By Peter Lewis
As often happens when new federal Budgets are announced, some of the seemingly small and insignificant items or changes that are included in the document get little notice or fanfare. Such was the case with the Government of Canada’s latest Budget, tabled in late February.
One little-noticed item was an extension of the length of time that a Registered Education Savings Plan (RESP) can remain open, from the previous limit of 25 years to a new limit of 35 years. In addition, contributions of money into an RESP can now be made for 31 years, up from 21 years.
As I said above, “seemingly insignificant”.
But in fact, these changes may be very meaningful to thousands of Canadian families – those who already have RESPs for their children, and those who will in the future.
Well, many families with two or more children invest in RESPs early in the first child’s life, in the hope that all the children will go on to college or university when they finish high school. That’s a noble thought, and investing in a family RESP is a wise thing to do: the money contributed by the subscriber is invested, along with various government grants, and over time can grow to a sizeable nest egg to help pay for post-secondary tuition and living fees.
But what if the first one or two children decide that they are not going to go on to post-secondary education? And if there’s a third child (or more) who may still do so?
Under the old rules, an RESP had to be wound down after 25 years – that is, it had to be used for education purposes by that time. Contributions to an RESP could only be made for 21 years. If the older children didn’t use the RESP within 25 years, and the younger children weren’t old enough to go to university, the RESP couldn’t be passed on to the younger ones. The subscriber (usually the parents) would have to either withdraw the income from the plan and pay tax on it, or roll the income into a Registered Retirement Savings Plan. Either way, any government grants would have to go back to the government at that time.
Now, with a 10-year extension, that issue has been resolved for all intents and purposes.
Contributions can continue to be made into a plan for the younger child or children, to pay for their college or university costs when they graduate from high school – or even delay going on for a year or two. Children who may be quite a bit younger than their brothers and sisters can still benefit from the RESP.
These measures of the Federal Budget were among a number of improvements that both the Liberal and Conservative Governments of Canada have made in recent years, to encourage Canadians to save for their childrens’ ongoing education. Clearly, our politicians and bureaucrats recognize the critical importance to Canada’s future of having a well-educated and motivated workforce, and the important role Registered Education Savings Plans have in making this a reality.
Peter Lewis is Chair of the Registered Education Savings Plan Dealers Association of Canada, and father of six children!