RESP knowledge still lacking, survey reveals

(August 16, 2005) Despite the fact the federal government of Canada is practically giving away money to parents who save for their children’s education, more than half say they have not opened a Registered Education Savings Plan (RESP).

Even if a client’s children aren’t old enough to have them thinking about back-to-school specials, the time of year should be enough to get them thinking about ways to save for the future.

Those who do contribute to an RESP on behalf of an eligible beneficiary, defer taxes on the investment income earned by RESP deposits until it is used by the child, and the Canada Education Savings Grant (CESG) adds 20% each year to the first $2,000 invested. Over the years, this matching program adds up to $7,200 if clients max out their RESP contributions each year.

Even with these incentives, an Investors Group research series that looks at families and money found roughly 51% of those who are saving for a child’s education have not opened an RESP. Of those, 25% say there are better ways to save for their education, and another 18% say they simply “haven’t got around to it” yet.

“There is absolutely no better way to save for a child’s education because an RESP includes a government grant,” says Debbie Ammeter, vice president of advanced financial planning at Investors Group. “There is no question that an RESP provides the best foundation for education savings.”

Surprisingly, she says there are misunderstandings about how RESPs work, even among those already contributing to a plan. More than half (56%) mistakenly believe they will lose the growth in their RESP savings if their child does not go to school. If one child decides not to go to college or university, the RESP can be switched to another child’s name, or parents can choose to repay the grant portion of the RESP and roll the contributions and investment growth into an RRSP or spousal RRSP if there is sufficient contribution room.

To set up a plan, the beneficiary must be a Canadian resident under the age of 17, and have a Social Insurance Number. To qualify for the government grant, RESP contributions must begin before the child turns 16. The money can be used to cover more than one tuition for the child, or it can go to any reasonable education expenses like books, supplies, transportation and living costs.

Children are expensive however, and it may simply be that the family can’t find the money to make RESP contributions.

To help low and middle income families, the government passed the Canada Education Savings Act at the end of 2004, which introduced the Canada Learning Bond and enhancements to the grant program for families with annual household incomes lower than $70,000.

The Canada Learning Bond program gives $500 to children born on or after January 1, 2004 in families entitled to the National Child Benefit supplement (NCBS) for the child, followed by 15 annual payments of $100 for each year the family is entitled to the supplement. On top of this, the legislation doubles the CESG from 20% to 40% of the first $500 contributed to a child’s RESP if the family’s net income is less than $35,000. For families with qualifying net income greater than $35,000 but not exceeding $70,000, the Act increases the CESG from 20% to 30%.

The NCBS is part of the Canada Child Tax Benefit, a tax-free monthly payment made to eligible families to help them with the cost of raising children under age 18. To qualify for the Child Tax Benefit, Canada Revenue says generally, families should apply for the CCTB as soon as their child is born.

As of July 2005, the CCTB was also available to one and two children families earning less than approximately $96,995, and families with three children, earning less than approximately $129,845. To apply, both the client and their spouse or common law partner need to be residents of Canada, and both must file a tax return, even if there is no income to report, before the CRA can calculate the benefit.

Filed by Kate McCaffery Advisor.ca, kate.mccaffery@advisor.rogers.com