Registered Education Savings Plans (RESPs) are designed to help families save for their children’s post-secondary education. The government will match 20% of the first $2500 contributed to the plan on an annual basis (per child). Contributions are not tax deductible and therefore can be withdrawn tax free when the time comes. All other funds coming out of the plan for educational purposes are known as ‘Educational Assistance Payment’ or EAPs; this would include the grants received and investment income/growth. EAPs are taxable to the student in the year withdrawn. Depending on the student’s total income and tax credits available, the amount of tax owing could be minimized.
What’s New
Currently the Income Tax Act limits the amount of EAP that can be withdrawn in the first 13 weeks of enrolment to $5000 for full-time students and $2500 for part-time students. This amount is often inadequate for students living away from home considering the cost of tuition, residence fees, meals, and supplies. The federal budget proposes to increase these withdrawal amounts to $8000 and $4000 for full-time and part-time students respectively.
In addition, the budget proposes to change the rules regarding joint subscribers. Currently, only spouses or common law partners can open a joint RESP. Divorced parents that previously held a joint RESP can maintain the plan, however, they are not able to open a new joint RESP. This can be challenging to divorced parents when trying to maximize contributions and grants for their children. The budget proposes that divorced parents will now be able to open joint RESPs for their children.
Registered Disability Savings Plans (RDSPs) are a tax-deferred registered savings plan for Canadians that qualify for the Disability Tax Credit (DTC). Launched in 2008, it is an excellent way to assist families in saving for their loved ones living with a disability. Up to $200,000 can be contributed to the plan, and although contributions are not tax deductible there is potential to collect government funds; Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs).
What’s New
RDSPs are normally set up by parents of minor children, however they can be set up for individuals who are over the age of 18 when their contractual competence is in doubt. If this is the case, RDSPs must be set up by the individual’s guardian or legal representative. Establishing a legal representative can be a lengthy and expensive process. As a temporary measure, the government will allow a ‘qualifying family member’ (parent, spouse, or common-law partner) to open the RDSP for adult that does not have contractual capacity and who does not have a legal representative. This amendment is a three-year extension to the current rule.
In addition, the new budget proposes to extend the definition of qualifying family member to include a sibling, so the brother or sister of the disabled adult will be able to open an RDSP on behalf of their loved one.
If you have any questions or want more information on RESPs or RDSPs please don’t hesitate to contact us.
Have a great weekend,
Tracey and Paige
Source: Original article written by Jamie Golombek, published March 30,2023 on The Financial Post website.
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