Help save for your children's education

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If you have young children and are worried about how you're going to pay for their post-secondary education, you might want to consider investing in a registered education savings plan (RESP).

RESPs are registered with the federal government and allow contributions to grow tax-free until the beneficiary begins studies at an eligible post-secondary educational institution. Taxes are not paid on the principle or interest until the beneficiary begins their studies.

At that time, taxes are calculated based on the beneficiary's income, which means often little or no taxes are actually paid.

Colette Gentes-Hawn is a spokesperson for the Canada Customs and Revenue Agency.

"Let's say that you, as a parent, have put away [not in a RSEP] $100 every month for your child's education," Gentes-Hawn said. "And that money grows and it has interest. And that money is in the name of your child, but it remains whatever income earned by that money is your income, because any gift you make to the child, the income of that gift will be yours. You can't transfer property to a child. So you would continue, if the child is a year old, let's say, for 18 years, you would continue to be taxed on whatever growth is in that money. When you put your money in a registered education savings plan, you don't have to be taxed on the growth of that money. The child will be taxed on that money when the child uses it. The attribution rules are not there for an RESP, and they are if you just simply put it in the bank, or whatever."

There are several types of RESP options available: non-family plans, that can have only one beneficiary; family plans, what can have one or more beneficiaries, although the beneficiaries must be related to the subscriber or subscribers, either through birth or adoption; and group plans, which are usually offered by foundations, which administer each RESP as part of a group.

A maximum of $4,000 per beneficiary can be contributed each year, with a maximum lifetime contribution set at $42,000 for each beneficiary.

Contributions can be made for up to 22 years with a non-family plan, and up to the year in which the beneficiary turns 21 in the case of a family plan.

If you're worried about investing in an RESP because you're not sure if your child will actually go onto post-secondary education, there's no need. Changes to RESPs brought in in 1998 have expanded your options.

If the child listed as the beneficiary does not go on to post-secondary education, the RESP can be transferred to another beneficiary. If the plan has been in existence for at least 10 years, and other specific conditions are met, the money can also be paid to the subscriber in the form of accumulated income payments, or can be rolled over into the subscribers RRSP or spousal RRSP.

Another change brought in in 1998 was introduction of the Canadian education savings grant (CESG), a grant from the federal government paid directly into a beneficiary's RESP. With the CESG, beneficiaries will receive a grant equal to 20 per cent of the first $2,000 in RESP contributions each year, which means a possible grant of up to $400 per year for each beneficiary.

The accumulated grants will be added onto the principle and interest in the RESP account, and paid out as part of the beneficiaries educational assistance payments during their post-secondary studies. If the beneficiary does not go on to post-secondary studies, the grants will have to be repaid to the federal government. Some RESP plans do provide provisions that would also allow you to transfer the grants to a younger sibling or other beneficiary.

"That's free money," Gentes-Hawn said of the CESG. "The best growth you can expect from your money is when it comes free from the government."

Want to find out more about setting up an RESP? There are several organizations that act as RESP promoters that start up an RESP for your child. Look in the yellow pages under registered education savings plans, or visit the HRC website, which lists active RESP promoters whose education savings plans are currently registered with the Canada Customs and Revenue Agency.

"As far as choosing between company A, B or C, look for the one that best suits your personal needs, that makes the kinds of investments that you feel are the best," Gentes-Hawn said.

For more information about RESPs, visit the HRDC website at

http://www.hrdc-drhc.gc.ca, or call 1-800-267-3100.