Weekly Tax Tips
Contribute to Your RESP
26 Feb 2010
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 Earnings on RESP investments accumulate tax-free and are generally taxed in your child’s hands when withdrawn from their plan.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.
There is no longer an annual RESP contribution limit, however, 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, higher CESG rates apply 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 totaled 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. The 2008 federal budget extended certain time limits with respect to RESPs, applicable for 2008 and subsequent taxation years, as follows:
- the number of years you can contribute to an RESP has been extended from 21 to 31 years (25 to 35 years for disabled beneficiaries),
- the deadline for terminating an RESP has been extended from the end of the year that includes the 25th anniversary of the opening of the plan to the 35th anniversary (30th anniversary to the 40th anniversary for disabled beneficiaries), and
- the contribution age limit for a beneficiary of a family plan has been increased from 21 to 31 years.
The recent changes to RESPs have made them more advantageous. Although the elimination of the annual RESP contribution limit means you may have more decisions to make about how much to contribute each year, your BDO advisor can assist if you have questions. With the high cost of post-secondary education, be sure to consider this savings vehicle as part of your tax planning.
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 26 Feb 2010.
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