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A complex but flexible investment tool

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Many parents and grandparents invested in RESPs for their children or grandchildren. RESPs are a great tool to help pay for a child's education and offer the dual benefits of government grants and tax-sheltered income.

The Canadian government matches up to 20% of your contributions to a maximum of $500 per year and $7,200 in total for each child through what is known as the Canada Education Savings Grant (CESG). Some families with lower incomes may also qualify for up to $2,000 in grants through the Canada Learning Bond (CLB). There is a lifetime limit for contributions of $50,000 per child.

"RESPs are actually pretty complex accounts," says Julia Chun, co-founder and senior financial planner at Spring Financial Planning, "but there are lots of options." Beneficiaries can use them for college and university degrees, apprenticeship programs, trade schools and even some gap-year programs. Participation can be either full-time or part-time.

Chun suggests parents take their time before deciding what to do about an unused RESP. "You don't lose your contributions if your children don't attend post-secondary school," she adds, "so don't imagine that you are actually trying to decide their future right now."

And if your child decides not to attend school after all? Several options are available.

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Option 1: Do nothing at all

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An RESP can remain open for 36 years, so you don't need to do anything right away. Your child or grandchild may change his or her mind and eventually attend school. Most students who opt for a gap year do end up returning to their studies, Ditmer says.

If you keep the RESP open and the child returns to classes, he or she will have access to three potential sources of income: your contributions, government grants and any investment income you've earned within the RESP.

However, you should know that if the child doesn't go to school, you will eventually have to collapse the RESP, and income from it could be attributed to you as the subscriber.

Option 2: Close your account

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An RESP contains three potential sources of income: your contributions, government grants and investment returns — referred to as an Accumulated Income Payment (AIP). The rules treat each source of revenue differently when you close your account.

Your original contributions can be withdrawn tax-free at any time.

You will, however, have to repay any government grants you received within the RESP, including the CESG and the CLB.

The AIP, or income earned within the RESP from interest or investments, can be withdrawn if you meet three conditions:

  • All children named in your RESP are at least 21 years old and are not in school
  • You opened the RESP at least 10 years ago
  • You are a Canadian resident

However, you will also pay tax on this income unless you find another way to protect these earnings by either transferring them to another child or rolling them into a Registered Retirement Savings Plan (RRSP) or a Registered Disability Savings Plan (RDSP).

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Option 3: Roll your contributions and income into an RRSP

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Transferring your RESP to an RRSP belonging to you or your spouse is an excellent option if you have the contribution room available. Rather than closing the RESP, you can transfer up to $50,000 in unused RESP contributions and earnings to an RRSP.

You must, however, still repay any government grants and meet several conditions. All beneficiaries of the RESP must be at least 21 years of age and none can be currently attending a post-secondary institution. The RESP account must be at least 10 years old, and you must have enough contribution room available in your, or your spouse's, RRSP.

Option 4: Move RESP income to an RDSP

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You can also elect to transfer the income earned within the RESP to an RDSP, which helps parents save for the future of a child eligible for the disability tax credit. Again, you'll have to pay back education savings grants to the government.

You can transfer only to the RDSP of your children or grandchildren and must meet at least one of the following conditions:

  • The beneficiary is, or will be, unable to pursue post-secondary education because he or she has a severe and prolonged mental impairment
  • The RESP has been in existence for more than 35 years
  • The RESP has been in existence for at least 10 years, and each beneficiary under the RESP has reached the age of 21 and is not eligible to receive educational assistance payments

Option 5: Transfer the RESP to another child

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Naming a new beneficiary or transferring the RESP to another child could mean you can preserve all three income streams within the RESP, including grants, if the new beneficiary has not reached the prescribed limits for grants and contributions.

If you have more than one child, this is an ideal option. The other child must be the brother or sister of the beneficiary and must be younger than 21. Other conditions may also have to be met, depending on the type of RESP plan you set up.

Opening an RESP for your child or grandchild is a long-term investment in their future, even if that future doesn't include post-secondary education. The RESP is still a valuable and flexible tool. Every situation is different. Talk to your financial advisor for advice on how best to preserve the income in your RESP.

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