Parents who have put money in RESPs for their children may be surprised to find the federal government is clawing back grant money deposited into the accounts.

A new measure introduced by the federal government to tighten up the administration of the Canadian Education Savings Grant had RESP promoters scrambling to contact plan subscribers before the Dec. 31 deadline to ensure that children covered by the plans were eligible for the grants. If not, some subscriber grant monies would be clawed back.

The system change, linked to the introduction of the Canada Learning Bond in 2005, adds another layer of scrutiny to CESG claims made by RESP promoters on behalf of planholders and enables the government to track grant eligibility. But there are a few wrinkles that need to be ironed out first.

The issue at hand, according to Marc LeBrun, senior director of program design for the Canada Education Savings Program at Human Resources and Social Development Canada in Gatineau, Que., is what is known as the “age 16/17 rule.” RESP beneficiaries, while they are 16 and 17 yeas of age, are eligible for the grant — 20% of the first $2,000 a year (the Canada Learning Bond adds more on the first $500 for lower-income families) — but only if their plan has been sufficiently active in prior years.

A plan must have had a minimum of $2,000 in contributions or at least four $100 deposits over any four years. “That rule was designed to encourage long-term savings — maybe you don’t have $2,000, but at least you’ve made a conscious effort to save over the years,” says LeBrun.

Subscribers may not have understood the nuances of the age 16/17 rule when they signed off on their documents. But, even if they did, the promoters themselves had no way to check the accuracy of subscribers’ proclamations that they did, indeed, meet these minimum requirements.

GOOD FAITH

Some bank customers have claimed they opened the accounts in good faith, with the assurance that the bank would apply for the grants on their behalf. They were surprised to learn that they had received grants for which they were ineligible.

One hurdle to tracking eligibility is that plans can be held with multiple RESP providers, which don’t share information. Also, government records are incomplete because the CESG was introduced in 1998; by 1997, there were already more than 700,000 RESP contracts, worth slightly less than $2.4 billion. The government would have no record of these plans in its database.

“We were relying on promoters to receive that affirmation from parents on the application form and, where possible, validate the information on their own system before they submitted it to us,” LeBrun says.

Now that the government has taken over the validation process (as of July 2005), it has to conduct an audit of past activity to ensure CESG monies haven’t been paid to ineligible families.

In June 2006, Le-Brun says, the government provided Canada’s 65 or so RESP promoters — banks, credit unions and other financial services providers, along with scholarship plan providers — with “proof of eligibility reports.” These reports listed all beneficiaries who were refused the CESG between August 2005 and January 2006 (July-December transactions).

RESP promoters have been asked to re-view each beneficiary file and verify that it has supporting documentation to prove it meets the age 16/17 rule. If it doesn’t, promoters are to reclaim the grant money and turn it over to the government.

In cases in which the grant money has been completely paid out — disbursed to students as Educational Assistance Payments — the government is responsible for reclaiming the grant. “We expect to deal with this on a case-by-case basis when the promoters get back to us,” LeBrun says.

Planholders would also owe the government any interest earned on the ineligible grant money. “But we’re not there yet,” LeBrun says.

The government is reluctant to provide information that hints at the scope of this audit because, as LeBrun says, the validation is to be conducted on an individual basis and proof of eligibility reports were still outstanding by several promoters. “We’ll have a better idea in early February,” he says.

Presumably, the process will affect more individual and family plans at banks, credit unions and other financial institutions than pooled group plans, according to Peter Lewis, vice president of operations for the Canadian Scholarship Trust Foundation, which offers scholarship plans through its distributor, C.S.T. Consultants Inc. “Group plans, by nature, are plans you buy when your kids are young,” he says.

@page_break@His firm doesn’t permit group plan entry for children over 14, so even if the plan is initiated when a child is 13, there’s a good chance subscribers will meet minimum eligibility by the time the child turns 16, he adds.

In fact, C.S.T. had fewer than 100 cases to verify, he says; of those, the vast majority checked out.

Banks are bearing the brunt of the verification process because, especially in the early years of the CESG program, parents were keen to sign up their children to receive the 20% bonus on the first $2,000/year and may not have understood the program’s intricacies. And the banks were keen to sign them up. IE