Wednesday, September 26, 2012

RESP answers

It's September, summer is over and school is now back in full-swing. Whether your kids are University-bound or just starting out in Junior Kindergarten, this time of year gets a lot of parents thinking about the cost of their education and what you can do to lessen the blow.

A Registered Education Savings Plan (RESP) is a great way to save for a child’s post-secondary education. But how you or the student beneficiary accesses those funds, what the money can be used for, and/or transferring an existing RESP to another beneficiary can be complicated. So here are some basic answers to round out your personal RESP education.
  • Investments that are RESP eligible allow savings to grow tax-free until your child enrolls in a qualifying post-secondary education program. Anyone can each establish an RESP eligible account for a child, but total contributions on behalf of a particular child may not exceed $50,000.
  • There are three types of RESPs:
    • A Family Plan allows you to name multiple beneficiaries, each of whom must be “related” to you. In most cases, the beneficiaries must also be siblings (including half-siblings and step-siblings).
    • An Individual Plan allows you to name one beneficiary, who does not have to be related to you.
    • A Group Plan ‘pools’ the earnings on your savings with those of other people, and the amount your child receives to pursue post-secondary education is based on how much money is in the ‘pool’ and on the total number of students in that school year.
  • The Canadian Education Savings Grant (CESG)1, is a federal program that provides a matching grant for each RESP contribution made for an eligible child. It is generally worth 20% of the first $2,500 of annual contributions ($500/year), but depending on family income and prior contribution history, could be worth up to $1,100/year. The maximum CESG that can be earned by any one child is $7,200.
  • The Canada Learning Bond (CLB)* is a federal program that provides $500 bond to an RESP for a child whose family receives the National Child Benefit Supplement, and $100/year for up to 15 subsequent years. The maximum CLB that can be earned by any one child is $2,000.
  • You can authorize “Educational Assistance Payments” (“EAPs”) from the RESP to the student beneficiary as soon as the student enrolls in a qualifying full- or part-time post-secondary education program. EAPs consist of government bonds and grants and plan accumulated earnings; they do not include contributions. EAPs are taxed to the student beneficiary, who will usually be in a low tax bracket. EAPs must be used to further the student beneficiary’s post-secondary education.
  • You can withdraw your RESP contributions tax-free at any time for any purpose, but if you make withdraw contributions at a time when your student is ineligible for an EAP, you will be required to repay CESG and perhaps other provincial/territorial grants*.
  • Family and Individual plans generally allow siblings under 21 to share the contributions, CESG, and accumulated earnings without penalty. These “sharing” rules are quite complex; to verify how they would apply to your plan, contact your plan provider.
There may be other restrictions or unexpected consequences (especially with Group Plans) – so before you sign up for a RESP, be sure to talk to your professional advisor.

1The Canada Education Savings Grant and Canada Learning Bond (CLB) are provided by the Government of Canada. CLB eligibility depends on family income levels. Some provinces make education savings grants available to their residents.

Thursday, September 13, 2012

Principal residence exemption and your cottage

Through the principal residence exemption, your home is just about the only investment you can profit from without paying a cent in taxes. The Income Tax Act allows this exemption on any housing unit that you, your spouse or common law partner or your children lived in during the year – and that can include a unit in a condo or apartment building, or even a cottage, mobile home or houseboat. If you own both a home and a cottage, you can designate one or the other as your principal residence even if you only take short vacations at your cottage. And you might want to do that for sound financial planning reasons. Let’s take a closer look at the principal residence exemption
  • Your family is allowed only one principal residence each year
  • If you own a multiplex and rent out the other units, you can claim the exemption only for the portion of the building you inhabit
  • It can make sense to designate your cottage for the exemption when, for example, your family has owned both a house and cottage for a number of years and you decide to sell your house, which has appreciated by $20,000 while your cottage has risen in value by much more. If you believe cottage prices will continue to be stable or rise, it can be a better tax-saving strategy to place your exemption on your cottage
  • If you own a house on a few hectares of land, you can generally claim the exemption only for the house and up to a half hectare of land and the rest will be subject to capital gains. The exemption may be available for all or part of the excess land under certain circumstances
  • You will probably not lose your exemption if you take in a boarder or renter who shares your kitchen and your house. You will likely lose the exemption for any portion of your home to which you make structural changes to create a self-contained apartment
  • If you move out of your house to rent it, you will be deemed to have sold it at fair market value. Because it was your principal residence, the immediate gain may be eliminated or reduced but any future gain will usually be taxable. There are however some planning opportunities that may allow you to extend the exemption into the years after the conversion
The best tax-saving principal residence exemption strategy for you depends on many factors, including your overall financial and retirement goals. Your professional advisor can help you make the right choices for you and your family.