Financial literacy tools…not just for kids.
You know you want and need to save for your children’s education, but the jargon can be daunting when it comes to Registered Education Savings Plans. Here’s a quick reference to some of the commonly used terms.
Accumulated Income Payment (AIP)
Money paid to the subscriber out of the plan's earnings, including earnings on the Canada Education Savings Grant (CESG) amount. AIPs, which are made only if the child does not attend college or university, have the following conditions:
- The plan has been in place for 10 years
- No beneficiary is in school
- Beneficiary is 21 years old or older
- The subscriber is a Canadian resident
Exceptions to these conditions are made for certain circumstances (e.g. a deceased or mentally impaired beneficiary). Unless the payments are rolled over to an RRSP with sufficient room, these are considered taxable income for the subscriber, and are subject to an added 20% tax.
Contributions to an RESP made after 1997, for which CESG money was or will be paid.
This is the person who has been designated to receive the benefit of the RESP. It is important to note that to receive the CESG, this beneficiary must be a resident of Canada and must have a Social Insurance Number.
Canada Education Savings Grant (CESG)
The Canada Education Savings Grant is a special grant provided by the federal government to help you save for a child's post-secondary education. The CESG is equal to 20% of the first $2,500 you make in annual RESP contributions. That's up to $500 per child each year to a lifetime grant limit of $7,200 per child.
What is the British Columbia Training and Education Savings Plan (BCTESP)?
The new BC Training and Education Savings Plan grant is designed to help families start planning and saving early for their children's education after high school. When a B.C. resident child turns six years old, the Province of British Columbia will put $1,200 into the child's RESP. The BCTESP grant requires no matching or additional contributions.
There are 3 basic criteria to receive the grant:
- The child must be born on or after January 1, 2007
- The child must have an RESP before they turn seven
- The child must be resident of B.C.
Person who puts money into the RESP. Often the same person as the subscriber (i.e. the child's parent).
This is the money that is deposited into an RESP on behalf of a beneficiary. These funds can be deposited automatically each month or periodically on a lump-sum basis. There is no annual limit; there is a lifetime limit of $50,000 per beneficiary.
Educational Assistance Payment (EAP)
Money paid from the RESP to the student to help fund post-secondary education. EAPs are considered income and are taxable to the student. This does not include a subscriber's refund of contributions from the RESP.
Education Savings Plan (ESP)
A contract between a person (subscriber), and a person or organization (promoter), under which the promoter agrees to pay educational assistance payments to one or more beneficiaries.
An RESP that can have more than one beneficiary. The beneficiaries must be connected by blood or by adoption and must be under the age of 21. A family RESP allows a younger sibling to use the funds should the oldest child decide not to go to university or college.
An RESP with one beneficiary. This beneficiary does not have to be related and can be over 21, making this an ideal plan for an older student and one that is suitable for a non-family subscriber to set up.
Post-secondary educational institution
For the purpose of discussing RESPs, these are not just mainstream colleges and universities. Canada Revenue Agency defines these as:
- Universities, colleges or educational institutions designated for the purpose of the Canada Student Loans Act, Canada Student Financial Assistance Act, or the Quebec Student Loans and Scholarships Act.
- An institution in Canada certified by the Minister of Human Resources Development to provide non-university related courses to enhance job skills.
- A university or college outside Canada that offers post-secondary level courses. A beneficiary qualifies only if he enrolls in a course that runs at least 13 consecutive weeks.
The institution that holds the RESP. Providers include some credit unions, most major banks, mutual fund brokers, and scholarship trust funds. Financial institutions and fund brokers usually provide "self-directed RESPs," while scholarship trust funds provide "group or pooled RESPs."
Qualifying educational program
To qualify, a program must run three or more consecutive weeks (13 weeks if the institution is outside of Canada) and the student must spend 10 or more hours per week on courses or work in the program. The program must be at the post-secondary level and includes apprenticeships, trade school programs as well as colleges and universities.
Registered Education Savings Plan
A tax-deferred investment plan designed to help save for a child's post-secondary education. Unlike RSPs, contributions made to an RESP are not tax deductible. Any earnings made within the plan from the contributions and grant, along with the grant itself, are taxable to the beneficiary upon withdrawal for post-secondary educational use.
The subscriber is the individual who contributes to an RESP. Depending on the type of RESP, the subscriber can be a parent, grandparent, aunt, uncle, sibling or friend of the beneficiary. Joint subscribers must be spouses or common-law partners according to Canada Revenue Agency (CRA). Organizations (i.e. charity, church, corporation or trust) cannot be a subscriber.
Contributions to an RESP for which no CESG was or will be paid.