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How An Registered Education Savings Plan Works

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A Registered Education Savings Plan or RESP is a special type of savings vehicle available to parents in Canada. It is intended primarily to help parents save money for post high school educational expenses for their children.

Heritage Education Funds provides a number of advantages, one of which is providing access to the Canada Education Savings Grant (CESG). RESPs are also used as investment vehicles for generating tax-deferred income.

The person that makes contributions to an RESP is called a subscriber. Contributions may also be made by representatives of subscribers. Contributions are not deductible from income taxes.

Promoters working for the RESP organization are tasked with paying contributions and income earned from contributions to plan beneficiaries. These funds are paid in the form of educational assistance payments or EAPs.

If for any reason the contributions are not paid to the plan beneficiary, the funds are paid to the subscriber upon the termination of the contract. Returned contributions will not have to be declared when filing taxes.

However, beneficiaries EAPs from promoters will have to include them in their tax forms in the year when they received the funds. Contributions are not taxable, and will not have to be included.

Education savings plans are registered as RESPs by the Canada Revenue Agency. Limits are set by the Income Tax Act on the amount that may be contributed for beneficiaries. These limits will be in effect for the lifetime of the beneficiary.

No contributions may be made to an RESP expect in the case of transfers from another RESP. Specified plans are the exceptions to this rule, which is in place until the end of the year during which the 31st anniversary of the opening of the plan takes place. RESPs will also have to be completed by the end of the year during which the 35th anniversary of the plan’s opening takes place.

The following is an overview of how RESPs typically work:

• Subscribers sign a contract for an RESP plan with the promoter. One or more beneficiaries may be named under the plan.

• Subscribers make contributions according to the terms of the RESP. If applicable, government grants may be paid to the RESP. Among eligible grants are Canada Education Savings Grants (CESGs) and Canada Learning Bonds (CLBs). Designated provincial education savings programs may also be allowed.

• The RESP promoter will be tasked with administering all funds paid to the RESP. The income will not be taxable as long as it remains in the RESP. It is also the responsibility of the promoter to ensure that payments from the RESP are provided according to the terms of the plan.

• Contributions returned to the subscriber are into subject to taxes.

• Promoter may make payments to beneficiaries for purposes of financing post-secondary education. Promoters may also make accumulated income payments.

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