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Knowledge requirements for RESPs - Post #04 - FPSC Level 1 Examination - December 2017

Posted by John Gobeil on

The FPSC Level 1 Examination is the first of two exams that must be passed to obtain CFP® certification. We have posted this entry to assist you in your preparation for the FPSC Level 1 Examination (FPE1) on Friday December 1, 2017.

In our last post, we examined the FPE1 Blueprint for the allocation of questions by financial planning functions. 

In this Post, we will provide you with our summary of the knowledge requirements for RESPs and a couple of questions on RESPs.

Knowledge of Registered Plans

Registered plans provide opportunities to avoid or defer income tax on savings. You can expect 15% to 20% of the questions to involve registered plans. The rules are complex and somewhat daunting.

According to Appendix B of the CFP® Professional Competency Profile, the level of knowledge is Expert for all aspects of RESPs, except Canada Learning Bonds.

Below is our summary of the knowledge requirements for RESPs.

Registered Education Savings Plans

Knowledge Requirements

  1. Purpose of the plan - An RESP is an education savings trust that permits savings to grow on a tax-deferred basis until the beneficiary is ready to attend an eligible post-secondary institution.

  2. The amount of contributions permitted to the plan - The RESP lifetime limit is the maximum amount of contributions permitted to all RESPs on behalf of any one beneficiary.  The RESP lifetime limit is $50,000.  There is no longer an RESP annual limit.

  3. Penalties for overcontributions - An RESP excess amount is an amount of contributions to an RESP in excess of the RESP lifetime limit. The penalty tax for overcontributions is 1% per month on any cumulative excess amount.

  4. Any income tax deductions for contributions - There is no income tax deduction for contributions.

  5. Any government grants and bonds for contributions - A Canada Education Savings Grant (CESG) is a government grant that is paid to the trustee of an RESP. 

    A child’s CESG contribution room is the amount of contributions to an RESP on which the RESP can receive Canada Education Savings Grants.

     The annual CESG contribution room is an amount of $2,500 by which an eligible child’s CESG contribution room increases on January 1 of each year, up to and including the year in which the child turns 17 years of age.

    A child’s CESG contribution room is the amount calculated as:

    • ((((the lesser of ((child's age as at December 31, 2006 + 1) and 9 years)) × annual CESG contribution room of $2,000) + ((child's age as at December 31 of current year - child's age as at December 31, 2006) × annual CESG contribution room of $2,500)) - assisted contributions).

    For each year’s contributions, the amount of the CESG is calculated as:

    • (the lesser of ($1,000 and (20% × (the lesser of (that contribution and the beneficiary’s unused CESG grant contribution room))))).

    The maximum total amount of CESGs in respect of any individual is $7,200.

    There are special CESG eligibility rules for RESP beneficiaries in the years that they turn 16 and 17 years of age.

  6. Transfers between individual RESPs - Transfers are allowed between individual RESPs for siblings, without tax penalties and without triggering the repayment of Canada Education Savings Grants, provided that the beneficiary of a plan receiving a transfer of assets had not attained 21 years of age when the plan was opened.

  7. Eligible investments - Except for of certain annuity contracts, the property that qualifies for an RESP is the same as for an RRSP.

  8. Penalties for ineligible investments - The penalty is 1% of the fair market value of all non-qualified investments held at the end of each month.

  9. Any restrictions on, and requirements for, withdrawals, such as minimum or maximum annual amounts - The beneficiary must enroll in a qualifying educational program or a specified educational program at an eligible post-secondary institution.

    There are maximum withdrawals.

    Family plans provide additional flexibility for the contributor because educational assistance payments need not be limited to the proportion of each child’s share of the contributions.

  10. The income tax treatment of withdrawals for educational purposes - 

    An educational assistance payment (EAP) is any amount that a trustee pays from an RESP for a beneficiary to assist her education at the post-secondary school level. An EAP does not include refunds of contributions made by the subscriber to the plan, which can be refunded as tax-paid capital.

    EAPs are taxable to the beneficiary in the year received.

  11. The income tax treatment of other withdrawals - An accumulated income payment (AIP) is a payment of the investment earnings from an RESP, including earnings on the CESGs. 

    The trustee may only make a payment of AIPs to the subscriber if:

    • the plan has been in existence for 10 years;
    • all beneficiaries have reached 21 years of age;
    • no beneficiary is attending school; and
    • the subscriber is a resident of Canada.

    The subscriber may be able to rollover an AIP to the subscriber’s RRSP, or will have to report the AIP as income and pay a penalty tax.

  12. Death of an RESP subscriber - If you and your spouse/common-law partner were joint subscribers and owned the RESP contributions as a joint tenancy, they would pass to the survivor under the right of survivorship. Only spouses/common-law partners can be joint subscribers of an RESP.

    Each province has legislation that would allow you to name a beneficiary for property held in certain prescribed plans and that would allow you to pass that property or plan to a beneficiary outside of a your estate. However, the prescribed plans do not include a Registered Education Savings Plan. 

    After the death of a subscriber, a subscriber includes any other person, including the estate of the deceased individual, who acquires the deceased’s rights as a subscriber under the plan (ITA 146.1(1); subscriber). So, your estate can acquire your interest in the contributions and continue as a subscriber.

    If you and your spouse/common-law partner are the parents of the children who are the beneficiaries of an RESP, in your Will as the beneficiary of your interest in the RESP, you should name:

    • your surviving spouse/common-law partner; and
    • if your spouse/common-law partner does not survive you, a testamentary trust for the children.

    If you were to leave additional assets to the testamentary trust, the trust could continue to contribute to the RESP after your death.

  13. Alternative savings vehicles - In-trust accounts, Universal life policies

  14. Strategic issues in saving for education - RESPs offer deferral or avoidance of income tax on the investment income. There is no deferral on contributions.

    The maximum amount of CESGs requires contributions of $36,000, calculated as ($7,200 ÷ grant rate of 20%). 

    To maximize benefit of CESGs, contribute $2,500 per year from birth of child for a total of $36,000.

    For additional savings, consider in-trust accounts, which can offer deferral or avoidance of income tax without RESP restrictions on amount of savings and use of funds.

    With more than one child, use family plan for greater flexibility.

    The strategy of using universal life is complicated and costly.

Of course, it is not enough to memorize these features of RESPs. You must also know how to apply them to a client situation.

According to Appendix B of the CFP® Professional Competency Profile, the level of knowledge is Expert for all aspects of RESPs, except Canada Learning Bonds.

You also need to have similar depth of knowledge of all of the registered plans.

The level of knowledge is expert for most aspects of Registered Retirement Savings Plans, Registered Retirement Income Funds, and Tax-Free Saving Accounts.

The level of knowledge is detailed for most aspects of Registered Pension Plans, Locked-In Retirement Income Funds, Registered Disability Saving Plans and Deferred Profit Sharing Plans.                                               

This question on RESPs is about as mathematical as you can get. We like financial calculators.

On August 4, 2017, Matthew will be 5 years of age. By the end of 2028, his father, Gerry, would like to accumulate $50,000 in an RESP for Matthew. At the end of each year, Gerry will contribute to the RESP and he expects that the investments within the RESP will earn 8%. Mathew will not be eligible for the Canada Learning Bonds nor the enhanced CESG rates.

Gerry's annual contribution would be:

(A) $2,096
(B) $2,196
(C) $2,296
(D) $2,396

Gerry and Anna have been married for four years. This week, they celebrated the birth of their first child, a daughter whom they named Erin. Gerry has $50,000 that he wants to invest for Erin's education. They do not expect that Erin will be eligible for Canada Learning Bonds or the enhanced CESG rates.

What should Gerry do?

(A) Purchase a universal life policy with enough life insurance on Gerry's life, so as to enable a contribution of $50,000; and upon Erin attaining 18 years of age, change the life insured to Erin, transfer ownership of the policy to Erin and have Erin withdraw the funds for her education.
(B) Establish an individual RESP for Erin and contribute $50,000.
(C) Establish an in-trust brokerage account for Erin with $50,000 and invest the funds in equities.
(D) Establish an in-trust brokerage account for Erin with $47,500; invest the funds in equities; establish an individual RESP for Erin and contribute $2,500; in each the 13 subsequent years, transfer $2,500 to the RESP; and in year 15, transfer $1,000 to the RESP. 

Next Post

In our next Post, we will provide you with solutions to the two questions on RESPs.

We will also consider the Refinements to FPSC® Financial Planning Practice Standards.

John Gobeil, BSc, CFP®

David Gobeil, CPA, CA, CFP®

Certified Financial Planner® and CFP® are certification marks owned outside the U.S. by the Financial Planning Standards Board Ltd. The Financial Planners Standards Council is the marks licensing authority for the CFP marks in Canada, through agreement with FPSB.

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