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The following article is from the Sept./Oct. 2011 issue of The $$$ Maker Report, a newsletter written and published by Carl Jung, CLU, who is based in Gibsons BC. http://karljungclu.com/1105

Everything you need to know about RESPs

In the last two decades, tuition and supporting educational costs in Canada for the average student has more than tripled. While our expenses are not as excessive as our American neighbours, they are trending higher annually. Students going to school this fall can expect to pay between $10,000 - $15,000 per year for a four-year university degree.

Pooled educational plans have been available for decades for Canadians looking to help fund a post-secondary education for their children or grandchildren. However, they were never embraced by the public as much as they could have been because of restrictive features on their contracts. Many parents were just not willing to enter into the fixed deposit schedule as the pooled plans demanded.

1998 marked the introduction of Canadian Educational Savings Grant (CESG), which allowed subscribers to gain the 20% government grant. RESPs now became more widely accepted as more banks, Credit Unions, life insurance companies and brokerage firms entered the market. 2007 was the year the rules were given even more favourable parameters and increased deposit limits.

What types of plans are available?

Individual Plan

• Designed for one beneficiary only, who can be either a family member or a totally unrelated third party.
• The beneficiary can be replaced by another child and still retain the CESG, but only under certain situations.
• Full control over investment options range from simple Daily Interest Savings Accounts & GICS, to Mutual Or Segregated Funds and individual stocks.
• Contributions can be made monthly, annually or even as a one-time deposit. There are no contractual obligations to the subscriber.

Family Plan

• Designed for related family members where multiple children are put on one plan.
• The accumulated deposits and growth can be shared between the children either equally, or any other percentage. Thus, if two children are involved and one child does not go on to further studies, the proceeds can be used exclusively for the second child.
• Beneficiaries can be added or removed at any time, however, all beneficiaries must be related (children, grandchildren or adopted children). Unrelated 3rd party children are not eligible.
• Same investment and deposit features as the Individual Plan.

Pooled (or Group) Plans

• Organizations like the Canadian Scholarship Trust Foundation or the Heritage Education Funds offer programs where contributions are combined (or pooled) with thousands of other depositors.
• Annually, they deem an amount that is distributed to children pursuing a post-secondary education, however, neither the dollar amount nor the number of beneficiaries is guaranteed in advance. It is left to the discretion of the Trust to decide annually what should be paid out.
• The investment inside the Trust tends to be fixed-income products like GICs, bonds, mortgages and debentures, thus limiting their growth in years where stock markets surge.
• Designed for regular fixed monthly or annual deposits through the signing of a contract, and tend to be very inflexible.
• Many have onerous fees & penalties for those who stop contributing or wish to withdraw their money before maturity.

How much can be contributed?

Up until 2007 the amount was $42,000, but it has now been raised to $50,000 per child. In prior years the maximum amount was $4,000 annually, which represented two years of $2,000 each. Parents were allowed to make two years of deposit within one calendar year. This has now been eliminated, however, the 20% grant is only paid on the first $2,500 (or $5,000 if two years are made at once).

The contributions are not tax-deductible, however, they grow tax-deferred until withdrawal. Assuming the child continues with plans for further education, the growth and the CESG are taxable in their hands when withdrawn.

How the does the grant work?

The lifetime maximum the government will give under the CESG program is $7,200 per child, which requires a deposit of $36,000. However, the grant is limited to $500/year (20% of $2,500), which allows parents to put in two years worth of contributions, thus bringing the total grant to $1,000 on a $5,000 deposit.

If the child does not go on for further studies, the grant must be repaid unless it is rolled-over to a qualifying sibling who has available grant room.

Low-income families that are below a certain threshold are eligible for an enhanced grant of up to an additional $500/year.

The grant is only paid until the end of the year the child turns 17, and is dependent or one of two rules
(a) a minimum of $2,000 was contributed before the year the child turned 16, and
(b) a minimum of $100 in annual deposits were made in any four year before the child turned 16.

How is the money withdrawn?

• Proof of registration is required for any withdrawal, however actual expense receipts are not necessary.
• The school must be on an approved list of post-secondary institutions of higher learning. A maximum of $5,000 can be withdrawn in the first 13 weeks, and after this date any amount can be withdrawn.
• If withdrawn under the rules of the program, the payments are taxable in the hands of the student. Note: only the growth and CESG are taxable; the original contributions can be withdrawn without tax consequences.

What happens if the child does not pursue a post-secondary education?

Do not be in a rush to close the account. Some children may simply not be ready to pursue a formal education at age 18, but might be ready in their mid to late 20s.

Should it be decided at a later point in time that a return to school is unlikely, consider transferring the proceeds to another sibling. Be aware that limits are placed on the CESG and you cannot roll tax-free more than the original contributions and grant already received.

Should there be no other sibling to transfer the account to, the proceeds can be rolled into your RRSP, within certain limits. The beneficiary must be at least 21 years of age, and the plan had to be in place for at least 10 years. The maximum that can be rolled into the RRSP is $50,000, and can only be done if the person has enough RRSP contribution room.

If the above options do not work for you, you can withdraw the proceeds and simply pay back the CESG. The growth is taxable that year (along with a 20% surcharge), but the original contributions are withdrawn tax-free.

Finally, the last option is to donate the investment proceeds to an educational institute of your choice and receive an offsetting tax deduction.

What else is available for young students?

Besides the Enhanced CESG, the Canada Learning Bond is available to low – moderate income families.

Alberta has the Alberta Centennial Education Savings Plan (ACES).

Parents with handicapped children are entitled to access the Registered Disability Savings Plan (RDSP).

 Posted: September 2011

The following information was supplied to us by Shelagh Rinald of Rinald Tax Advisory Inc. of Victoria. BC 

Child Care Expenses

The Income Tax Act allows an individual to claim a deduction for child care expenses if the individual or a supporting person of the child is employed, carrying on a business; carrying out research and receiving a grant, or attending secondary school or educational institution in a full-time or part time program. 

Normally, child care expenses are deductible by the spouse with the lower net income and the amount that may be deducted its limited to the lesser of two-thirds of earned in come and  

  - a maximum of $10,000 per year for each child who is eligible for the disability tax credit for the year;

  - a maximum of $7,000 per year for each other eligible child who is under 7 years of age at the end of the year,

  - a maximum of $4,000 per year for each other eligible child who is under 17 years of age at the end of the year.

 Child care expenses can include payments made to any person resident in Canada other than a parent of the child, a related person under age 18 or a person for which a parent has claimed a deduction as a dependent.

The Canada Revenue Agency confirmed in a recent Technical Interpretation that amounts paid to grandparents could qualify as long as the expense incurred were in respect of an eligible child and the grandparent was not being claimed as a dependent by the individual's parent.

In the right circumstances, paying a grandparent for child care services can reduce the overall family tax burden. For example, a grandparent over the age of 65 and resident of Ontario with $12,000 of existing income would be subject to additional tax of approximately $700 on childcare payments of $8,000. As long as the amount paid is reasonable for the services provided, the parent paying the amount could save up to $3,800 from the tax deduction. Of course, the $3,100 reduction in the family tax burden must be compared to the effect the additional income might have on the grandparent's eligibility for the Guaranteed Income Supplement, Old Age Security payments and other income tested benefits.

Provided to you by:

RINALD TAX ADVISORY INC. 841 Yates Street Victoria, B.C. V8W 1M1 Tel: 250-361-1300; Fax: 250-590-1555 Website: www.rcatax.com

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

Further details may be obtained from our website at www.taxspecialistgroup.ca

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

 Posted: November 2011