It’s Back to School Time Again
Back to school reminds parents that their children are moving a step closer to high school graduation and starting their own path for the future. In many cases, students will opt for post-secondary education, and that’s where Registered Education Savings Plans (RESPs) can help.
The bookkeeping and accounting team at Canwest Accounting work with a lot of clients on their tax returns and see many students claiming withdrawals from RESPs.
“It’s up to the parents whether RESPs are the best idea for them,” says Sharlane Bailey, Owner of Canwest Accounting, which has offices in Victoria and on the West Shore in Langford. “For example, a lot of parents don’t take into account that if the student also works, they may owe income tax when cashing in RESPs.”
As long as the income from these investments stays in the RESP, it is not taxed, but when money is withdrawn and used to pay for a child’s post-secondary education the plan earnings and government contributions are taxed and must be paid by the student.
Many Parents Subscribe to an RESP
Many parents subscribe to an RESP because their contributions are topped up by applicable government grants, including the Canada Education Savings Grant, Canada Learning Bond, and in BC, the BC Training and Education Savings Grant. In order to receive the full benefit of the grants, parents need to invest the maximum amount of $2,500 into RESPs each year. It is also important to note that if you don’t start investing in a RESP for a child by the time they are 15, you won’t receive the grants.
The lifetime limit for contributing to all RESPs for a beneficiary is $50,000. That may not cover a student’s entire education if they are not living at home and require funds for living expenses, or if they pursue an undergraduate degree plus a Master’s and/or doctorate degree.
What if the child decides not to pursue a post-secondary education? If funds are withdrawn from a RESP outside of paying for a student’s education, called an Accumulated Income Payment, the grant money will be returned to the government.
Bailey recommends that anyone investing in RESPs do so through a reputable investment company or financial institution, adding that companies only dealing in RESPs may have additional rules or conditions around contribution amounts. Make sure you read the fine print. Another option for parents may be saving money for their children’s education in a tax-free savings account, assuming they have room. They won’t receive the government grants, but will have more control over the money.
She also reminds students to download their T2202A tuition receipt in January or February and claim this on their income tax return, along with any proceeds from RESPs and/or employment.
The suggestions and advice provided by Canwest Accounting should not be relied upon in place of professional advice. You are responsible for checking the accuracy of relevant facts and opinions provided.