KENYON WALLACE INVESTIGATIVE REPORTER

RESPs were introduced by the federal government in 1974 to encourage families to save for post-secondary education.

In 1998, the government introduced the Canada Education Savings Grant, which at its basic level matches 20 per cent of annual contributions to a maximum of $500. Each beneficiary has a lifetime grant limit of $7,200. RESPs carry a lifetime contribution limit of $50,000 per child.

Investments grow tax-free. When the child goes to college or university, the money is taxed at the student’s income tax rate, usually resulting in little or no tax owing.

Group RESPs are different from RESPs offered at banks or credit unions in that they are sold and administered by “scholarship plan dealers.” In group plans, contributions from individual investors are pooled according to the birth year of the beneficiary.

When a plan reaches maturity, beneficiaries receive their contributions plus “educational assistance payments” — income earned plus any government grants and Canada Learning Bonds. How much is received depends on several factors, in- cluding how much a customer contributed over the life of the plan and how many plan members drop out before maturity.

Group plans charge upfront sales fees, which are deducted from initial contributions. Customers have up to 60 days to withdraw from their plan and get all their money back.

Customers who cancel their plans after 60 days will get back their contributions, less sales fees, but may lose any earnings on their investment, as well as government grants. These forfeited earnings are distributed to customers remaining in the plan at maturity. Analysts have likened group RESPs to “tontines,” life insurance plans invented in Europe during the17th century in which investors pay into funds, and those who survive the longest share the pool of money.

Customers who join group RESPs commit to making regular contributions. If contributions are missed or not made on time, customers risk going into default, which may result in termination, in which case investment income and government grants could be lost.

Sources: Employment and Social Development Canada and Ontario Securities Commission’s website GetSmarterAboutMoney.ca