An RESP (Registered Education Savings Plan) is in essence a contract between two parties known as the subscriber and the promoter.
- The subscriber (or a person acting for the subscriber) generally makes contributions to the RESP. Subscribers cannot deduct their contributions from their income on their tax return. If the contributions are not paid out to the beneficiary, the promoter usually pays them to the subscriber at the end of the contract. Subscribers do not have to include the contributions in their income when they get them back.
- The promoter usually pays the contributions, and the income earned on those contributions, to the beneficiaries. The income earned is paid as educational assistance payments (EAPs). Beneficiaries include the EAPs in their income for the year in which they receive them. However, they do not have to include the contributions they receive in their income.
There are two different types of RESPs available: family plans and specified plans.
- The only RESP that allow subscribers to name more than one beneficiary.
- Each beneficiary must be connected by blood relationship or adoption to each living subscriber or have been so tied to a deceased original subscriber.
*A beneficiary under a family plan entered into after 1998, must be less than 21 years of age at the time he or she is named as a beneficiary. When one family plan is transferred to another, a beneficiary who is 21 years of age or older can still be named a beneficiary to the new RESP
- A single beneficiary RESP (non-family plan) under which the beneficiary is entitled to the disability tax credit for the beneficiary’s tax year that includes the 31st anniversary of the plan.
- A specified plan cannot permit another individual to be designated as a beneficiary under the RESP at any time after the end of the year that includes the 35th anniversary of the plan.
- No contributions (except transfers from another RESP) may be made to the plan at any time after the end of the year that includes the35th anniversary of the plan, and the plan must be completed by the end of the year that includes the 40th anniversary of the plan.
An overview of how an RESP generally works.
- A subscriber enters into an RESP contract with the promoter and names one or more beneficiaries under the plan.
- The subscriber makes contributions to the RESP. Government grants (if applicable) will be paid to the RESP. These grants can be the Canada Education Savings Grant (CESG), Canada Learning Bond (CLB), or any designated provincial education savings program.
- The promoter of the RESP administers all amounts paid into the RESP. As long as the income stays in the RESP, it is not taxable. The promoter also makes sure payments from the RESP are made according to the terms of the RESP.
- The promoter can return the subscriber’s contributions tax-free.
- The promoter can make payments to the beneficiary to help finance his or her post-secondary education.
- The promoter can make accumulated income payments.