP investments accumulate tax-free and are generally taxed in your child’s hands when withdrawn from their plan. With a lower marginal tax rate, your child should pay much less tax on the income than you would pay.
While there is no annual RESP contribution limit, there is a lifetime RESP contribution limit of $50,000. When you contribute money to an RESP, the federal government will deposit an additional amount — the Canada Education Savings Grant (CESG) — equal to 20% of your contribution up to certain limits. The maximum CESG each year is $500 (equal to 20% of a contribution of $2,500) and the lifetime CESG limit is $7,200. Also, an additional CESG is available to certain contributions made by low and middle-income families.
If you fail to make a contribution in a year, the unused “CESG room” will be carried forward. But your ability to utilize CESG room in future years will be limited. Consequently, if you are considering an RESP contribution in the near future, you should try to make a contribution before year-end.
Another CESG rule is important to consider as part of your year-end tax planning. The CESG can be restricted during the years the beneficiary turns 16 and 17. A CESG will only be allowed if:
- Contributions to all RESPs for the child have totalled at least $2,000 before the year the child turned 16, or
- Contributions of at least $100 per year were made for the benefit of the child during any four years prior to the year the child turns 16.
Therefore, you may need to make an RESP contribution this year so that your child’s RESP is eligible for a CESG in future years.
With the high cost of post-secondary education, be sure to consider this savings vehicle as part of your year-end tax planning. For more information on RESPs, read our tax bulletin RESPs: Saving for Your Child’s Education. Your BDO advisor can assist if you have questions.
This tax tip is a publication of BDO Canada LLP on developments in the area of taxation. This material is general in nature and should not be relied upon to replace the requirement for specific professional advice. The information in this tax tip is current as of 27 Jan 2012.
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