This post is part of the Big RESP Series. See the entire series here.
See the previous post on RESP asset allocations.
These rules are valid as of 2008.
There are two types of resp accounts that you can have: individual and family. This post will outline some of the rules and differences of these account types.
Individual Plan
Individual plans can only have one named beneficiary. The beneficiary can be any individual named by the subscriber including the subscriber (Individuals can open RESPs for themselves). There are no age restrictions on this type of account, however CESG and other grants can only be paid to beneficiaries under the age of 18. The beneficiary on the account can be replaced by anyone else but if the new beneficiary is not blood related to the subscriber then any CESG (grants) have to be repaid. The last contribution date is the end of the 21st year of plan’s existence. Plan has to be collapsed after it’s 26th year.
Family Plan
Family plans can have one or more beneficiaries. The beneficiaries must be connected to the subscriber by blood or adoption. This includes children, grandchildren or siblings of the Subscriber, either by blood, adoption, or marriage. The beneficiaries must be under 21 years old when named. All contributions on behalf of a beneficiary must be made before the beneficiary has turned 22. Beneficiaries can be removed or added anytime during the life of the plan.
If there is more than one beneficiary then the contributions have to be allocated to each beneficiary. For example if you have twins you might set the allocation at 50% for each child. If you have two kids that are different ages and you don’t set up the resp until the second child is born then you might choose to allocate more of the contribution to the older child in order to catch up on their contributions.
One rule which is always in effect for both types of plans is the maximum lifetime contribution of $7200. If you have a situation where both of your children have received the maximum grant and you want to transfer some of the contributions to a different beneficiary then you will lose the corresponding grants. This also applies to transfers with individual accounts as well.
So which is better? Family or Individual?
If you only have one child then the individual account is the obvious answer. For multiple child families it may appear at first glance that family accounts are more flexible than individual accounts however in fact they are pretty much the same thing because the rules allow transferring money between any type of accounts. In case one of your kids doesn’t go to school, it doesn’t matter whether you have your kids in a family account or individual accounts since you are allowed to transfer money to the kid(s) who are still going to go to school in either case. I would suggest that family plans are slightly better if you have more than one child mainly because it will save on account fees and it might simplify the paper work a bit. Bottom line is that it doesn’t really matter so pick the cheapest and most convenient option.
A drawback of the family plan
Family accounts have to be collapsed by Dec. 31 of 25th year after plan setup.
The problem with this rule is that if you have a large age discrepancy between beneficiaries ie if you have twins, set up a family account right away and then (oops) 9 years later you have a third child, adding the third child to the family plan doesn’t make sense since the plan has to be collapsed before the youngest child even finishes high school. You can set up an individual account but this defeats the purpose of family plans. Most financial insitutions didn’t start offering resps until 1998 when the government started to give grants based on contributions so the oldest resp plans are only about 9 years old (I’m not counting pooled plans). I predict that in 15-20 years when this rule starts to affect some resp holders that it might be a prime candidate for a change. The rule regarding collapse of the family plan should be based on the age of the youngest beneficiary, not the age of the plan. It should read something like “The family plan has to be collapsed by the end of the year in which the youngest beneficiary turns 25″.
An import thing to consider
When setting up a RESP for a child it’s important to communicate with other relatives and friends who might have also set up a resp for the same beneficiary. The government will add up all the contributions attributed to each beneficiary in order to enforce the various limits and maximum amounts. This applies to any resp accounts set up for a beneficiary – it doesn’t matter if they are set up in different financial institutions by different subscribers. This issue was more important when there was an annual maximum for resp contributions (which was removed this year), however there is still the lifetime limit ($50k) to consider as well as maximum annual grant amounts.
You might be wondering why someone would set up an resp for a relative (ie nephew) rather than give the money to the parents to set up an resp? For one thing if that parent is not as financially sound as you are and perhaps you don’t trust them then you might not want to give them the money for fear that they won’t set up the resp or maybe they will withdraw the money before the child goes to school. Another scenario is if the child doesn’t go to school, then the money goes back to the subscriber so you might want to make sure you get your money back in that case.
See the next post – RESP – A comparison to Non-Registered accounts.
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I have to admit, I sort of breezed through this as I’m not concerned with RESPs at this point but I found the little bit about contributing to relatives / friends kids very interesting. I’ve always preferred to give gifts of money for university savings for my friends kids but I also wonder if it really ends up there…
Good to know!
Telly – I’m devastated that you don’t read my every word on this fascinating subject
Actually even I find it a bit boring at times…
Mike
I’m glad you addressed nosy relatives at the end of this post. It is one of my big concerns. .
Do you know of a way to legally prevent a relative from doing this? (also setting up an RESP) I have a baby due in Dec and this has been a huge source of contention, especially since my mother is a financial advisor/insurance broker and sets up these things for a living.
Is there even a way to find out if someone has set one up for your child besides waiting for the gov’t to notify me that I’ve gone over the annual limit?
Thank you so much!!!
AF – that is a problem that most people would be happy to have.
The only way I can think of to prevent anyone from setting up an resp is to not give them your child’s SIN number (it’s mandatory).
You can find out if there are other accounts set up by calling the HRSDC – they can see how much is being paid out in grants.
You should try to find out how much your relatives are contributing and then contribute accordingly.
Keep in mind as well, there is no annual contribution limit. There is a maximum grant that can be paid out in a single year but any contributions on top of that won’t get a grant.
Hope this helps,
Mike
Any ideas on how to distribute funds to your children under a family plan? How does one calculate how much “belongs” to the first child vs. his/her younger sibling?
Hi Y Hat – when you have a family plan you have to allocate the contributions so that a certain percentage goes to each child.
The resp provider will send this info to the government so both will have this info in their systems. When you do a withdrawal you can specify which beneficiary is getting the money.
Let me know if you need more info,
Mike
AF: Actually, your mother will need your signature (parent or legal guardian) if she wishes to apply for the CESG to be paid into her plan. My mother did this and I remember her bringing over such a form for this purpose. I imagine if you don’t sign, she can still open the RESP, but won’t be able to fetch the grant… though I’ve not checked that.
Thinking about this, it seems a bit strange that there is not a similar form for the CRA granting permission to open the RESP in the first place. It would seem at least possible that someone could object to having the $50K lifetime maximum eaten up by other relatives plans, but that doesn’t appear to be considered looking at the paperwork.
Four Pillars: In the post, while considering which plan is better you state: “however in fact they are pretty much the same thing because the rules allow transferring money between any type of accounts”.
Actually, in asking about this at the CRA (called back a few times even) I was told that transferring is a bigger deal than you might think. From what I gather, a transfer is an “all or nothing” type scenario. This surprised me as I had actually taken the time to download and read the transfer form and it had a section that at least suggested that a partial transfer is possible.
Worse still is that in doing so you would effectively be collapsing the plan from which you are transferring. In doing so, the grant and accrued interests will be evaluated for taxation and/or returned to HRSDC. I _think_ the most favourable scenario in this evaluation is blood related siblings, but I was told it was a case by case basis and that they could not specifically comment on my case (very typical: 2 kids aged 3 and 4) so I rather went away with the sense that some money would certainly be lost.
Frankly, I got some conflicting information the different times I called so would encourage anyone considering the “individual plans” option to inquire for themselves before going ahead.
This new (albeit somewhat unclear) information was enough to worry me into going back to the bank, closing the individual plans I’d already opened and opening a single family plan for my kids. Luckily, I had not yet contributed before I realised my “mistake”. In truth, the decision was made much easier after I got wind of the changes in the 2008 budget. The original limits is what pushed me towards the individual plans in the first place. I’d imagine the rules changes makes the family plan a no brainer for most people now.
Hi Pablito – thanks for the great comments.
I’ve found the CRA to be pretty hit or miss.
If you transfer an individual resp to a family resp then the individual resp is not collapsed as long as the beneficiaries are blood related.
You’re right that the new rule about the longer age of the resp account (35 years) changes this decision. I definitely think a family account is a better option.
I’m going to do a followup post on the resp change and how it affects some of the ideas that I posted about here.
Mike
Hi Mike: It is a bit academic now, but given the amount of time I’ve spent trying to get my head around all the confusion, I’m genuinely curious now…
Are you saying that I was misinformed about the transfer restrictions or was my mistake in letting them think I would transfer the first child’s individual RESP into the second child’s individual RESP? Is the key in transferring to a (new) family RESP?
Pablito – I’ll do some more research to verify but I wasn’t aware of any restrictions between blood relatives.
Thanks, but I’m not sure it is worth the effort. I was just asking out of curiosity.
Hello,
I’m a Canadian Citizen living in the USA as a resident with two children who were born in the USA. Can my father (lives in Canada) setup an RESP on behalf of my two children and also be qualified for the yearly grant (I believe $400 for every $2000)?
Thanks!
Nazir – no, he can’t. The kids have to be Canadian residents to qualify for the grant.
So there is no other way? They have to be Canadian residents with a SIN? Or just a resident? We will eventually move to Canada and reside there so I’d like to find a way to take advantage of this plan. Our kids are 3 yrs old.
Thanks
Like I said, they have to be Canadian residents. Otherwise no dice.
My dilemma is that my ex-spouse, who became the subscriber of the RESP after the death of his mother (the original subscriber) apparently took the funds and spent them, rather than allow one of his three children named as beneficiaries in the family plan access to some of the money for post secondary education fees. Is that legal? And what about the rights of the beneficiary, or does the child/student have any where the RESP is concerned?
This is really a tragic circumstance.
Annette – the subscriber of the resp owns the money 100% so they can do whatever they like with it. The beneficiary has no claim to the money until it is given to them.
Given that there was a divorce involved you might want to check this out with a lawyer since the rules might be different in that case.
Thanks so much for your advice. Great website, by the way!