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Registered education savings plans and in trust accounts

Parents and grandparents often want to start saving for children and grandchildren early on.

Instead of opening an account in name of the child in a regular savings account, they can put money into Registered Education Savings Plans and in trust accounts as these can have tax savings and other benefits.

What is a Registered Education Savings Plan?

A RESP is a dedicated savings plan to save for a child’s education plan after they have completed high school.

Anybody can open an RESP for a child, such as parents, grandparents other relatives and even friends. When the child goes to college or university he or she can start withdrawing payments or educational assistance payments from the account.

How do RESP’s work?

The subscriber (the person who opened the account for the child) makes contributions to the RESP.

The promoter (usually the government), pays contributions and income earned from contributions to the account.

The Canada Revenue Agency registers the account and imposes lifetime limits based on the Income Tax Act on the amount that are allowed to be contributed for each beneficiary.

Note that a subscriber cannot write off the amount he or she contributed during tax time.

The savings within the RESP are tax free on investment earnings, as long as the money stays in the account. If money is saved for a child that is under 17, the federal and sometimes provincial government, too, will contribute money to the account as a grant or a bond.

RESP’s are not just accounts but they can be invested in mutual funds, stocks, GIC’s and bonds. Depending on the plan, some plan allow you to decide where to invest the money and some other plans invest the money for you.

RESP’s can stay open for a very long time, up to 36 years. Under specific plan rules, RESP’s can stay open even longer, up to 40 years if the beneficiary is eligible for the disability tax credit.

If the child decides not to pursue post-secondary education after high school, you can transfer the money into another RESP for another child.

What is an in trust account?

An in trust account can be opened by an adult “in trust” for a child beneficiary.

Parents and grandparents often choose this option because this arrangement can often lead to income splitting, which benefits them at tax time. An in trust account is an informal trust arrangement.

In trust accounts are often not recognized by the law because legal trusts usually have to be set up with the help of a lawyer who makes sure that all requirements to make a legal trust are fulfilled.

While it may not be strictly required for trust documentation to be drawn up in order to create a trust relationship, without legal documentation it’s often quite hard to prove the intention of the person who made the trust and it may be declared that no trust exists.

An accountant or lawyer should be consulted to find out the exact tax and legal implications of this arrangement.

Read more:

Registered Education Savings Plans (RESPs)

Understanding In-trust Accounts