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RESP 21 Year Plan

By Nizam Shajani, CPA, CA, MBA

Registered education savings plans managed effectively will allow for a free $7,200 Grant (Canada Education Savings Grant (CESG)) to be used for education purposes towards a child’s education plus investments that can grow tax deferred.

The CESG is based on 20% of a $2,500 contribution made each year and available until the calendar year in which the beneficiary turns 17.  Contributions must commence prior to the year in which your child turns 15.  The maximum contributions per RESP account is $50,000 per child.  Note excess contributions are subject to tax of 1% per month, compounded.

In addition – to someone at the highest tax bracket, the grant would have a potential tax savings of an estimated $19,247 as the gains on the withdrawals (based on a 5% annual gain on the investment that would otherwise be taxed at 34.31% in the hands of the contributor) would be taxed in the assumed lowest tax bracket of the child.

To receive the maximum benefit, a contribution of $3,333 per year for 15 years would need to be made for a total of $50,000.  The contributions would grow to an estimated $90,866 at the end of year 17 based on a 5% return each year.

Note you will need to provide some documentation that the beneficiary is going to an approved school to make withdrawals, however the RESP can stay open for 35 years from the date it was initially opened.  If the beneficiary does not go to an approved school, there are taxes and penalties on the withdrawals.  However, there are strategies in place to help minimize this.

Withdrawals on contributions are not taxed.  Withdrawals on the accumulated income, including grants, interest, dividends and capital gains are taxable to the recipient.  Students will have the tax advantage of the personal exemption, tuition tax credits and a lower tax brackets.  Withdrawals while the student is at these lower tax brackets are usually the most advantageous.

In our example, if the student were to take $14,025 into income in each of years 18, 19, 20 and 21, with the remaining $50,000 contribution returned to the initial contributor in year 21 – the tax savings (assuming the contributor is at the highest tax bracket and the student has no other income) would be approximately $19,247 in addition to the $7,200 in CESG provided to the beneficiary.

Table 1

 
RESP 21 Year Plan
Opening Balance  $                       –  
Annual Contribution  $                3,333
ROI                         5%
Withdrawals at Year 18  $              14,025
   
  Opening Contribution Return CESG Withdrawal Balance
Year 1                           –                        3,333                     –                500                            –                  3,833
Year 2                    3,833                      3,333                  192                500                    7,858
Year 3                    7,858                      3,333                  393                500                  12,085
Year 4                  12,085                      3,333                  604                500                  16,522
Year 5                  16,522                      3,333                  826                500                  21,182
Year 6                  21,182                      3,333              1,059                500                  26,074
Year 7                  26,074                      3,333              1,304                500                  31,211
Year 8                  31,211                      3,333              1,561                500                  36,605
Year 9                  36,605                      3,333              1,830                500                  42,268
Year 10                  42,268                      3,333              2,113                500                  48,215
Year 11                  48,215                      3,333              2,411                500                  54,459
Year 12                  54,459                      3,333              2,723                500                  61,016
Year 13                  61,016                      3,333              3,051                500                  67,900
Year 14                  67,900                      3,333              3,395                500                  75,128
Year 15                  75,128                      3,333              3,756                200                  82,418
Year 16                  82,418                             –              4,121                   –                  86,539
Year 17                  86,539                             –              4,327                   –                  90,866
Year 18                  90,866                             –              4,543                   –                  14,025                81,384
Year 19                  81,384                             –              4,069                   –                  14,025                71,429
Year 20                  71,429                             –              3,571                   –                  14,025                60,976
Year 21                  60,976                             –              3,049                   –                  14,025                50,000
                      50,000            48,898            7,200                  56,098  
Tax Savings                          19,247

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