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The CESG was introduced in 1998 to encourage Canadians to make contributions to RESPs for the future PSE of their children, grandchildren, or other named beneficiaries. The CESG is a component of the Canadian Opportunities Strategy, which was initiated by the Government of Canada to encourage Canadians to attend PSE as a means of enhancing knowledge and skills.

The logic model for the CESG is set out in Appendix B — Program Logic Model. As indicated in the logic model, the end objective/goal of the program is to contribute to having more skilled and knowledgeable Canadians who are able to participate fully in the workplace and society. The CESG seeks to achieve this goal by pursuing four strategic objectives:

• Promoting inclusion through participation in workplaces and communities;
• Promoting an educated, skilled and prepared workforce through skills and learning;
• Improving program administrative practices through ensuring program integrity and continuous improvement; and
• Building and maintaining relationships with partners.

The CESG pursues these strategic objectives through four main activities (i.e. marketing, research and analysis, grant administration, and relationship development) that are aimed at four short-term outcomes:

• Increased awareness of the CESG and the importance of saving for PSE; and
• Three program-related outcomes (i.e. program decision-making; increased efficiency and effectiveness of program delivery; and enhanced quality/integrity of the program).

All of the short-term outcomes are aimed at encouraging early and sustained participation in RESPs, in order to:

• Reduce financial barriers to PSE;
• Increase PSE access and participation; and
• Reduce the financial burden of PSE.

2.1 RESP/CESG Procedures

The RESP/CESG procedures set out the requirements for subscribers and promoters:

• An RESP subscriber: A subscriber must be an individual and not an organization, corporation or trust. An individual becomes a subscriber of an RESP by selecting and signing a contract with an RESP promoter.
• An RESP promoter: The promoter can be any person or organization offering an RESP to the public, such as a bank, trust company, a mutual fund management company, an investment dealer, an independent financial advisor or group scholarship trusts. As required by the Income Tax Act, the property of an RESP must be held by a corporation licensed to be a trustee in Canada.

Under the terms of the contract, the subscriber agrees to contribute to the RESP on behalf of an individual named under the plan as the beneficiary. The promoter, in turn, agrees to invest the subscriber's contributions and the grant from the CESG and make Education Assistance Payments to the beneficiary when he or she begins their PSE. The promoter also helps the subscriber in applying for the CESG based on the subscriber's contributions to the RESP. The promoter notifies HRDC of the contributions and HRDC processes the request and submits the appropriate grant amount to the promoter/trustee. The promoter then deposits the grant directly into the subscriber's RESP account. The promoter may charge an administration fee and/or close-out fee, and may impose rules as to the frequency and minimum amount that can be deposited in an RESP.

In order to be eligible for the CESG, the RESP must comply with tax rules set out in the Income Tax Act (the Act). The Canada Customs and Revenue Agency (CCRA) administers the tax provisions under the Act.

2.2 Payments To and From RESPs

Under the CESG Program, the Government provides a grant of 20 percent on the first $2,000 of annual contributions made to the RESP for children up to age 17 (the maximum allowable annual RESP contribution is $4,000). Starting January 1, 1998, all children who are Canadian residents began to accumulate "grant room" at a rate of $400 per year until the end of the year in which they become 17 years of age. If RESP contributions made on behalf of a beneficiary in one year do not attract the full $400 of the CESG, the unused portion of the CESG will be added to the beneficiary's grant room and will be available for use in another year. A beneficiary could receive up to $800 in grants in a single year, based on the maximum annual RESP contribution limit of $4,000. A maximum of $7,200 ($400 times 18 years) per beneficiary is available through the CESG.

The CESG is deposited directly into an RESP. Savings in the RESP grow tax-free until the beneficiary attends a PSE institution full-time.

When the beneficiary enrols as a full-time student in a qualifying educational program in a post-secondary educational institution (usually a community college, university or technical/vocational college), he or she becomes eligible to receive the accumulated investment income on the subscriber's RESP contributions together with the grant itself as an Education Assistance Payment (EAP). Students with disabilities may qualify for an EAP for part-time studies. The EAP is taxable in the beneficiary's hands but, as a student typically has little or no other income at this point in the life cycle, he or she pays little or no income tax on the EAP. Contributions are returned to the subscriber as a PSE withdrawal, with the expectation that these withdrawals will also be used to fund the child's education.

2.3 Restrictions

To be eligible for the CESG, the beneficiary must be a Canadian resident at the time the RESP contribution is made and possess a valid Social Insurance Number (SIN). Only contributions made to the RESP before the end of the calendar year in which the beneficiary turns 17 years of age are eligible to receive the grant. Also, to qualify for the grant at age 16 and 17, certain minimum contributions had to have already been made to the RESP for the child before the end of the calendar year in which the child turned 15.³

If an RESP beneficiary does not attend a post-secondary institution, there are different options available to the subscriber. If the RESP allows for it, the subscriber may wish to leave the money in the plan for a few years in case the beneficiary changes his or her mind. Another option is that the subscriber can name a sibling under age 21 as a new beneficiary without loss of the grant. If the RESP is a family plan (as described below), another child in the plan could use the grant to a maximum of $7,200.

Once all of the RESP beneficiaries turn 21 years of age and are still not attending a post-secondary institution, and the plan has been in existence for at least ten years, the subscriber may be able to withdraw the income earned in the RESP as an Accumulated Income Payment (AIP). Withdrawal of contributions from an RESP containing a grant when the beneficiary is not enrolled in PSE causes 20 percent of the amount withdrawn to be returned to the Government of Canada as a repayment of the grant paid.

2.4 Types of RESPs

There are three types of RESPs:

• Individual family RESPs: The designated beneficiaries of this type of RESP, of which there may be one or more, must be related to the subscriber by blood or adoption and be under 21 years of age. If one or more of the beneficiaries does not enter PSE, the grant may be re-distributed to the remaining named beneficiaries who do enter PSE, to a maximum of $7,200 per student. With this type of RESP, the subscriber typically chooses the investments to be made.
• Individual non-family RESPs: In the case of this type of RESP, subscribers set up a plan for only one beneficiary at a time. The beneficiary does not have to be related to the subscriber, and could even be the subscriber him/herself. The subscriber typically chooses the investments to be made within the RESP.
• Group RESPs: This type of RESP is offered mainly by scholarship trust companies or foundations. Typically, contributions are returned to the subscriber tax-free to fund the beneficiary's first year in PSE, and then accumulated earnings and the grant are paid out as "scholarships" to the beneficiary in his/her second, third and fourth years in PSE. These "scholarships" are EAPs. Group plans are also known as pooled trust plans because contributions are pooled with others and invested for the benefit of those eligible for the scholarships. The amount paid is dependent on the number of units or shares the subscriber purchased, the rate of return and the number of students under the plan who pursue PSE.

2.5 Number of Contracts and Amounts Paid

As of December, 2000, there were a total of 1.7 million RESP contracts in existence, worth a total value of $5.9 billion. This represents considerable growth in levels since the implementation of the CESG in 1998 (i.e. there were 700,000 contracts worth $2.4 billion as of December 31, 1997, the day before the CESG came into operation)

The year-over-year growth in RESP contracts has diminished over time, from 46 percent between 1998 and 1999, to 15 percent between 1999 and 2000. Similarly, the annual growth in contributions to RESPs fell from 63 percent between 1997 and 1998, to 24 percent between 1999 and 2000 (CESG, administrative data, as of September, 2001).

Over the first four years of the CESG's existence (1998/99 to 2001/02), close to $1 billion dollars was paid out in grants. A total of $318 million was paid out in 2000/01, the latest complete year for which administrative data were available. Data from the 1999 Survey of Approaches to Educational Planning (SAEP) indicate that 6.5 percent of households made contributions to an RESP. In the case of households with children under 18 years of age, 17.7 percent made RESP contributions.

Footnotes

3	A minimum of $100 in annual RESP contributions had to have been made for the beneficiary in any 4 years before the calendar year in which they turn 16, OR, a minimum of $2,000 of RESP contributions had to have been made for the beneficiary before the calendar year in which they turn 16.