Post-secondary education for your children will be one of your most expensive cash outlays. Here’s an example to illustrate the magnitude of costs involved:

• Approximate current cost of a four year Canadian University education 
  @ $14,000* per year………………………………………………………                        $56,000

• Cost in 10 years @ 3% inflation rate……………………………………                  $75,300

• Annual savings required over 10 years at a 6% net return rate..………… $5,390

* Assumes annual undergraduate tuition fees of $6,800/year + room/board, etc. of $7,200. Note: tuition fees vary significantly by  province.

A Registered Education Savings Program (RESP) is the primary savings vehicle to finance post secondary education because of its significant financial benefits (although annual contributions are not tax deductible):

i) Subscriber contributions for a qualifying beneficiary receive a 20%/$500 yearly tax-free Canada Education Savings Grant (CESG) on the first $2,500 of any annual contribution up to a $7,200 CESG limit. Unused CESG's from prior years may be carried forward.

ii) All earnings on subscriber contributions and CESG's are tax-sheltered until the beneficiary uses the funds to finance a qualified post secondary educational program.

iii) The lifetime contribution limit is $50,000 and may be made in one lump sum. Due to tax sheltering, this up-front funding option may be more beneficial financially than collecting the 20% annual CESG on the first $2,500 over an extended number of contribution years.

RESP Types

• Family - In this case, there are one or more blood related or adopted beneficiaries of the contributing subscriber. Contributions must cease before a beneficiary turns 31 (though the CESG grant ceases at 17);
   
• Individual - There is only one beneficiary but anyone may contribute up to and including the 32nd year of the RESP's existence (though the CESG grant ceases at 17);
   
• Group - This is offered by Foundations who set how much is paid in and when. Each age group has a particular plan and members take a share.

RESP Guidelines

Several terms and conditions are involved with an RESP, so consult with your advisor prior to any decision. Here are a few guidelines to help you better understand the process:

Contributions

• A RESP is comprised of three parts i) subscriber contributions, ii) CESG's, iii) investment earnings;
   
• It is managed by a financial provider who invests the contributions and the CESG grants;
   
• For each beneficiary, the maximum RESP lifetime contribution limit is $50,000. This may now be made in one lump sum to leverage the tax sheltered earnings feature.  The maximum annual CESG grant is $500 with a lifetime limit of $7,200.

Eligibility

• To be eligible, beneficiaries require a Social Insurance number (SIN) and qualify up to the end of the year in which they turn 17. Special conditions apply when he/she turns 15;
   
• A qualifying post secondary educational program must last at least three consecutive weeks with a minimum of 12 hours instruction each week. Trade school, CEGEP, college, university and apprenticeship programs are eligible. Foreign programs must last at least 13 weeks;
   
• A qualifying student must be enrolled full or part-time in an approved program.

Payments

• An Educational Assistance Payment (EAP) is the amount paid to a student from an RESP to help finance the cost of post-secondary education. It is comprised of the CESG and earned investment income. To release EAP's, the provider requires a letter from the institution confirming full time enrollment and the name/length of the program;
   
• A student may receive payments up to $5,000 before completing 13 consecutive weeks of a qualifying program. After 13, there is no limit to the amount paid if the student remains in the program. If there is a 12-month period in which the student is not enrolled in a qualifying educational program for 13 consecutive weeks, the $5,000 maximum applies again. EAP payments are included as income on a student's tax return;
   
• In addition to EAP's, any amount of subscriber contributions may be withdrawn tax free to finance education.
   
• For example, a $10,000 student payment may be comprised of a $4,000 EAP component (i.e. CESG & investment earnings) together with a subscriber's contribution of $6,000. The $4,000 is taxable in the student's hands while the $6,000 contribution is tax free.

Termination

• Should the child not attend school and the RESP is terminated, all subscriber contributions are returned tax free and the CESG's are repaid to the government. Any remaining earnings are taxed in the subscriber's hands or, in some cases, may be transferred to a Registered Retirement Savings Plan (RRSP).

Other Grants

• Modest income families may be eligible to receive a Canadian Learning Bond (CLB) up to $2,000 for children born after December 31, 2003;
   
• Children born or adopted in Alberta on or after January 1, 2005 may also be eligible to receive a grant of $500 when an RESP is set up, and $100 at ages 8, 11 and 14.

Informal In-Trust Accounts

In this case, a donor contributes an asset(s) in trust to a beneficiary (minor child/children/niece, etc.). The account is then managed/invested by a trustee until the child reaches majority (i.e. 18 or 19). While income generated on the Trust's assets is taxed in the donor's hands, the actual assets vest fully with the beneficiary. Thus, if the donor designs the Trust for capital growth to finance post secondary education, the resulting capital gains taxes upon distribution will be paid by the beneficiary usually at a lower tax rate.