A Registered Education Savings Plan (RESP) is a registered contract between an individual (the subscriber) and a person or organization (the promoter). In the contract, the subscriber also has to name the beneficiaries who will be entitled to the education assistance funds from the RESP. The general arrangement is that the subscriber makes contributions to the RESP, and income earned in the account is tax free so long as the money stays in the account before distribution to the beneficiaries. There are not immediate tax savings as RESP contributions cannot be deducted from your income on your T1 income tax and benefit return. In addition, you cannot deduct the interest you paid on money you borrowed to contribute to an RESP. The federal government will also match the contribution of the subscriber, according to the income of the subscriber, up to a maximum of $500 per year, per child. At maturity, when the beneficiaries are enrolled in an education institution, money will be paid in the form of educational assistance payments to the beneficiaries. Beneficiaries have to include the education assistance payments (which include the matching contribution from government) in their income for the year in which they receive them from the promoter. However, they do not have to include the subscriber’s contribution portion of the payment that they receive in their income. The contribution may also be returned to the subscriber tax free. Contributing to a RESP is a good way to earn tax free income and save for the tuition costs of dependent children. For 2007 and later years, there is no annual limit for contributions to RESPs and the lifetime limit on the amounts that can be contributed to all RESPs for a beneficiary is $50,000.
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