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Celebrating Canada’s 150th Anniversary: A History of RESPs

July 1, 2017 marks a major milestone for our great country: the 150th anniversary of Canada. Our nation has come a long way since then, and  many things we take for granted today weren’t around in 1867. Imagine living in a world without mobile phones, computer or running water.

Canada’s 150th anniversary is the perfect time to reflect on all the great things Canada has accomplished in the last 150 years, and what we hope to accomplish as a nation in the years to come.

We have much to be proud of: We’re a bilingual country, we’re known as a peacekeeping nation, and we’re the hockey capital of the world (despite our national sport being lacrosse). But what you may not be aware of is that we’re a global leader in education assistance and investing in the future of our children. This all started with the introduction of RESPs.

A Brief History of RESPs

RESPs may seem like a relatively new concept, but did you know they’ve been around since 1974? That’s right; the federal government introduced RESPs over 40 years ago. Since then, the program has undergone many changes to encourage Canadians to save more towards the post-secondary education of their children.

RESPs started out with a court ruling in 1972. Jack Harvie Quinn challenged the government’s position that he should pay income tax on money that he saved in a trust account to fund his son’s post-secondary education. The federal government took the dispute all the way to the Federal Court, where the higher court sided with Quinn. Although it was a small amount of money being disputed, the ruling set a precedent for nearly 40,000 taxpayers in a similar situation.

Faced with the court’s ruling, the government could do one of two things: accept the ruling or change the Income Tax Act to make this type of income taxable. In a surprise move, the government decided to introduce RESPs into tax legislation.

Bill C-49 introduced the framework for what would be known as RESPs. As an RESP subscriber, you’re permitted to enter into a contract with a promoter, such as Heritage Education Funds, to save for the beneficiary’s post-secondary education. Although the subscriber can’t claim a tax deduction for RESP contributions (similar to RRSPs), any contributions made are held in a tax-sheltered trust account. When the money is eventually withdrawn to pay for post-secondary education, it’s taxed in  the hands of the beneficiary, who in most cases pays little to no tax..

CESG Introduced

1998 was a big year for Canada. Not only was Shania Twain topping the charts with her latest album, Come on Over, but RESPs underwent a major change. On January 1, 1998, the federal government introduced the Canada Education Savings Grant (CESG). Under the CESG, contributions to the RESP would now be eligible for a government grant of 20 per cent, up to a yearly maximum of $400.

Then-Federal Finance Minister Paul Martin summed up the importance of RESPs in his 1998 budget speech:

As a result of the initiatives we are taking, RESPs will now be among the most attractive savings vehicles available for a child’s education. We believe that RESPs will soon come to be considered as essential for future planning as registered retirement savings plans are now.

They represent one of the best things parents can do for their children, one of the best things grandparents can do for their grandchildren – it speaks to the partnership of generations.*

Today RESPs remain the best way to save for your children’s post-secondary education. With a lifetime contribution limit of $50,000, coupled with the CESG and additional CESG, parents who start saving early for their child’s education will be at a distinct advantage. If you’re a parent with a young child or you’re thinking of starting a family one day, by saving regularly in an RESP, you’ll ensure your child has a bright future instead of being weighed down by student debt.

So go out and celebrate your country’s sesquicentennial loudly and proudly, and here’s to another 150 years of putting our money where it counts: towards our children.

 

* Source https://lop.parl.ca/Content/LOP/ResearchPublications/2016-110-e.html