We have an interesting RESP question asked by Bea – who shall henceforth be referred to as “Grandma B”. 

Here is her comment:

Who supervises how the resp is spent–can a child remove all the funds and not use them for education–I am a grandmother of a family who have resp grants from me–I hold the papers in my name and know the father would love to grasp the funds on the 18th birthday–what is the protection–is there proof needed by the government that it was used for education? If the 2nd child turns 18 and the first one did not go on to school are they transferable? Appreciate your comments. Bea

Wow, I sense that RESPs are not a calm dinner table topic in that family!

Ok, let’s go through the questions:

Can a child (or beneficiary) remove funds from an RESP account?

No, they can’t.  The person who opens the RESP account (also known as the subscriber) is the only person who can authorize any payments from the account.

Can the child’s father remove money from the RESP account?

No, same reason as above.

What proof is needed that money from an RESP is used for education?

When you do a proper educational assistance payment (EAP) then you have to show proof of enrolment to the financial institution when you request a payment.  Contact the financial institution for the exact documentation they require.  You don’t have to provide receipts or prove that the money was spent on anything “educational”.

Can I transfer RESP money to a sibling?

Yes, you can.  If the older child does not use all their RESP amounts, then you can transfer to a sibling.  Keep in mind that the lifetime grant limit of $7,200 will still apply.  If you try to transfer grants which give one beneficiary more than $7,200 in grants, then the grants will be returned to the government.

You don’t need a family plan account to do the transfer.  This can be done between two individual accounts as well.

I hope this answers your questions, Grandma B!

Dillon recently left a question about using RESP funds for CEGEP on my RESP withdrawal rules post.  For those of you who don’t know, CEGEP is an education program which students in Quebec must complete before heading to university.

Here is his question:

Hi, I am 16 years old and going to be attending CEGEP this fall. My father has saved some money in a RESP account (in which I am the beneficier) and I was wondering how can I “use” the money without being charged the taxes and without losing the accumulated income. Do I need to request a special reciept from my school?
Thanks a lot!

Great question Dillon, you are the first “beneficiary” who has ever sent a question to me. 

First, let’s answer the question directly and then look at a few other possible issues.

How to use RESP funds for CEGEP or other post-secondary education

To use money from an RESP account for eligible post-secondary education, you must provide some sort of proof of enrollment to the financial institution which holds the RESP.

I would suggest phoning the financial institution where the RESP account is held, tell them your situation, including which CEGEP school you will be attending.  They should be able to tell you exactly which documentation is necessary to complete an Educational Assistance Payment (EAP) from the account.

Your Father will need to provide this enrollment documentation to the financial institution each time a withdrawal in requested.

You don’t need to show any kind of receipts or justify the withdrawal in any way.  As long as you are a student, then the money can be withdrawn and used for whatever you like.

The subscriber or owner of the account controls the payments

One point I want to emphasize is that the subscriber (the person who opened the account) controls the payments.  The beneficiary cannot request any payments, they must work with the subscriber in order to use the RESP money.  In Dillon’s case, his Father has to request the payment and provide the enrolment proof to the financial institution.

Financial institutions will not provide info to anyone other than the account holder.

This ties in with the previous point, a beneficiary cannot call up the financial institution and make inquiries about the RESP account.  Only the subscriber can do that.  The beneficiary can call and ask about procedures, such as how to request an RESP withdrawal.  A beneficiary cannot call and ask anything specific to the RESP account, such as how much money is in the account.

Make sure you check out my post 8 things you need to know about withdrawing money from an RESP account.

Good luck with school Dillon!

So your little darling is going to a post-secondary educational facility once they finish high school. Hopefully you’ve already verified that their school is eligible for RESPs.  The big question now is how to access some of those dollars that you have saved up in an RESP account for them.

I’ve put together a useful list of all the information you need to know in order to get your money out of an RESP account.  Keep in mind that your financial institution might have slightly different requirements, so please contact them for details.  If you have a scholarship/group/pooled RESP then you will definitely have more restrictive rules and should contact your financial institution.

1) You don’t need receipts or a good story to withdraw funds

If you want withdraw money from an RESP account, then all you have to do is provide proof of enrolment .  Check with your financial institution for their proof of enrolment criteria.   The government has provided a Verification of Enrolment form which most educational institutions will fill out for you. You don’t have to provide receipts or any other kind of justification for your payment request.   Just ask for your money.

2)  Ask for more, rather than less

Withdrawing from an RESP is not as convenient as withdrawing from your chequing account.  Don’t be afraid to ask for enough to tide your student over for a while.  You don’t have to give all the money to the student right away when you withdraw it. Most students are not as financially savvy as you are, and might benefit from getting a regular payment, rather than a lump sum at the beginning of a semester.

3) The money in your RESP is your money, until you give it to the student

All withdrawals from an RESP account can can be sent to either you (subscriber) or the student (beneficiary). When you request a withdrawal of either contributions or accumulated income, you will instruct your financial institution who to send the money to.  There is nothing wrong with sending the money to yourself and then you dole it out as you see fit.  It’s your money.

4) Only the subscriber can request payments

The student who is the beneficiary of an RESP account has no control over the money.  They cannot request payments – only the subscriber.

5)  Specify if the withdrawal is to be from contributions, non-contributions or both

There are two parts to an RESP account:

1. Contribution amount.  This is the total amount of all your contributions to the account.
2. Accumulated Income.  This is all the money in the RESP which is not contributions.  RESP grants, capital gains, interest payments, dividends are all included in the Accumulated Income portion.

Example of contribution amount and accumulated income amount

Joe contributed $1,200 per year for 10 years to an RESP account he set up for his niece. 20% grants were paid on all the contributions and the investments have gone up in value.

• Account is now worth $17,000.
• Total contributions are $12,000 (10 times $1,200).
• Accumulated income amount is $5,000 ($17,000 minus $12,000).

You can do two types of withdrawals from an RESP account:

1. PSE (Post-Secondary Education Payment) is a withdrawal from the contribution amount.
2. EAP (Educational Assistance Payment) is a withdrawal from the Accumulated income.

Some interesting facts about PSE and EAP:

• PSE payments are not taxable income and there are no limits on withdrawals.
• EAPs are taxable in the student’s hands.
• A T4A slip will be issued by the financial institution at the end of the year for any EAP made during the year.
• There is a $5,000 limit for EAP in the first 13 weeks of schooling.
• Most institutions will default payments to 100% EAP which means that the money is taxable income for the student.
• When doing a withdrawal, you should specify how much of the money will be coming from contributions and how much from accumulated income.

6) Don’t withdraw more than $7,200 of grant money per beneficiary

If you have a family plan RESP, make sure you don’t withdraw more than $7,200 of grant money per beneficiary. $7,200 is the lifetime grant limit per beneficiary. Typically, any EAP will contain grant money.

Because the subscriber sets the amount of EAP for each withdrawal,it’s possible for someone to withdraw a disproportionate amount of EAP for one beneficiary which might mean that one beneficiary will be over the limit for RESP grants.

If that happens, the grants will be returned to the government. Your financial institution keeps track of how much grant money is paid out to each beneficiary, so all you have to do is ask them for an update and change your withdrawals appropriately.

Example of over-withdrawing grant money

Homer has two kids; Bart and Lisa. He set up a family RESP for them at a young age and eventually maxed out the lifetime grant limit of $7,200 for each child. This was accomplished by contributing $36,000 for each child.

Eventually the account looked like this:

• Contributions = $72,000
• Accumulated income = $30,000 (this includes the grants)

When Bart enroled at a local heavy machinery training school – Homer started making withdrawals from the RESP account. Over the two year program, he withdrew $30,000 and sent the money to Bart. However, Homer didn’t understand RESP rules very well and didn’t specify if the withdrawals were to come from contributions, accumulated income or both.

His institution defaulted the payments to EAP (from accumulated income) which means that all the grant money in the account went to Bart. Once the government figured out what happened, they “took back” the amount of extra grants used by Bart. $7,200 was removed from the RESP account. This could have been avoided if Homer had asked his institution where the grant money was going. He could have withdrawn just enough EAP to give Bart his share of the grants, and then started to withdraw contribution money.

7) Watch the taxes

EAP are treated as taxable income for the student. Most students don’t pay much, if any income taxes. If the student is in a taxable situation, then it might be worthwhile to adjust the payments to reduce the amount of EAP which will reduce the taxable income for that year.

8 Don’t leave accumulated income in the account

When accumulated income is withdrawn from an RESP account as an EAP – there are no penalties and the money is considered taxable income for the student. If the student drops out of school and the accumulated income has to be withdrawn as an AIP (Accumulated Income Payment), then the RESP grants are returned to the government, the money is taxable income for the subscriber and there is a 20% penalty tax as well.

Clearly removing accumulated income from your RESP via EAP is the preferable method.

If you have $20,000 of accumulated income in an RESP account, one might decide to withdraw $5,000 for each year of a four year program. Sounds reasonable, but what happens if your child decides she’s had enough education after one year? You will be left with $15,000 of accumulated income in the account which will be very expensive to remove as an AIP.

You can take advantage of the six-month rule which allows you to do EAP for six months after the child has stopped going to school. Or you can wait and then eventually use other methods to reduce the RESP penalties. or you can remove more accumulated income while the child is going to school. This is the reason why most financial institutions default payments to “EAP” – because it’s generally in your best interests to do so. Don’t worry about taking more than the child needs – you can store the extra money in your TFSA or the student’s TFSA.

Have you completed an RESP withdrawal?  Do you have any tips?

Jay wrote in with an interesting RESP strategy that I thought I would share;

He writes

Our child has a (roughly) $25,000 RESP and will begin attending post-secondary in September.

From what I’ve read, we don’t have to provide receipts for expenses, we just have to provide proof of enrollment to begin removing funds from the RESP.

Now my questions…
1) After the first $5,000 is withdrawn at the beginning of September, are there any limits to the amount that can be removed on a yearly basis? (I *think* there isn’t, and the only ‘limit’ would be choosing to keep the withdrawals below the threshold where income tax would have to be paid.)
2) The reason we’re asking (1) is it *seems* like it would be a good idea to take out any *extra* cash and divert it into a TFSA (Tax Free Savings Account). Do you know if there are any problems with doing that?

My Answer

First of all – the $5,000 withdrawal rule in the first term only applies to non-contributions in the RESP account.  Contributions you can take out any time once the child starts school.  Non-contributions are things like grants, capital gains, dividends, interest that have accumulated in the account.

Second – as Jay notes, to do a withdrawal from your RESP, you only need to show proof of enrollment – no receipts for books etc.

Jay wants to know if there are any other limits on withdrawals after the first 13 weeks, as he sounds like he wants to remove the money from the RESP as quickly as possible and put it into a TFSA.

The answer is that no there are no limits.  In fact, since you can take the contributions out right away, most people can take out a large percentage of the RESP in the first term and then clean it out entirely in the second term.

He does mention income tax as a consideration but you have to remember:

1. Contributions are not taxable when withdrawn – it is only the non-contributions that are taxable.
2. Withdrawals of non-contributions are taxed in the hands of the student not the parent.

In Jay’s case, it sounds like he can probably withdraw all the money in the first two semesters without any problems.

Check out my RESP rules page for more RESP information.

One of the drawbacks with RESP accounts, is that it is very difficult to predict exactly how much money your child will need as a student.  Studying out of town is much more expensive than living at home.  A four year University program is far more expensive than a 9-month cooking course.  Your child might do one year of a post-secondary program and then run off and join the circus.

If you are a diligent saver, contribute the maximum amount to an RESP account and things don’t work out as planned, then it is pretty easy to end up with extra money in the RESP account when the student has finished.

Why is excess money in your RESP a problem?

When contributions are withdrawn from an RESP, there are no taxes applied since the money has already been taxed.  When non-contributions (ie grants, capital gains, interest payments dividends) are withdrawn from an RESP they are considered income in the hands of the student.  If the child is not eligible to receive payments from an RESP which would be the case if they quit school then the non-contribution payments are taxed in the hands of the subscriber (account owner) along with a 20% penalty.  Needless, to say it is far more preferable to have the money be taxed in the hands of the student.

Here is a more complete description of the RESP withdrawal rules.

This is why financial institutions will always default any withdrawal request to EAP, if you don’t specify otherwise  It is generally in your best interest to withdraw the non-contributions first, followed by the contributions.  This of course, has to be balanced by the fact that the student might pay tax if the EAP amounts are large enough.

A reader question

Reader Lance wrote in with an interesting question (at least it is interesting for someone who likes RESPs as much as I do).

Is there is a limit to how much one can withdraw from an RESP once the beneficiary starts post secondary education. Let’s take an extreme example. Say you really managed to do well performance wise, and your contributions, grants, and returns have totaled $300K. You have one child and they intend on staying at home while completing a four year degree. Assuming that total education needs are reasonable, say under $15,000 per year, are you allowed to take out more as you know you aren’t going to exhaust the $300K? Can you take out $75,000 per year?

I’ve read that you have to have documentation supporting your requirements when you go to your bank/financial institution when you first start taking out RESP money.

The analysis

The federal rules state that to get an EAP payment (educational assistance payment), proof of enrollment at a qualified institution must be provided for each withdrawal.  This is the type of payment made to the student when attending school.

The guidelines also state that the promoter (financial institution) shall:

• Verify whether the amount requested covers valid educational expenses which will help the beneficiary further their education.
• The RESP Promoter’s organization may have established guidelines or policies with respect to acceptable educational expenditures.
• Only $5,000 EAP can be with withdrawn in the first 13 weeks.

Those rules can be found on this page on the HRSDC website.

EAP – Education Assistance Payment.  These are non-contribution payments made to a student enrolled at a qualified post-secondary educational facility.

AIP – Accumulated Income Payment.  This payment is made when collapsing an RESP account, usually because the student decided to end their schooling.  The payment is made to the subscriber and is taxed in their hands along with a 20% penalty.  The 20% RESP withdrawal penalty can be easily avoided however.

Do you need to provide receipts when withdrawing from an RESP account?

To answer your second question, first – From my research, it appears that most, if not all financial institutions do not ask for receipts or question your requested payment amounts.  You just have to provide proof of enrollment.  You should check with your financial institutions since they might have different guidelines.

Can you withdraw whatever amount you want from your RESP account?

If you do end up with a $300,000 RESP, then your financial institution might be a problem when requesting withdrawals.  I would suggest just keep after them, if there is any resistance.

The real problem with doing an excessively large RESP withdrawal is that the CRA reserves the right to audit any EAP payments after the fact, so if you do an abnormal-sized EAP payment, then they might come calling.  If the CRA decides that your EAP payment was in fact an AIP payment, then the taxes and penalties will be quite severe.

In Lance’s case, if the account was $300,000 and there were $36,000 worth of contributions, then the total EAP amount would be $264,000, which works out to $66,000 per year.

The reality is that there are no solid guidelines as to what the money could be spent on, so theoretically a student could buy a fancy new car for example, since that car would be used to get to school.  Maybe the student could buy a condo if there was a huge amount in the RESP.  Not sure how that would fly with the CRA though.

If you do end up in this situation, then I would consult a tax expert to determine the best course of action.  On the one hand, it would be nice to save on the 20% penalty and extra income taxes, on the other hand you wouldn’t want the CRA to levy the 20% penalty and taxes after the fact, along with a potential fine.

This situation might be more common that you think.  If you have good-sized RESP accounts for three kids and two of them don’t want to go to post-secondary education, then you can transfer their RESP money (minus the grants) to the third child who will end up with a very large RESP.

Another scenario might be if you have a decent-sized RESP account, let’s say $100k and the kid quits school after one year.  You can still do the EAP withdrawals for 6 months after that, but again, will the CRA do an audit if the payments are too large?

What would Mike do in this situation?

Well, as a dedicated passive, low-cost investor, it is extremely unlikely that I would end up with an excessively large RESP account based on investment returns alone.  I do have two kids however, so it is possible that if one doesn’t go on to post-secondary education then the money would get transferred to the other child which might make for a very large RESP.

I wouldn’t worry too much about the CRA, if I am taking extra money out of the RESP that I know isn’t going to be used for education.

Here’s why:

1. The withdrawal rules were changed in the 2008 budget to allow EAP withdrawals (payments for school) for up to 6 months after the student is finished or quits school.   Why would the government introduce a rule like this, unless they were trying to encourage people to get all the extra money out of their RESP?  Obviously, if the child is no longer enrolled in school then any withdrawals are not going to be used for educational purposes, yet the government went out of it’s way to allow this.
2. Create some expenses.  In Lance’s case, he asked about a student that lives at home.  Well, how about charging them rent?  Charge them for food, tv time, parking fees, utilities, companionship fees etc etc etc.

Please keep in mind that this should not be taken as advice – I’m only saying what I would do.  Please see a qualified tax accountant if you want real advice.

One of the drawbacks of opening up an RESP account to save for your child’s post-secondary education is that if the child ends up not attending post-secondary education or quits early, then there are some penalties applied when the RESP account is collapsed.

How the penalties and taxes are applied if your RESP account is collapsed

When the account is collapsed then the following happens:

1. Any RESP grants paid into the account are removed and sent back to the government.
2. You can withdraw all your original RESP contributions without any taxation or penalties.
3. Anything left in the account is taxed at your marginal tax rate plus 20%.   This part of the withdrawal is called the Accumulated Income Payment (AIP).

How to avoid the RESP 20% penalty

All you have to do is contribute the AIP amount to your RRSP or your spouse’s RRSP.  By doing this you can avoid the 20% extra penalty and you will defer any income taxes that would have been due on the payment.

Here are the conditions necessary to be able to contribute the AIP amount from the RESP to an RRSP:

• Subscriber is a resident of Canada.
• Payment has to be make to only one subscriber of the plan.
• Plan has been open for at least 10 years and each individual who is or was a beneficiary, is over 21 years of age and not eligible for an educational assistance payment (EAP).

But I need the money!

No problem, contribute the AIP amount to the RRSP, wait until the following year and then withdraw the same amount from your RRSP.  Assuming your marginal tax rate is unchanged between the time of the contribution and withdrawal then the amount of income tax paid will be the same as if you hadn’t contributed the AIP to the RRSP in the first place.  And there is no 20% penalty!

What if my spouse and I don’t have any RRSP contribution room?

Good problem to have!.  Assuming you are still working then you can just wait to collapse the RESP until the following year.  Reduce your RRSP contributions appropriately so that you will have enough room next year to contribute the accumulated income portion of the RESP.    In this case you are really only saving the 20% penalty since you are reducing your normal RRSP contribution by an amount equal to the AIP, but saving 20% is still very worthwhile.

My son just quit University after one year and there is still money in the RESP – do I have to pay a penalty to withdraw?

If you collapse the RESP account then the penalties and taxes will have to be paid.  However, the 2008 budget allowed for EAP withdrawals up to 6 months after the child stops going to school.  EAP withdrawals are when you withdraw the accumulated income from the RESP.  These will be taxed in the hands of the student and won’t incur any penalties.  If you are in that situation then just empty the account out as soon as possible.  This strategy can only be used if the student starts post-secondary education.

From the RESP Promoter User Guide:



Six Month Grace Period

Budget 2008 introduced a six-month grace period for receiving an EAP to provide more flexibility for a beneficiary to access RESP savings. Under this measure, an RESP beneficiary is eligible to receive an EAP for up to six months after ceasing to be enrolled in a qualifying program, provided that the beneficiary would have qualified while still enrolled.

Check out my RESP rules guide for more information on RESP rules and how to set up an RESP account.

It’s been a while since I’ve done a basic RESP post going over the rules for contributions and withdrawals so here is an updated version of the 2010 RESP rules for contributions and withdrawals.

I do keep my old older RESP posts up to date – you can check out my RESP contribution rules post and RESP withdrawal rules post.  Those posts are quite indepth and contain specific examples.  Here is a link to the main RESP reference page which links to most of my RESP articles.  You can also peruse the RESP category which lists all the RESP articles on the blog.

What is an RESP account?

An RESP account is a registered education saving plan account.  Contributions can earn a 20% grant (or more) from the government.  There is no tax receipt issued for the contribution.  No income is taxable in the account.  Withdrawals are taxed in the hands of the student and contributions can be withdrawn tax-free.

RESP contribution rules for 2010

The basic rules are as follows:

• The child must have a SIN number and be a Canadian resident to have an RESP and receive the grants.
• Every child accrues $2500 worth of “grant eligible” contribution room per year starting in 2007.  Only $2000 worth of contribution room is accrued per year before 2007.
• Any contributions made in excess of the “grant eligible” contribution room are allowed but won’t receive any grant.
• All “grant eligible” contributions will receive a 20% grant.  This grant might be higher for lower income families.
• Each year you can contribute up to 2 years worth of contribution room – 1 for the current year and 1 for past years where contributions were missed.
• Maximum amount of grant per child is $7,200 for their lifetime.
• The last year a child can receive a grant is the year they turn 17 subject to certain conditions.
• Maximum amount of contributions that can be made to a child’s RESP is $50,000.

RESP withdrawal rules for 2010

• Student must attend a qualified post-secondary educational facility as determined by the government.  This rule is quite reasonable in that it encompasses trade schools and pretty much any kind of training.  A recent change allows part-time studies to count for RESP withdrawals.
• Contributions can be withdrawn tax-free.  Everything else is taxed in the hands of the student.  You can direct your financial institution whether you want to withdraw contributions or earnings.
• To get money from the account you just need to show proof of enrollment at a qualified institution.  You can then spend the money on whatever you want (books, tuition, booze etc) since you don’t have to show receipts for anything.
• If the child doesn’t go on to post-secondary education then the account can be transferred without penalty to a close relative (ie brother or sister).  Otherwise the account can be collapsed and there will be penalties on the non-contribution portion of the RESP account.  There are ways to minimize the hit especially if the owner of the account has unused RRSP contribution room.

I’ve written extensively about RESP accounts which are educational savings accounts available to all Canadians.  Quebec has decided to do one better and offers a special Quebec educational savings grant which is available on top of the normal federal RESP CESG grants.

The grants work in a similar fashion to the federal RESP grants except they are half as much.  This means that the RESP is that more valuable to a Quebec resident since the basic grant will be 30% of contributions instead of the 20% that residents of all the other provinces get.

Both federal RESP grants and QESI grants are paid in the same account so any contributions discussed below refer to your normal RESP contributions.  You don’t have to set up separate accounts or have separate contributions.

Here are the QESI Quebec RESP grant rules

• The grant amount per year is 10% of the first $2500 contributed per beneficiary.
• Max $250 grants credit per tax year per beneficiary
• The lifetime maximum grant amount per beneficiary is $3600.
• There is a $250 grant carry forward (as of 2008) so you can actually contribute $5000 and get $500 QESI grant if you have enough room.

Supplemental increase for lower income families

If the net family income is $38,385 or less, then extra grants of 10% of net contributions will be paid up to a maximum of $50 per beneficiary per tax year.
If your net family income is between $38,385 and $76,770 then you will get extra grants of 5% of net contributions up to a maximum of $25 per beneficiary per tax year .

The supplemental QESI grant is payable only to an RESP that is either an individual plan or a family plan where all the beneficiaries are siblings.

Grant room or accumulated rights (as the Quebec government likes to call them)

Every eligible child begins to receive QESI room at birth, or on Feb. 21, 2007, whichever is later.

The Quebec government has termed grant room for the QESI basic amount as “accumulated rights”.  I think something got lost in the translation of those terms. 

These grant rights accumulate at a rate of $250 per year.

As of 2008, any QESI rights accumulated during previous years can be added to the basic amount up to a maximum of $500 a year.

The supplementary QESI credit cannot be carried forward if not used.  The carry forward only applies to the basic QESI grant.

Eligibility for QESI grants

Basically the same as federal government CESG.

Beneficiary Eligibility Critieria

Every child up to and including age 17 is eligible to receive the QESI grant, provided the child:

• is a Quebec resident as of Dec. 31st of the taxation year being applied for;
• has a valid social insurance number (SIN);
• is named as a beneficiary to an RESP where the QESI is offered;
• meets the CESG 16/17 year-old rules;
• has a contribution made to an RESP in their name; and
  has available grant room.

You shouldn’t need to apply for this grant – the financial institution should do it for you.  It should be noted (as Steph pointed out in the comments) that not all financial institutions offer this grant.   It is important for you to research which ones do before opening up an account.

Here is the link to the Revenu Quebec page that lists the companies that are or that will eventually become compliant:

http://www.revenu.gouv.qc.ca/en/citoyen/credits/credits/iqee/fournisseurs_reee.aspx

Make sure to ask at which step of the process they are… (already compliant or in the process of) before, so that you won’t be disappointed in the end !

Randy had some questions about RESPs:

Hi, I was wondering what is meant exactly by ‘approved post-secondary school’. I might go back to EU in the next 10 years, so I wasn’t sure what’s needed as proof of education to be able to withdraw including the grant money. I talked to a childrens education fund sales person and he mentioned that it could be any post-secondary school/university, even outside of Canada, all that’s needed is a note from the institution that proves that the kid is enrolled.
Is this true?

He also wanted to know if grants accrued while in Canada would be taken away if the child leaves the country:

Will the government will take back the grants (matched contributions made by the gov) if the kid studies outside of Canada?

He also asked about the specific resp account:

Also, I’m looking into setting up a TD mutual fund RESP account that i’ll then convert into a TD e-series funds account as is described in another blog entry in this series (http://www.moneysmartsblog.com/resp-how-to-get-started/). Hopefully there’ll be no annual fee. this sounds a bit complicated though, is it to avoid the annual fees?
Most banks have a 50$ annual fee for RESP accounts. For example the TD Waterhouse RESP account (their other RESP product) has a 50$ annual fee if you have below $25K in the account.

RESP grants can only be earned by kids who are living in Canada

While the child is living in Canada, they are eligible to receive grants on any money contributed to the RESP.   If the child moves away from Canada – they can continue to make contributions but can’t get any more grants.  They can keep any grants that they earned while residents of Canada.

RESP grants can be used for post-secondary education in a different country

If the child ends up going to post-secondary school in a different country then they can still use the RESP (including grants) for this purpose.  They don’t need to attend school in Canada.  You need to call the CRA to verify the exact school you want the child to attend.  You just need to show proof of enrolment at the school.

From this document  http://www.cra-arc.gc.ca/E/pub/tg/rc4092/rc4092-08e.pdf

A post-secondary educational institution includes:

• Aa university, college, or other designated educational
  institution in Canada;
• An educational institution in Canada certified by HRSDC as offering non-credit courses that develop or improve skills in an occupation; and
• An university, college, or other educational institution
  outside Canada that has courses at the post-secondary
  school level, as long as the student is enrolled in a course
  that lasts at least 13 consecutive weeks.

One thing to keep in mind is that the RESP is completely tax sheltered while you are in Canada.  This may not be true if you live in a different country.
Example.

Little Johnny lives in Canada from age 0 to 8.  His parents contribute $2500/year for 9 years – total contributions will be $22,500.  Total grants received from government will be $4500.

Johnny and family moves to Germany in the year he turns 8.  At that point they can’t get any more RESP grants.  The RESP + grants will continue to exist in Canada – if Johnny goes to post-secondary school In Germany then he can use the RESP money (including grants) for that purpose.

It’s important to note that the government approves the RESP grants – not your financial institution.  So don’t get the idea that if you “forget” to tell your financial institution you don’t live in Canada any more they will continue to pay the RESP grants.  They won’t.

Why convert your TD mutual fund account to eFund account?

The main benefit to converting the TD mutual fund account to the eFund account is to be able to buy the TD efund index funds.  They are the cheapest index funds around and are the best deal if you are willing to manage the RESP account by yourself without any financial advice.  According to the Canadian Capitalist – there are no annual fees on a TD efund RESP so that would be a huge benefit as well.

Annual account fees are a bad thing – especially for a smaller account (such as a new RESP).  Try to avoid them if possible.

I recently got a question on my addition resp grant post from Donna – she brings up a number of interesting points which I’d like to address.  If you want to read any other posts on resp then check out the main resp reference page.

This was her question:

Hello. I have 3 children, 15, turning 17 and an 18 year old.
I am divorced and we had to liquify our RESP 12 years ago.
Since then their father had passed and left a little insurance money.
Is there anything that would be worthwhile in investing into the
RESP now and can it be backdated?? Any suggestions?
Looks like all 3 will be going to post secondary…2 university for
sure.
Help!

Investment time horizon

First point (and most important point) is the concept of investing time horizon.  If you are investing money that you need in a couple of years then you have to invest in something that is not risky in order to ensure the money will be there when you need it.  In Donna’s case I would just put the money in a high interest savings account or short term bonds (via etf or index fund) since her youngest will be going to school in 2 or 3 years.

RESP contribution rules and catchup rules

The two main benefits of resps are the government grant (20% of contributions) and the tax-sheltered status.  Let’s look at the possibilities for each of her kids:

18 year old

The last year the resp contribution grant can be paid is in the year the beneficiary turns 17.  If you set up an resp for the 18 year old then the main benefit of government grants won’t be available.  The tax sheltering might still be useful but only in certain cases.  If you are in a high tax bracket (ie 40%+) and will be contributing a significant sum of money – let’s say $10k.  Then you will be saving roughly $120 taxes per year (assume 40% rate on 3% interest).  The interest portion of the account will be taxable in the child’s hand when withdrawn but as long as they are in a lower tax bracket then you will save some tax money.  This benefit is pretty debatable – all it takes is one good summer job and the tax benefit mostly disappears.  I’m not sure that I would bother with an resp for the 18 year old especially if the money is going to be used in the next year or two.

Turning 17 year old

By the description “turning 17″ I’m assuming the child is turning 17 in 2009.  There are special rules for 16 and 17 year olds with respect to the government grants which mean that this child won’t qualify.

The rules are as follows:

RESPs for beneficiaries aged 16 and 17 will be eligible only if at least one of the following conditions is met:

1. At least $2,000 must have been contributed to an RESP for the beneficiary before the end of the calendar year the beneficiary turned 15 and not withdrawn.
2. At least $100 must have been contributed to an RESP for the beneficiary in each of any four years before the end of the calendar year that the beneficiary turned 15 and not withdrawn.

From the comment it appears that all the previous resp contributions were withdrawn which makes this child ineligible for any grants.  My previous comment about tax sheltering for the 18 year old are still valid for this child.

15 year old

Finally some good news – the 15 year old is eligible for the 20% government grant for this year and the next two years – but only if $2000 is contributed this year (see above rule).  Donna asked about “backdating” the contributions – the resp rules allow you to receive up to $500 of grants per year for past years in addition to the yearly maximum of $500 in grants for the current year contribution.
Put simply, Donna can contribute $5,000 for the 15 year old in 2009 and will receive $1,000 in grants.  Then she can do the same in 2010 and 2011 – at that time she will have made $15,000 in contributions and received $3,000 in grants which is well worth the effort of setting up the account.  In this case the tax sheltering effects are even more beneficial than for the older kids.
If she doesn’t want to contribute the maximum then I would suggest contributing a minimum of $2,000 this year otherwise this will be the last year the child will be eligible for grants.

Additional CESG grants

Donna didn’t say anything about income but if your family income is below around $78k then you might be eligible for additional resp grants which could mean grants of 30% or even 40% instead of the basic CESG rate of 20%.  This of course would mean more grant money for the 15 year old.

Summary

If I were in Donna’s shoes I would make sure first and foremost that I didn’t invest in anything with any risk at all (resp or not) – there just isn’t very much time until this educational money is needed.  Secondly, I would definitely open an resp for the 15 year old because there is a lot of potential grant money available.  I don’t know if it’s worthwhile opening resps for the other 2 depending on other factors discussed.  The 15 year old is the only one who will have a clear benefit from an RESP from the information given.  I would also find out if she was eligible for any extra grants.