To ensure full compliance with tax obligations on savings and pension plans, including the Registered Education Savings Plan from Heritage Education Funds (RESP), it’s essential to know several basic facts, including those most recently extended to RESP in 2017. These plans, sponsored by the Canadian government, are designed to encourage individuals to invest in post-secondary education for a child. The government generally makes a contribution to these plans if the child is under 18 years of age.
1. New Rules
The anti-avoidance rules now governing all Registered Plans have been extended to RESPs. In basic terms, these rules apply a special tax on specific advantages that “exploit the tax attributes” of the RESP. It’s important to understand this detail as well as the special taxes on prohibited investments and on non-qualified investments.
Now that “anti-avoidance rules” now apply to RESP, you have another detail that you must understand and with which you must comply. You can learn more about your Heritage RESP requirements from the links below and by consulting with a professional experienced in this area.
A Registered Education Savings Plan (RESP) is defined by the government of Canada as “a contract between an individual (the subscriber) and a person or organization (the promoter). An individual, a spouse (or partner) can be joint subscribers in the plan. A “public primary caregiver” for a beneficiary can also be an original subscriber.
The promoter is the entity paying contributions and earned income as contributions to the beneficiaries. That income is paid as “educational assistance payments.” The contract states that the subscriber names beneficiaries (future student) and agrees to make contributions. The promoter agrees to pay educational assistance payments (EAP) to the beneficiaries.
3. Income Effects
It’s important to understand that subscribers cannot deduct contributions on their tax and benefit return. That’s one of the best reasons for working with an experienced professional who understands RESP and the associated tax obligations. If the contributions are not paid out to a beneficiary, the promoter generally pays the funds to the subscriber when the contract is at an end.
At this point, the returned contributions don’t have to be included in income. However, the beneficiary must include EAPs as income in the year that they’re received. There are no taxes due until funds are removed to pay for education.
4. Become a Subscriber
If you are not a subscriber on the original RESP, you can become one if you get subscriber’s rights from a court order or written agreement dividing property. If you’re a public primary caregiver and receive those rights in a written agreement, you can also become a subscriber. It’s also possible for another individual to become a subscriber upon the death of the original subscriber. Again, it’s important to work with a knowledgeable representative to be sure of your status.
5. Beneficiary Requirements
A subscriber can designate a beneficiary if the individual’s Social Insurance Number (SIN) is supplied to the promoter before designation is made. The individual named as beneficiary must be a resident of Canada when the designation is made. You might also want to discuss an RESP family plan before making final decisions on the structure of your agreement.
These plans are considered rather easy to access and have become popular because of the associated investment incentives. Parents don’t pay taxes on the money initially, which gives them an additional incentive to invest in a child’s education. Not only can they avoid some tax obligations, the government adds to the plan as the subscriber contributions go forward.
As you learn more about RESPs, you will find there are obligations from all parties involved, including the child. If this young person chooses not to pursue post-secondary education in an approved program within a designated amount of time, the government may require you to return the grant money. Investment earnings withdrawn from the RESP that are not used for expenses related to education are subject to income tax plus an additional penalty of 20%.
If you have questions or concerns about the RESP process, obligations, and structure, be sure you perform the necessary research and also consult with someone in a position to provide accurate guidance and advice in this special area.