An RESP is offered by different financial institutions as Heritage Education Funds and scholarship plan dealers, and are regulated and sponsored by the Canadian government. The main impetus behind RESPs is that the Canadian government wants parents to invest in their children’s education after high school/secondary school.
A person who opens such an account is called a subscriber, and the subscriber can begin accruing tax-free earnings in a savings account of this nature when he/she makes regular contributions to the RESP under him/her.
The taxman will not be involved during the investment of your money in an registered education savings plan. Only when you withdrawals or payments are received will be taxed.
How this works: the payments that your child receives will not be taxed (there will be no tax deductions) but the payments will be considered income and will be taxed on your part as contributor’s earnings.
The majority of students who withdraw money from educational plans do not have earnings of their own as they are not employed, and thus, they will be able to get the fruits of their educational plans with no deductions.
The History of RESPs
In Canada, RESPs are designed so that parents can begin saving up for their children’s education immediately after birth. You can open an RESP for your child, or another adult.
The Canadian government will be pitching in during the process of contribution and investing, and the process has been highly simplified to allow the majority of Canadians to benefit from the sponsorship of educational plans.
You can just walk into a bank, credit union, Investment Company, mutual funds manager, and other similar institutions, to get an future educational savings fund for your child.
All of these savings plans will be under the Canadian government’s regulation, and the government will be pitching in regardless of where you get the plan in the first place.
Who can contribute to an educational plan?
The beauty of RESPs is once you open a savings account for your child; there are no hard limitations on who can make the actual contributions to mature the savings accounts.
Of course, the majority of subscribers will be parents who will be making the payments themselves, but there are instances when a family member like an uncle or grandparent also wants to pitch in.
In other instances, a completely unrelated person (non-family) also pays the contributions for some account holders. Who contributes does not matter – what matters is you are able to contribute on time.
How does the Canadian government pitch in?
The contributions made by the subscriber are actually matched by the Canadian government up to a certain level and this sum is contributed to the Heritage RESP savings plan, too. The deposits made by the government are collectively known as the Canadian Education and Savings Grant.
How much the government contributes to each plan is graduated, and computed based on the annual income of the family. The maximum amount of contributions of the government is capped at $7,200. It might not sound like much, but considering that the maximum contribution for each head is $50,000, the $7,200 is a huge help.