Grandparents in Medicine Hat annually face the burning question: what do we give to our grandchildren at Christmas or on their birthday? Although not soft and cuddly like sleepers or a stuffed animal, and it will take time it before it is fully appreciated, a contribution to a Registered Education Savings Plan (RESP) makes good estate planning sense as it helps your children and grandchildren at the same time.

What is an RESP?

An RESP is a contract between an individual subscriber (usually a parent) and a promoter (usually a financial organization). The promoter registers the RESP with Canada Revenue Agency (CRA).

How Does an RESP Work

The subscriber makes contributions to the RESP. The contributions can be money of the subscriber or money given to the subscriber (from grandparents, friends etc.) to contribute to the Plan. There is no limit on the amount which can be annually contributed to the RESP. CRA however,  sets a lifetime limit of $50,000. In the contract, the subscriber can name one or more beneficiaries. These are the future student grandchildren. The promoter agrees to pay the contributions, and the income earned on these contributions, to the beneficiaries. The income earned on the contribution is paid out as educational assistance payments (EAPs). The beneficiaries have to include the EAPs in their income for the year in which received. Beneficiaries do not have to include in their income the contribution portion of the RESP. Government grants may also be available for contribution to the RESP. Government grants include Canada Education Savings Grants, Canada Learning Bond as well as grants under designated provincial education savings programs.

Income Tax

Contributions are not tax deductible. Income which stays in the RESP is not taxable. The beneficiary will pay tax on the EAPs when received but not on the contribution portion. If, for some reason, the Plan needs to be collapsed, the subscribers contribution can be returned without tax. The income portion of the returned RESP will be taxed in the hands of the contributor.

Estate Planning

The RESP is a contract with the promoter set up by the parents. The contract should be reviewed with your estate planning lawyer to understand what happens to the RESP  on the death of a parent.  Having  the plan in the joint names of the parents makes the plan easier to deal with if one of the parents dies. However, the death of a sole  subscriber may cause serious problems for the Executor if the Last Will does not give clear insructions on the administration of the RESP.

On a breakdown of the marriage the parents will have to determine whether one or both will continue to be the subscriber to the plan.

Conclusion

Considering the future cost of post secondary education  an RESP, although not providing an immediate tangible gift, will be gratefully received by the beneficiary as they head off on their post secondary education.