A great gift for the grandkids

Ivan Cons

October, 2009

If you would like to give a wonderful gift to your grandchildren, consider enrolling them in a Registered Education Savings Plan. The RESP is an easy vehicle to set up, with the simple condition that the child must have a social insurance number. An RESP is a unique savings account registered with the Canada Revenue Agency created specifically to help families save for their children’s post secondary education.

Some of the highlights of the plan are that all contributions grow tax-free until the child is enrolled in a post-secondary program approved by the guidelines of the plan. There is a lifetime limit contribution of $50,000 per child. When the money is withdrawn for educational purposes, it is taxed in the hands of the student, which under most circumstances leads to minimal or no tax. In addition, there is a CESG grant whereby the Canadian Government matches 20 per cent of the first $2,500 per year contributed to an RESP up to a maximum of $7,200 over the plan’s lifetime.

There are further CESG matching rates that allow the bonus to increase to 30 per cent on the first $500 of annual contributions for families who are receiving the Canadian child tax benefit.

When selecting an RESP provider, it is important to understand the differences between product and companies. Some products offer complete flexibility in investment choice and payments. Others promoted as non- profit education plans have more restrictive regimens that have financial penalties if you are unable to continue contributing. It is important to learn how to ask the right questions when selecting the vehicle of choice.

If the child named as beneficiary decides not to pursue a post-secondary education, as the plan owner you have options.

First, you can nominate a new beneficiary, provided the person you choose is under 21 and related. Second, you may transfer up to $50,000 of the earned income into an RRSP within your contribution limits. All grant money must go back to the government. Third, you can receive the earnings via an accumulated Income Payment. Finally, you can withdraw the money subject to various tax rates.

There are many choices. As with all other financial decisions, be informed and clearly understand the nature of the contract you are signing.

Remember, the greatest gift you can give a child is an education.