Class Gifts

Parents don’t have to be the only ones saving for their child’s education. Anyone can open an RESP.

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Multiple RESPs can be opened for one child, but there are stipulations concerning how much can be contributed.

While saving for a child’s post-secondary education often falls on the parents’ shoulders, it’s not always just mom and dad socking away dollars for their kids’ futures. A registered education savings plan, the main school-related savings account, can actually be opened by grandparents, aunts, uncles and even friends. “Helping to fund someone’s education by setting aside money in an RESP is a gift that may last a lifetime,” says Sara Kinnear, Director, Tax and Estate Planning, with Investors Group, explaining why people open RESP accounts for children other than their own.

If you’re interested in opening an RESP for a relative or friend, here are a few things you need to know.

Sara Kinnear
B.A., LL.B., CFP, TEP, is Director, Tax and Estate Planning, with Investors Group

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    Anyone can open an account

    Unless you’re opening a family plan RESP, there are no rules governing who can open an education savings account for a child. All someone needs is the beneficiary’s name, address and social insurance number. However, you need parental consent (or that of the primary caregiver or legal custodian) to apply for the Canada Education Savings Grant (CESG), an annual RESP contribution of up to $500 from the government.

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    There’s no limit on the number of accounts, but…

    Multiple RESPs can be opened for one child, says Kinnear, but there are stipulations concerning how much can be contributed. There is a total lifetime contribution limit per beneficiary of $50,000 – anything above that amount will be taxed at a rate of one percent for every month the additional money is in the fund. As well, a child can only receive a Basic CESG of $500 in total per year, which is 20 percent of a $2,500 contribution. (If the child has CESG room carried forward from a prior year, then the maximum annual Basic CESG award is $1,000.) So while you can open, say, three accounts, you can’t get additional grants or exceed the lifetime amount. Kinnear suggests coordinating with the parents to make sure that the lifetime limit isn’t exceeded.

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    State who gets the money

    If a sole subscriber of an RESP dies, then the money becomes part of his or her estate. In many cases the executor will be required to wind down the unused plan and share what’s left among the estate beneficiaries. In other words, if the subscriber’s will said “all to my children”, and didn’t mention the RESPs for the grandchildren at all, then it’s the kids, not the grandkids who get the cash from the RESPs. To avoid this problem, grandparents should in their wills appoint the parents of the grandchild in question to become subscribers to the RESP upon their death.

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    Consider your age before opening an account

    If the money ends up not getting used – i.e., if the beneficiary doesn’t pursue post-secondary education – the RESP income (growth or earnings) can be transferred into the contributor’s RRSP. If, however, the RESP subscriber is over 71, those unused funds could cause problems. While money that’s not used by one child can be transferred to a sibling, if the cash can’t be spent on education, then the government will take back the CESG and you’ll also be subject to a 20-percent penalty tax on the income. Most people can avoid this tax by putting the RESP income directly into an RRSP, but if you’re turning 71 you will be winding down your RRSP. In that case, says Kinnear, “it might be better for the parent to establish the RESP, and the grandparent to fund it.”

    Despite a few additional things to consider, opening an RESP for a non-family member can be the gift that keeps on giving. Just make sure to talk to the parents first before making the initial contribution. “The key is to communicate with the parents of that child to ensure that, between the two of you, there is a cohesive plan in place,” says Kinnear. “You want to work together,” she says.

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