In a recent Investor Clinic video, I asked readers to send in their questions about registered education savings plans.
Most people know that RESPs are a great savings tool, thanks to the Canada Education Savings Grant (CESG) that kicks in an additional 20 per cent of free government money for a child's postsecondary education. But RESPs are also among the most complex accounts out there, with myriad rules and conditions that can trip up the uninformed.
To help us navigate the RESP maze, Investor Clinic invited May Wong, executive director of the Toronto-based Omega Foundation, to answer your questions. Ms. Wong leads Smartsaver, a non-profit project that shows families how to start an RESP, obtain government grants and make the most of the many options available.
I haven't yet opened an RESP account for my daughter, who turns 17 on Sept. 29 . Can I contribute $37,500 right now to get a $7,500 grant?
Sadly, no. You have to start saving in an RESP before the end of the calendar year in which your child turns 15 to be eligible to receive any grants when the child is 16 or 17. Specifically, the RESP must already hold a minimum of $2,000 in contributions, or hold at least $100 in contributions from any four years prior to the end of the calendar year in which your child turns 15.
Even if you did have an RESP in place that met those conditions, you couldn't receive a $7,500 grant. The maximum basic CESG available for a child annually is $500 (20 per cent of $2,500), or up to $1,000 if you carry forward grant room not used in previous years. Families with lower incomes can receive up to $1,100 a child, including carry forwards. The maximum lifetime CESG one child can receive is $7,200.
I would like to open an RESP for my niece's son. She is severely handicapped and cannot work, so has very little money. I also want to ensure that the funds are only used for her son's education. What would you suggest?
Set up an individual RESP for your niece's son yourself. As the subscriber of the RESP, you control the investment and withdrawal of the funds. If your niece's income is low, be sure to apply for both the basic CESG and the additional CESG for lower-income families, which provides up to 20 per cent more in matching grants. Eligibility is assessed based on the income of the child's primary caregiver.
I would like to know if there are U.S. tax implications for RESPs set up for children with dual citizenship (Canadian and American). Two of these children live in Canada. One lives in the United States.
There may be, depending on the residency of the subscriber (contributor). Earnings, such as interest or investment growth within an RESP are tax-sheltered in Canada. It's possible the income may not enjoy the same tax-sheltered status in the subscriber's country of residence if that's not Canada. When the earnings are withdrawn, they are taxed in the hands of the RESP's beneficiary. They'd be subject to the same tax treatment as any other income the beneficiary may have. Also note, only Canadian residents qualify to receive the CESG.
What is the Canada Learning Bond and who can get it?
The Canada Learning Bond (CLB) is a contribution to an RESP made by the Government of Canada. It is not a matching grant: No family contribution is required to receive it. It's available to any child born in 2004 or later whose family receives the National Child Benefit Supplement (net family income in 2011 of $41,544 or less). The CLB contributes at least $500 to the RESP of an eligible child with an additional $100 added each year the child is eligible, to a maximum of $2,000. The CLB is the best-kept RESP secret. So few people know about it, only one in five eligible kids have received this free money. There are CLBs waiting for more than one million Canadian children. All their parents need to do is open an RESP. So whether you have kids or know kids who may be eligible for the CLB, help them get it started today. With RESPs and the CLB, all kids can set their sights on postsecondary education.
Note to readers: Starting next week, my Investor Clinic column will be moving to Fridays, where I'll continue answering your investing and personal finance questions. On Wednesdays, I'll be writing a new column called Yield Hog, focused on dividend stocks and other income products.
John Heinzl