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Registered Education Savings Plan(RESP) is a contract between a subscriber and an organization or a promoter. It is a savings plan that helps parents save for their kids post-secondary education. The RESP’s income is taxed in the hands of the kids and therefore, there is little or no income tax charged on the interest. The principle is refunded to the subscriber once it matures and it is tax free.
How RESPs Work
The subscriber, or the person representing the subscriber basically makes contributions to the Registered Education Savings Plan. Keep in mind that contributors can’t deduct their contribution from their income on their benefit return and income tax.
The promoter pays the contributions as well as the income earned on the contributions to the beneficiaries. The earned income is paid as EAPs, or Educational Assistance Payments. If they are not paid out to the beneficiaries, the promoter will pay them to the subscriber once the contract matures.
Also note that the subscriber does not have to include the contributions in their respective income when they get them back. Regardless, beneficiaries usually receive the EAPs and the contributions from the promoter. They need to include EAPs in their income for the year in which they are bound to receive them.
Here is a quick overview of how RESPs work:
1. The subscriber enters into an Registered Education Savings Plan contract with an organization and names the beneficiaries who are under the plan
2. They make the contributions. Government grants will be paid to the RESP if applicable and they include; Canada Learning Bond, Canada Education Saving Grant or any designated savings program.
3. The organization or promoter in this case administers all the amounts paid into the RESP. They also ensure that the payments are made in accordance to the RESP terms.
Who Can Be A RESP Subscriber?
With an exception for family plans, there is basically no restrictions on who can be an original subscriber under Registered Education Savings Plan. An original subscriber can be:
1. You and your spouse or even a common law partner.
2. A Public caregiver of a beneficiary under a Registered Education Savings Plan
A public primary caregiver is a person who has special allowance under the Children’s special Allowance ACT. A public caregiver can be the institution, department or the department that takes care of the beneficiary or the public curator/trustee of the province in which the beneficiary lives in.