The Canadian government allows its citizens to contribute towards saving for their children’s post-secondary education via the Registered Education Savings Plan (RESP Canada). The plan receives contributions from both individuals and government grants, with the growth and investment returns sheltered from all taxes until you withdraw.

With the continually rising cost of higher education, RESP Canada provides parents with a somewhat stress-free opportunity to save up for their children’s future educational pursuits gradually. If started early, and with regular contributions throughout the years, combined with the effects of free government grants, your investment can grow considerably. This allows your children to receive their university or college education and graduate with little to no debt. This will, in turn, yield more positive effects down the road.

Open an RESP After Bankruptcy, Not During

If you have recently filed for bankruptcy or submitted a consumer proposal, an RESP is one option that you can take to help you get back into saving, contributing toward a child’s higher education.

It is not recommended to open an RESP during bankruptcy, as they are not on most provincial or federal bankruptcy exemption lists. Even though an RESP is for the benefit of a child, the funds are not exempt assets. This means that any RESPs will be calculated as part of your assets if you file for bankruptcy.

Choosing an RESP Plan

Anyone can open an RESP account, provided both the beneficiary and subscriber (account opener and contributor) — who may be a parent, grandparent, relative, or family friend — is Canadian. The subscriber can choose one or more beneficiaries under a single plan, while a child can be a beneficiary for more than the RESP plan.

To open an RESP account, the subscriber must have the child’s Social Insurance Number and then choose one of three types of RESPs:

1. Individual RESP plans: Anyone can open this type of account and make contributions, including parents, relatives, sponsors, or philanthropic strangers.
2. Family RESP plans: This plan can have one or multiple beneficiaries, provided they’re related to the subscriber or have been formally adopted. For instance, you can include your children and nephews under the same family RESP plan, but not a friend’s child. The funds in family RESP accounts can be spent on educating any of the beneficiaries.
3. Group RESP plans: This type of plan only allows one child as the beneficiary, who may or may not be related to the subscriber. Since there are multiple contributors, the beneficiary can choose to share the pooled earnings with other children in the same age group.

Keep in mind that RESP accounts cannot be transferred, except to a sibling. In addition, the beneficiaries are expected to be under 21 years when added to an RESP plan. Also, group RESP plans have the most rules and restrictions compared to other plans.

Parties Involved in Opening an RESP Account

There are 6 parties in an RESP plan:

• The financial institution or scholarship plan dealer. You can purchase an individual or family RESP plan through a bank, credit union, or other financial institution. However, scholarship plan dealers are the organizations responsible for administering RESPs, and you can also set up any plan with them but beware they may change fees.
• The subscriber. They make contributions, but whatever they contribute is not deducted from their income on their Income Tax and Benefit Return.
• The promoter. This person administers the contributions paid into an RESP account. The promoter also pays the contributions, and the earnings on the contributions—known as Educational Assistance Payments (EAPs)—to the beneficiaries according to the plan’s terms.
• Beneficiaries. They receive the contributions and EAPs from the promoter. While contributions should not be included in income, EAPs must be included in the year when they’re received.
• Government grants. If applicable, the grant will be paid to the RESP. The grant can be awarded by the Canada Learning Bond (CLB), Canada Education Savings Grant (CESG), or other designated provincial education savings program.
• The Canada Revenue Agency. This is the body tasked with registering your education savings plan contract as an RESP.

Here’s the breakdown of government grants on an RESP:

• The CESG contributes $7,200 over the lifetime of an RESP by matching 20% of your annual contributions (up to $500 per year), making it worthwhile to make annual contributions to your RESP plan.
• Additional CESG, which depends on the contributor’s income, can give you another 10% to 20% on your annual contributions (up to $100 per year).
• The CLB is given by the Canadian government to low-income families and includes a deposit of $500, followed by annual top-ups of $100 until the beneficiary turns 15 years old.
• Provincial government grants are usually one-time grants that should be applied when the beneficiary reaches a certain age.

Getting Started

If you want to start making contributions for your child’s education, you can open an RESP account as soon as you get their Social Insurance Number (SIN). At this point, you can visit a scholarship plan dealer and sign a contract allowing them to make all investment decisions. Alternatively, you can visit a bank or credit union to set up a family or individual RESP plan, which will allow you to self-direct your RESP investments.

Be very careful when choosing a company to start your RESP with. Many of the independent companies or ‘Plan Dealers’ (ie not a Bank or Credit Union) will charge high fees to administrate your plan. This means if you have an issue and have to cash the funds early you will receive little to no money back as it will be taken to pay their fees. Many banks and credit unions do not charge fees so make sure to do your research in advance and ask lots of questions.

Making Contributions

With family and individual RESP plans, the subscriber has full authority to decide when to make the contributions. However, with group plans, the contributions should be regularly based on a predetermined schedule, as missing a contribution can result in a penalty charge or missed interest. In some cases, your account may be terminated, forcing you to give up some or all of your earnings (EAPs) on the investment.

The Income Tax Act sets the lifetime limits for your RESP based on the amount that can be contributed to each beneficiary. However, the maximum contribution for any single beneficiary is $50,000.

Accessing the Funds in an RESP Account

All RESP accounts must be closed by the 35th anniversary (after 36 years) from the date of purchase. The promoter is expected to pay the contributions and income earned on them to the beneficiary at the right time to aid in financing post-secondary education. So, when your child enrolls in a qualifying higher-education institution, they will start receiving EAPs (Educational Assistance Payments) from the RESP to finance their post-secondary education.

The child claims the EAP as income on their tax return for the year when it’s received. The tax implications are usually negligible since they’re likely in the lowest tax bracket with probably little-to-no other income.

If this is not possible, perhaps because the child doesn’t want to pursue post-secondary education, the investment can be transferred to another eligible child. Alternatively, the promoter will pay the subscriber’s RRSP (Registered Retirement Savings Plan) a maximum of $50,000 at the end of the contract, tax-free.

Final Note

RESPs are a great way to plan ahead for a child’s future and back into saving once you’ve completed bankruptcy or submitted a consumer proposal.

If you are thinking of going through bankruptcy and would like to hold onto a child’s RESP, there are ways you can do this. Keep in mind that every situation is different, and it is recommended that you speak to a trustee.

For more information on how RESPs are affected during a bankruptcy or a consumer proposal and information about getting back on your feet, please contact Kevin Thatcher & Associates here.