Sales Representative Proficiency Course

Transcription

1 RESP D ealers A ssociation of C anada Sales Representative Proficiency Course 2011, RESP Dealers Association of Canada All rights reserved. No part of this publication may be reproduced, stored or transmitted in any form, whether electronic, mechanical, photocopied or otherwise, without the prior written consent of the RESP Dealers Associations of Canada. Applications for written consent should be made to RESPDAC, 2221 Yonge Street, Suite 210, Toronto, ON M4S 2B4. 1

2 Contents Introduction... 6 Who is This Course For?... 8 Course Requirements... 9 What Does This Course Cover? Helpful Hints Saving for Education Rising Costs Increasing Benefit of Post-Secondary Education Registered Education Savings Plans What is an RESP? Registration of a Plan Three Types of RESPs RESP Distributors RESPs and the Income Tax Act Subscribers Beneficiaries Contribution Limits Mandatory Termination Transfers Tax on Over-Contributions Payments from RESPs Grant Programs Canada Education Savings Grant (CESG) Additional Canada Education Savings Grant Payments

3 Canada Learning Bond Alberta Centennial Education Savings (ACES) Plan Quebec Education Savings Incentive (QESI) Key Benefits and Potential Risks of RESPs Benefits of RESPs Potential Risks of RESPs How Scholarship Plans Work How Individual, Family and Group Plans Differ Administration of Scholarship Plans How Scholarship Plans Derive Value Investment Mandate of Scholarship Plans Investment Strategies Scholarship Plan Disclosure Documents Financial Statements Notes to the Financial Statements Other Scholarship Plan Information Additional Financial Disclosure and Oversight Accessing Disclosure Documents Fees and Expenses Enrolment or Membership Fees Enrolment Fee Refunds Completion Insurance Withdrawal Fees Administration and Management Fees Other Charges

4 8. Scholarship Plan Dealers Role of the Scholarship Plan Dealer Internal Policies and Procedures Supervisory Systems Responsibilities of the Sales Representative The Sales Representative s Responsibilities Code of Ethical Business Conduct Marketing and Advertising Role of Marketing and Advertising Definition of Sales Communication and Advertising Approval Requirement Misleading Sales Communications and Advertising Standards for Advertising and Sales Communications Performance Data Business Cards and Letterhead Cold Calling and Telemarketing Federal Regulation Income Tax and CESG Legislation Proceeds of Crime and Terrorist Financing Act and Regulations Disclosure Provisions Securities Legislation Securities Regulation in Canada Introduction to Securities Securities Regulators Securities Law

5 Regulations, Rules, Instruments and Policies Investigations and Enforcement Registration Prospectus Requirements National Policy The Economy Understanding the Economic Environment Measuring the Economy Economic Policy Understanding Financial Markets Understanding Securities Tax and Other Considerations Understanding Investment Risk Three Types of Assets Characteristics of Securities Other Financial Products Appendix A: Glossary Appendix B: Keeping Up with the Jones Appendix C: Sibling Rivalry Appendix D: Plan Transfer Form Appendix E: Excerpts Competition Act

6 I ntroduc tion Introduction This course has been prepared by the Registered Education Savings Plan Dealers Association of Canada (RESPDAC) as part of its ongoing effort to establish the highest standards of knowledge and conduct among those who distribute Scholarship Plans in Canada. RESPDAC was established in 2000 with the following mandate: Proudly advocate the concept and benefits of saving for post-secondary education through Registered Education Savings Plans; Develop, maintain and enforce standards of professionalism and ethical conduct by all member companies, their employees and representatives; Represent the group RESP industry in dealings with regulatory, government and political organizations and individuals in a proactive, responsible and cooperative manner; and Ensure cooperative relations among member companies, with the ultimate goal of serving the needs of subscribers first and foremost and maintaining the high standards of the group RESP industry. 6

7 I ntroduc tion RESPDAC is recognized by regulators, political decision-makers, the financial industry, media and the public as the foremost advocacy group for RESPs in Canada. Our focus is on promoting the concept of education saving to Canadian families, and to working cooperatively with provincial regulators in ensuring professional, efficient and ethical operations for the security and benefit of our subscribers. The members of RESPDAC are: C.S.T. Consultants Inc: distributing the Canadian Scholarship Trust Plans. Heritage Education Funds Inc: distributing the Heritage and Impression Plans. Knowledge First Financial: distributing the Knowledge First Education Savings Plans. Universitas Management Inc.: distributing the Universitas, Reflect and Individual Plans. 7

8 I ntroduc tion Who is This Course For? The Sales Representative Proficiency Course is the mandatory educational prerequisite for people seeking registration as a sales representative of a Scholarship Plan Dealer in Canada. People who invest in Scholarship Plans expect excellent service, expert knowledge and absolute trustworthiness from sales representatives and dealers. You will be entering into long-term relationships with your clients, and they will be relying on you when making important investment decisions. Your clients and your dealer must always have confidence in your knowledge and integrity. To meet these expectations, you must have proper training and a thorough understanding of your regulatory and ethical obligations throughout your career. The objective of this course is to provide the knowledge you need to: Understand and comply with your legal, regulatory and ethical obligations as a registered sales representative, and Provide your clients with informed, prudent and objective advice about the importance of saving for education, their educational savings options, how RESPs work, available grant programs and all of the investment products you are offering. 8

9 I ntroduc tion Course Requirements Some important facts you need to know before you get started: This is a self-study course. To successfully complete it, you must obtain a grade of at least 70% on a final two-hour examination. You should expect to devote about 20 to 30 hours to studying and reviewing the material. The final examination must be completed within three months of registration in the course (you may complete the course and the exam in a shorter timeframe). Sample examination questions have been included at the end of each chapter to reinforce important concepts and to help you understand what you need to know to successfully complete the course. An online practice exam module is also available for the student at RESPDAC website. Most Scholarship Plan Dealers require that sales representatives take a product knowledge exam. Check with your dealer to ensure you have the proper study materials. 9

10 I ntroduc tion What Does This Course Cover? In the Sales Representatives Proficiency Course, you will learn about: The costs and benefits of post-secondary education in Canada, The rules governing RESPs and government grant programs, The general design of Scholarship Plans, Scholarship Plan disclosure documents, Scholarship Plan fees and expenses, The role of Scholarship Plan Dealers, Responsibilities of sales representatives, RESPDAC s Code of Ethical Business Conduct, The regulatory framework, and An overview of the economic and financial environment in Canada. 10

11 I ntroduc tion Helpful Hints Each chapter begins with an Overview and ends with a Summary of content covered. Each chapter includes Test Your Knowledge questions that review information discussed in that chapter. Looking for a definition? The Glossary, found in Appendix A, is a handy resource that defines some key terms used in the industry. More Online: This icon indicates where there are links to websites where you can access more detailed information or check for updates. This course can serve as a reference guide keep it handy after you ve written the exam. You can find the course materials, along with additional reference materials and access to a practice exam module online at the RESPDAC website. Once you have successfully completed your course and exam, you will have access to this course material online for your reference. Your student ID only expires if you don t successfully complete the course and exam by the prescribed date. 11

12 1 Sav ing for Educ ation 1. Saving for Education Chapter 1 Overview This chapter covers the two key factors that underline the importance of saving for education: The rising costs of post-secondary education in Canada, and The increasing advantages of post-secondary education. 12

13 1 Sav ing for Educ ation Rising Costs The cost of post-secondary education in Canada is high and rapidly getting higher. Consider these facts from Statistics Canada: Tuition fees have been growing much faster than inflation. Tuition fees in Canadian universities have seen an average annual increase of 4.4% between 1998 and 2008, compared to an average annual inflation rate of 2.3%. For students entering university in 2009, the estimated cost of a four-year university education away from home was about $68,000. Children born in 2010 are expected to face costs of more than $116,000 for the same four-year program when they start university. See the following Table 1.1 for estimated future university costs by year of birth. Undergraduate tuition fees at Canadian universities rose by an average of 21.5% from 2002 to The largest increases in that period were seen in professional fields such as law, medicine and dentistry, where tuition fees increased by as much as 65%. 13

14 1 Sav ing for Educ ation Table 1.1 Projected Costs of a University Education Estimated Cost of Total Tuition for a 4-Year Program* (At Home) Estimated Cost of Total Tuition and Accommodation for a 4-Year Program* (Away from Home) Year of Birth Year of School Entrance $81,118 $129, $76,751 $122, $72,619 $116, $68,709 $111, $65,010 $105, $61,510 $100, $58,199 $95, $55,066 $90, $52,101 $86, $49,296 $81, $46,642 $77, $44,131 $73, $41,755 $70, $39,507 $66, $37,380 $63,428 * Based on Statistics Canada figures, the increase from 1995/1996 to 2006/2007 in total tuition cost was 5.69% and the increase in the cost of accommodation over the same period was 4.53%. Source: Heritage Education Funds, Inc. 14

15 1 Sav ing for Educ ation RESPs in the Real World Braden was born in His parents, Ray and Marie, are university graduates and want to save for his education. They discover that a four-year university education is expected to cost more than $90,000 in 2020 when Braden finished high school. They come to you for advice about how they can best save to meet that target. Savings matter: a much higher percentage of youth for whom savings had been set aside for their education (either by themselves or by their parents) went on to college or university compared to youth for whom there were no savings, according to the Statistics Canada 2006 Back to School Factbook. More students are working: about 46% of students worked in the school year compared to just 28% in You can t count on academic or sports scholarships and awards: while the parents of 40% of children 18 years old and younger expected their children would receive a scholarship or award to help finance their post-secondary education, only 15% of students reported receiving such an award in 2002, according to Statistics Canada. 15

16 1 Sav ing for Educ ation Students are graduating with more debt: more than half (59%) of college and university graduates had student debt at graduation in 2006, up from 45% in The average amount owing for an undergraduate student was over $24,000 in 2006, a Canada Millennium Scholarships Foundation study found. In addition to tuition, post-secondary education costs include student fees, living expenses and books. More details are available on the CanLearn website. This online resource about post-secondary education offered by Human Resources and Skills Development Canada could be a useful source of information for you and your clients. MORE ONLINE: While most Canadian parents hope their children will go on to post-secondary education, only 50% of parents in 2002 had savings for college or university. 16

17 1 Sav ing for Educ ation Increasing Benefit of Post-Secondary Education In recent years a post-secondary education has become critical to success in Canadian society. The number of jobs available for those without a post-secondary education is dropping, while the number of opportunities for those with a postsecondary education continues to increase. College and university graduates are more likely than less educated people to find jobs, keep jobs and earn more money, according to a 2009 study, The Value of a Degree: Education, Employment and Earnings in Canada by the Canada Millennium Scholarship Foundation. The study finds: Canadians without a high school diploma are two-and-a-half times more likely to be unemployed than those with a university degree. A university degree holder earned $18,000 more per year than a high school graduate in 2005; those with a graduate degree earned $29,000 more than a high school graduate. A college graduate will earn $394,000 more than a high school graduate over 40 years, while those with a university degree will earn an additional $745,

18 1 Sav ing for Educ ation Table 1.2 Median 2005 Earnings for Full Year, Full-Time Earners Age 25 64, by Education and by Region Less than high school $32,029 High school $37,403 Trades or apprenticeship $39,996 College $42,937 University degree $56,048 Source: Statistics Canada, Income and Earnings Highlight Tables, 2006 census. Statistics Canada Catalogue no XWE Statistics Canada also finds that education translates into jobs and the earnings gap widens over time. Two of every three new jobs in Canada require a post-secondary education. The unemployment rate for 25- to 29-year-olds with less than high school was 15% in 2004, compared to 9% for high school graduates, 6% for college or trade graduates, and 7% for university graduates. As outlined in the following Table 1.3, the earnings gap increases over time, based on education level. The annual average income of people aged 15 to 24 without a university degree ( Certificate/diploma below Bachelor level ) and those with a Bachelor s degree in 2006 were not far apart at about $11,000 and $15,000 respectively. By the age of 35 to 44, university graduates were earning, on average, 18

19 1 Sav ing for Educ ation more than $21,000 more than those without a post-secondary degree or diploma. The earnings gap is largest for 45- to 54-year-olds, with university graduates outpacing the earnings of those without a university degree by $30,000. Table 1.3 Average Employment Income, By Age Group and Education Level, Canada, $11,119 $29,627 $37,744 $41,281 $34,493 $15,515 $15,028 $39,555 $59,146 $71,355 $61,871 $33,985 $15,086 $42,882 $72,058 $86,284 $78,501 $42,964 Certificate/ diploma below Bachelor level Bachelor s degree University certificate/ diploma or degree above Bachelor s Source: 2006 Census of Population, Statistics Canada. 19

20 1 Sav ing for Educ ation Chapter 1 Summary Tuition fees have been growing faster than inflation. A four-year university degree (living away from home) is expected to cost more than $122,000 for a child born in Young people are more likely to pursue a post-secondary education if their parents have savings, but only about half of parents today have education savings. Job opportunities for Canadians without a post-secondary education are dropping but rising for those with higher education. People with post-secondary education are more likely to find a job, keep it and earn substantially more money than people without a postsecondary education. 20

21 1 Sav ing for Educ ation Test Your Knowledge Chapter 1 1. How have tuition fee increases compared to the inflation rate in recent years? (a) Tuition fees are rising more slowly than the inflation rate. (b) There is no relationship between tuition fees and the inflation rate. (c) Tuition fees have been rising faster than the inflation rate. (d) Tuition fees are protected from the inflation rate by federal law. 2. What does the government estimate that the cost of a four-year university or college education living away from home could be for a child born in 2008? (a) $109,500 (b) $14,000 (c) $204,000 (d) $123,000 21

22 1 Sav ing for Educ ation 3. While most parents hope their children will go on to post-secondary education, how many have a specific savings program for education? (a) 25% (b) 50% (c) 75% (d) 99% 4. What percentage of new jobs in Canada requires a post-secondary education? (a) Half (b) A quarter (c) Two-thirds (d) Three-quarters 5. How does education level affect earnings over time? (a) University and college graduates typically earn less money than those with a high school diploma. (b) There is no noticeable difference. (c) Earnings of those with post-secondary education outpace those with less than high school as they age. (d) By their 50s, those with less than high school education have earnings roughly equal to those with post-secondary education. Answers: 1.C 2.D 3.B 4.C 5.C 22

23 2 R egister ed Educ ation Sav ings Pl a ns 2. Registered Education Savings Plans Chapter 2 Overview In this chapter you will learn about: The origins of RESPs in Canada, How Plans are registered, The three types of RESPs, How Plans are distributed (sold), What investments are RESP-eligible, and The rules for RESPs. 23

24 2 R egister ed Educ ation Sav ings Pl a ns What is an RESP? An RESP is an investment plan for post-secondary education. The subscriber (often a parent or grandparent) contributes funds to the plan to help pay for future educational costs incurred by the beneficiary. Contributions to an RESP are not taxdeductible, but the income (e.g., dividends, interest, capital gains) earned on those contributions is sheltered from tax until it is withdrawn. As long as the funds are withdrawn to pay for eligible post-secondary education costs (described in more detail later in this chapter), the income that has been earned in the RESP is taxed in the hands of the beneficiary (the student), rather than the subscriber. Since the student will generally be attending school full-time and earning little or no income, the income that the student receives from the RESP will typically be taxed at a very low tax rate. The ability to defer taxes on the income earned is one of the key advantages of RESPs. Other benefits are discussed in subsequent chapters. 24

25 2 R egister ed Educ ation Sav ings Pl a ns RESPs in the Real World Two families save for their children s education by putting away $3,000 at the beginning of each year for 10 years. In both cases, the subscribers are subject to the same marginal tax rate of 40%. The Smiths puts the money in non-registered high interest account that earns 4% annual interest. Each year they pay income tax on the income earned in the account. At the end of 10 years, the Smiths have paid $2, in tax and have $34, saved in the account. The Jones put their money in an RESP and earn the same 4% annual interest. They do not have to pay tax on the income earned in the account. At the end of 10 years, the Jones have paid no tax on the income earned and have a total of $37, in their Plan. The Jones have accumulated almost $3,200 more in income than the Smiths on their $30,000 contribution and that does not include the significant government grants that would also have been available to the Jones on their RESP contributions (grants are covered in Chapter 3). The $7, in income earned in the Jones RESP will be subject to tax when it is withdrawn, but it will be taxed at the low rate (or zero) that applies to their student at the time. The Smiths found it difficult keeping up with the Jones without the tax deferral benefits of an RESP. See the details of these calculations in Appendix B. 25

26 2 R egister ed Educ ation Sav ings Pl a ns Education Savings Plans (ESPs) date back to the early 1960s. Originally, the Plans were strictly a savings arrangement, similar to a bank account, where investment income was taxed in the hands of the subscriber and the students received the aftertax income from the Plan. In 1974, the Federal Government enacted changes to the Income Tax Act to encourage people to save for their children s post-secondary education. The changes allowed Education Savings Plans to become registered and to serve as tax shelters RESPs. Registration of a Plan RESPs are regulated from an income tax perspective by the Federal Government and administered by the Canada Revenue Agency (CRA). To be established as a Registered Education Savings Plan, the Plan must be approved by CRA. CRA reviews the terms and conditions of the Plan, and ensures that the appropriate trust arrangements are in place and that the Income Tax Act has been followed. Specimen Plan documents are filed by the Plan s promoter with CRA. Once approved, the Plans are given a registration number under which they are allowed to operate. 26

27 2 R egister ed Educ ation Sav ings Pl a ns Three Types of RESPs The three basic types of RESPs are: 1) Individual (or Non-Family) Plans: An Individual RESP can have only one beneficiary. 2) Family Plans: Family Plans can have one or more beneficiaries, connected by blood or adoption to the subscriber. but all must be 3) Group Plans: The subscriber designates one beneficiary in a Group Plan. Usually offered by not-for-profit Scholarship Plan Foundations, Group Plans pool the contributions made by subscribers and invest them to earn income. Subscribers contributions to Group Plans are typically administered on an age group or maturity date concept. This means that the contributions for beneficiaries who are expected to attend post-secondary school in the same year are administered together and invested so the money is readily available when those students are likely to need it. Most Scholarship Plan Dealers generally specialize in Group Plans, although most offer Family and Individual (Non-Family) Plans as well. 27

28 2 R egister ed Educ ation Sav ings Pl a ns RESP Distributors RESPs are offered by almost all major financial institutions, including banks, trust companies, credit unions, mutual fund companies, investment dealers and Scholarship Plan Dealers. Most financial institutions offer self-directed Individual and Family RESPs where the subscriber decides what investments will be made in the RESP. In many cases, subscribers who choose a Self-Directed RESP will pay annual administration fees as well as commissions or similar fees when they buy or sell securities within the Plan. Some institutions also offer managed RESPs where a professional adviser determines the investments that will be made within the subscriber s Plan. Subscribers are typically charged fees for these advisory services and the administration of the account. Scholarship Plans are managed Plans in which the funds contributed by subscribers are placed in a pool that is professionally managed at the direction of the Plan s advisers. Subscribers to Scholarship Plans can expect to be charged an enrolment fee, which is deducted from early contributions, and fees related to the ongoing management and administration of the Plan. (See Chapter 7: Fees and Expenses for more details.) 28

29 2 R egister ed Educ ation Sav ings Pl a ns RESPs and the Income Tax Act Important rules that govern the operation of RESPs appear in sections 118.6, and 204 of the Income Tax Act. MORE ONLINE: These and other rules that govern the operation of RESPs change over time. As a registered Scholarship Plan representative, you will be expected to stay informed of changes and comply with them. The rules described below are current as of June RESP-Eligible Investments Section of the Income Tax Act describes the types of investments that can be held in RESPs. With a few exceptions, investments that qualify for an RESP are the same as those that qualify for a Registered Retirement Savings Plan (RRSP). 29

30 2 R egister ed Educ ation Sav ings Pl a ns RESP qualified investments include: Money and deposits, Guaranteed Investment Certificates (GICs) issued by a trust company, Bonds and other obligations of the Government of Canada, a province, a municipality or a Crown corporation, Shares listed on prescribed stock exchanges in Canada or in a foreign country, Bonds and other debt obligations of a corporation whose shares are listed on a prescribed stock exchange in Canada or in a foreign country, Segregated fund policies, Prescribed investments (certain mortgages, units or shares of a mutual fund and shares of small business organizations), and An investment acquired by the RESP trust prior to October 28, Scholarship Plans are subject to additional investment restrictions imposed by provincial and territorial securities regulators. Generally, these require that Scholarship Plans invest in secure debt instruments such as GICs, government bonds and debentures, and certain mortgages. These restrictions are discussed in more detail in Chapter 13: Securities Regulation in Canada. 30

31 2 R egister ed Educ ation Sav ings Pl a ns Subscribers Subscribers must be individuals (not trusts or corporations), must provide a Canadian Social Insurance Number and must be resident in Canada at the time of enrolment of the beneficiary. A child care agency can be a subscriber provided it is taking out a Plan for a child under the agency s care. (This relates more to Self-Directed Plans than Group Plans). Contributions to an RESP can be made on behalf of a subscriber (for example, by an employer). Those contributions can also qualify for grants (see Chapter 3). Spouses, or common law partners, can be joint subscribers to an RESP. MORE ONLINE: For Canada Revenue Agency s definitions of spouses and common law partners: Control of the subscriber s contributions remains with the subscriber, rather than the beneficiary. Education Assistance Payments (EAPs), however, are paid directly to the qualifying beneficiary. For Individual Plans (one beneficiary):»» The subscriber can contribute for up to 31 years. 31

32 2 R egister ed Educ ation Sav ings Pl a ns»» The beneficiary does not have to be related to the subscriber and can be any age when named.»» The subscriber can be the beneficiary. For Family Plans (more than one beneficiary):»» Subscribers can name beneficiaries who are under 21 when named, and can make contributions only until the beneficiaries turn 31.»» Each beneficiary must be connected by blood or adoption to the subscriber(s). For this purpose, a blood relationship includes a parent, brother, sister, child and grandchild of the subscriber; an adopted child is connected to his or her adopting parents and grandparents; and step-children are connected to their step-parents. A subscriber s niece, nephew, aunt, uncle and cousin are not considered to be connected by a blood relationship. Acceptable relationships are defined in section 251 (6) of the Income Tax Act.»» The subscriber may not be the beneficiary in a Family Plan. 32

33 2 R egister ed Educ ation Sav ings Pl a ns For Group Plans (one beneficiary): The rules vary from one Scholarship Plan dealer to another, but generally:»» Subscribers name beneficiaries, which may be restricted with respect to age and/or timing of eligibility of withdrawals.»» The beneficiary may be required to be connected to the subscriber.»» The subscriber is not typically the beneficiary. Beneficiaries A Social Insurance Number must be provided for each beneficiary. Beneficiaries must reside in Canada while contributions are being made to the Plan. A person can be named as the beneficiary of more than one Plan, subject to contribution limits (outlined below). The named beneficiaries of a Plan can be changed or replaced (subject to conditions in the RESP contract), although there may be tax consequences if the change results in an over-contribution for the new beneficiary. 33

34 2 R egister ed Educ ation Sav ings Pl a ns Contribution Limits Since 2007, the Income Tax Act has allowed a subscriber to contribute up to a lifetime maximum of $50,000 to an RESP per beneficiary. There is no annual limit for contributions, but there have been limits in the past. Historically, the annual limits have been: Prior to 1990: No annual limit, For 1990 to 1995: $1,500, For 1996: $2,000, and For 1997 to 2006: $4,000. Historically, the limit on lifetime contributions has been: For years before 1990: no limit, For 1990 to 1995: $31,500, and For 1996 to 2006, $42,

35 2 R egister ed Educ ation Sav ings Pl a ns Mandatory Termination An RESP must be collapsed 35 years after it is established. Transfers An RESP can be transferred to another RESP. The effective date of the first RESP is applied to the continuing Plan after the transfer. So if the original Plan was started in 1990 and a transfer was made in 2000, the RESP must still be collapsed 35 years after it was started, which is in Excess contributions (and applicable penalty taxes) could result for beneficiaries of the receiving Plan. Penalty tax would not apply if: An individual was a beneficiary under the transferring Plan and the receiving Plan just before the transfer date, or A beneficiary under the transferring Plan is a sibling of a beneficiary under the receiving Plan, provided that the beneficiary under the receiving Plan is under 21 years of age just before the transfer. 35

36 2 R egister ed Educ ation Sav ings Pl a ns Tax on Over-Contributions An over-contribution occurs when the total of all contributions made by all subscribers to all RESPs for a beneficiary exceeds the lifetime limit for that beneficiary. Payments into the Plan from federal and provincial grant programs (discussed in Chapter 3), as well as insurance premiums, are not counted towards the over-contribution. If there is an over-contribution to an RESP, the subscriber is taxed on the overcontribution at the rate of 1% per month on any over-contribution that is not withdrawn by the end of the month. This tax is payable within 90 days after the end of the year in which there is an over-contribution. Payments from RESPs The money that accumulates in an RESP consists of: The subscriber s contributions, Grant money that the subscriber has received (see Chapter 3), and Income that has been earned over time on the Plan s investments. There are rules that dictate how that money can be withdrawn from the RESP, whether any of it must be repaid to the government and whether or not any tax penalties could apply. 36

37 2 R egister ed Educ ation Sav ings Pl a ns Refund of Contributions The contributions made by a subscriber to an RESP will always be returned to the subscriber, less any applicable fees (i.e. enrolment fees, depository fees and insurance premiums).in most cases, the net contributions are withdrawn when the beneficiary attends post-secondary education and is used, along with the income and grant money that has accumulated in the Plan, to help with educational expenses. While subscribers in Group Plans do not choose their investment options, subscribers in Self-Directed RESPs can choose to invest in a wide range of securities, including some with considerable risk. It is possible to suffer losses on RESP investments that erode the value of the subscriber s contribution. There is no guarantee that all of the subscriber s contributions will still be there when the subscriber wants to withdraw them. Selecting appropriate investments for any RESP is very important. 37

38 2 R egister ed Educ ation Sav ings Pl a ns Withdrawal of Grant Money and Income Earned in an RESP The ability to withdraw the income and grant money that an RESP has earned is governed by legislation and by the contractual terms of each Plan. There are four ways funds can be withdrawn from RESPs: 1) EDUCATION ASSISTANCE PAYMENTS (EAPs) This is the most common method of withdrawing the income and grant money that has been accumulated in an RESP. To qualify for an EAP, a beneficiary must be: A resident of Canada (in order to receive any provincial or federal grant portion of an EAP), Enrolled full time in a qualifying educational program at a designated postsecondary educational institution, or At least 16 years old and enrolled part-time in a specified educational program. Enrolled in a part-time program that is at least 12 hours of study per month for at least three consecutive weeks in Canada or 13 consecutive weeks outside Canada, or 38

39 2 R egister ed Educ ation Sav ings Pl a ns Afflicted by a documented mental or physical impairment that prevents full-time enrolment. Qualifying educational program (s.118.6, Income Tax Act): is a post-secondary program at a designated educational institution of not less than three consecutive weeks duration that provides that each student taking the program spend not less than 10 hours per week on course of work in the program. A program at an educational institution outside of Canada must last at least 13 weeks. Designated educational institution (s , Income Tax Act): includes a university, college or other educational institution that has been designated by an appropriate governmental agency under the Canada Student Loans Act, the Canada Student Financial Assistance Act or similar legislation. Human Resources and Skills Development Canada has also approved additional educational institutions in Canada that offer non-credit courses that develop or improve skills in an occupation. Universities, colleges or other educational institutions outside of Canada that have courses at the post-secondary school level are allowed as long as the student is enrolled in a course that lasts at least 13 consecutive weeks. An updated Master List of Designated Educational Institutions is available at main/designated/ldi.shtml. Specified educational program: (s.146.1, Income Tax Act): is a program at postsecondary school level that lasts at least three consecutive weeks and requires a student to spend not less than 12 hours per month on courses in the program. Apprenticeship program qualify for EAPs as well. 39

40 2 R egister ed Educ ation Sav ings Pl a ns MORE ONLINE: EAP Application Process While each RESP provider may have slightly different requirements, there are a number of forms and information that will be required: Payment Application: This form is completed by the beneficiary and includes questions about their education program and where the EAPs should be deposited. Proof of Registration: This form identifies the beneficiary, the program that the beneficiary is enrolled in, and details such as length of the program and whether the student is full or part-time. It must be signed and stamped by the Registrar of the educational institution. Proof of Progress: Some Group Plans require proof of progress in an educational program. The beneficiary is required to submit their transcript from the Registrar confirming successful completion of the previous academic level(s). 40

41 2 R egister ed Educ ation Sav ings Pl a ns Limits on EAPs For full time students, EAPs cannot exceed $5,000 before the beneficiary has completed 13 consecutive weeks in a qualifying educational program. After that, there is no limit on the amount of EAPs that can be paid if the student continues to qualify for them unless there is a 12 month period in which the student is not enrolled in a Qualified Education Program for a minimum of 13 consecutive weeks. Should this occur, the $5,000 maximum applies again. For part-time studies, the EAP is limited to $2,500 for each 13 week semester of part-time studies. MORE ONLINE: For EAPs up to $20,000 (indexed annually), Canada Revenue Agency will not assess the reasonableness of each expense item as long as the conditions permitting an EAP are met. 41

42 2 R egister ed Educ ation Sav ings Pl a ns 2) Accumulated Income Payments (AIPs) The subscriber s contributions to an RESP may be withdrawn without tax penalty. The income earned in an RESP is typically withdrawn in the form of EAPs but can sometimes also be withdrawn by the subscriber in the form of AIPs. Subscribers may withdraw income as an AIP providing that: The payment is made to, or on behalf of, a subscriber who is a resident of Canada, The payment is made to, or on behalf of, only one subscriber of the RESP, and Any one of the following three conditions apply: (a) The AIP is made not less than 10 years following the year the RESP was entered into, (b) Each individual (other than a deceased individual) who is or was a beneficiary has reached 21 years of age and is not currently eligible to receive an EAP, or (c) The AIP is made in the 35th year following the year the RESP was entered into. Subscribers may also withdrawn income as an AIP if all beneficiaries named under an RESP are deceased. 42

43 2 R egister ed Educ ation Sav ings Pl a ns While most Group Plans are not eligible for AIPs, some have self- directed options that allow AIPs. Generally, AIPs are payable only to the subscriber. AIPs may be transferred to the subscriber s RRSP (or a spousal RRSP) to the extent of any unused RRSP contribution room to a maximum of $50,000 per subscriber. Any portion of an AIP that is not contributed by the subscriber to an RRSP will be taxed as income in the hands of the subscriber and will be subject to an additional 20% penalty tax (12% in Quebec) in the year of withdrawal. 3) Transfers to Other RESPs As described earlier in this chapter under the heading Transfers. 4) Donations to Educational Institutions When an RESP is left with a small amount of cash after the subscriber withdraws contributions and the requirements for Accumulated Income Payments (AIPs) aren t met, that money is sometimes donated to a designated educational institution. 43

44 2 R egister ed Educ ation Sav ings Pl a ns Chapter 2 Summary The subscriber contributes funds to the Plan. Contributions to an RESP are not tax-deductible, but the income earned on those contributions is sheltered from tax until withdrawal. As long as the income earned in the Plan is withdrawn to pay for eligible post-secondary education costs when the student is enrolled in school, it will be taxed in the hands of the beneficiary (the student) in the year it s withdrawn. The student will generally be subject to a very low tax rate. Registered Education Savings Plans were recognized by the Federal Government in 1974 through changes to the Income Tax Act. To be registered, an RESP must be approved by the Canada Revenue Agency. The three types of RESP are Individual, Family and Group Plans. RESP-eligible investments are generally the same as those eligible for RRSPs. 44

45 2 R egister ed Educ ation Sav ings Pl a ns Subscribers may contribute up to $50,000 per beneficiary. Subscribers and beneficiaries must have a Canadian Social Insurance Number. Subscribers can withdraw net RESP contributions without tax penalty. The income earned within, and grants paid to, an RESP can be withdrawn by beneficiaries, in the form of Educational Assistance Payments, to pay for eligible post-secondary education costs. If a beneficiary does not pursue a post-secondary education, the subscriber may still be able to withdraw the income earned in the RESP in the form of Accumulated Income Payments (AIPs), subject to certain restrictions and potential tax penalties. 45

46 2 R egister ed Educ ation Sav ings Pl a ns Test Your Knowledge Chapter 2 1. Why are RESPs described as tax shelters? (a) Contributions are tax-deductible. (b) Income earned on contributions is sheltered from tax until withdrawal. (c) Contributions are not subject to GST. (d) After-tax income is not subject to tax. 2. How does an Education Savings Plan become a Registered Education Savings Plan? (a) It is reviewed and approved by CRA. (b) Its prospectus is receipted by a securities commission. (c) It refers to itself as an RESP. (d) It adheres to the RESPDAC Code of Ethical Business Conduct. 46

47 2 R egister ed Educ ation Sav ings Pl a ns 3. Do the following describe a Group Plan or a Family Plan? Contributions are pooled for investment purposes. Investment income goes to others in the pool if a beneficiary doesn t go on to college or university. Only offered by not-for-profit entities. Contributions are administered on an age group concept. (a) Group Plan. (b) Family Plan. 4. What are not RESP-eligible investments? (a) Money and deposits. (b) Corporate or government bonds. (c) GICs. (d) Commodity futures. 5. What is the current RESP contribution limit per beneficiary? (a) No annual limit and $50,000 in total. (b) $2,000 per year and $42,000 in total. (c) $4,000 per year and $42,000 in total. (d) There is no limit. 47

48 2 R egister ed Educ ation Sav ings Pl a ns 6. Until what point can contributions be made to a Family RESP? (a) One of the beneficiaries turns 31. (b) One of the beneficiaries begins post-secondary education. (c) The youngest beneficiary turns What are the rules for beneficiaries? (a) Each beneficiary must maintain an A average in high school. (b) A person can be named as the beneficiary of more than one Plan. (c) A beneficiary must be under the age of 12 when the Plan is established. (d) A beneficiary must pledge eternal gratitude to the subscriber. 8. Which of the following is NOT true about EAPs? (a) To qualify for EAPs, the beneficiary must be enrolled full-time in a qualifying educational program. (b) EAPs consist of income earned on subscriber contributions and grants such as the Canada Education Savings Grant. (c) EAPs are taxed based on the income of the beneficiary, not the subscriber. (d) Funds can be transferred from EAPs for a down payment on a first home. Answers: 1 B, 2 A, 3 A, 4 D, 5 A, 6 A, 7 B, 8 D 48

49 3 G r a nt Progr a ms 3. Grant Programs Chapter 3 Overview This chapter outlines important information about federal and provincial grants available to RESP subscribers. Your clients will expect you to be knowledgeable about these opportunities to receive money from the government to help build their RESPs. The grant programs covered in this chapter are: The Canada Education Savings Grant (CESG), Additional Canada Education Savings Grant payments, The Canada Learning Bond (available to families who qualify for the National Child Benefit Supplement), The Alberta Centennial Education Savings Plan, and The Quebec Education Savings Incentive. 49

50 3 G r a nt Progr a ms Canada Education Savings Grant (CESG) The Federal Government launched the Canada Education Savings Grant (CESG) program in 1998 to provide further incentive for parents to save for the postsecondary education of their children. Human Resources and Skills Development Canada (HRSDC) pays a basic grant of 20% of annual contributions made to eligible RESPs for a qualifying beneficiary. The annual maximum is $500 for each beneficiary; the cumulative lifetime maximum of all CESG is $7,200. The CESG is deposited directly into the RESP. The HRSDC service standard is to make this payment within 65 days of the subscriber making a contribution. The grant money is held in the Plan for distribution in the form of EAPs to assist the beneficiary with post-secondary education expenses. The key CESG rules are: Qualifying contributions: Annual RESP contributions of up to $2,500 ($2,000 for 1998 to 2007) per beneficiary qualify for the CESG. The beneficiary must be a Canadian resident with a Canadian Social Insurance Number at the time of the contributions. The CESG must be applied for within three years of the date of deposit. Qualifying contributions can be made up to December 31st of the year in which the student turns 17. Beneficiaries ages 16 and 17: The CESG is only available if a minimum of $2,000 of RESP contributions were made before the year in which the beneficiary turned 16, or a minimum of $100 of annual RESP contributions were made and not withdrawn in at least any four years before the year the beneficiary turned

51 3 G r a nt Progr a ms Amount of the grant: The CESG program pays an additional 20% of the subscriber s qualifying contribution to the RESP for the beneficiary to a maximum of $7,200 per beneficiary. The exception is the Additional CESG program, described on the next page. CESG amounts are not included in the calculation of the lifetime limits of the RESP. Carry forward contribution room: Even if a subscriber does not make an RESP contribution in a given year, the beneficiary still accumulates $2,500 of CESG eligible contribution room for that year ($2,000 contribution room per year prior to 2007). Unused contribution room can be carried forward to produce a maximum annual grant of up to $1,000 per student, in any given year. 51

52 3 G r a nt Progr a ms RESPs in the Real World In Chapter 2, we saw how the Smiths discovered they couldn t keep up with the Jones without the tax deferral benefits of an RESP. Let s see what happens when the Jones have the additional benefit of the CESG. We know that the Smiths save $3,000 a year for 10 years and earn annual interest of 4%. At the end of 10 years, the Smiths have paid $2, in tax and have $34, saved in the account. The Jones receive CESG of $500 each year. At the end of 10 years, their RESP is worth $43, Their education savings outpace the Smiths by more than $9,400 due to CESG ($5,000), additional interest earned ($1,563.41) and tax savings ($2,839.52). See the calculations in Appendix B. Acceptable Use: If the beneficiary does qualify for EAPs, the CESG amounts are included in those EAPs. Reallocation: CESGs and income earned on CESGs can be shared with other beneficiaries in a Family Plan as long as no beneficiary receives more than $7,200 in CESGs Repayment: The CESG (but not the interest earned on it) must be repaid to the Federal Government if the beneficiary of an RESP does not pursue qualifying post-secondary education. 52

53 3 G r a nt Progr a ms When contributions are withdrawn from an RESP that received CESGs and the beneficiary is not eligible to receive an Educational Assistance Payment, the RESP trustee will be required to make a CESG repayment equal to 20% of the withdrawal. The CESG would also be repaid to the government if the beneficiary is replaced, unless the replacement beneficiary is under 21 when named and is connected by blood or adoption to each subscriber. For this purpose, a blood relationship includes a parent, brother, sister, child and grandchild of the subscriber; an adopted child is connected to his or her adopting parents and grandparents; and step-children are connected to their step-parents. Repayment of the CESG is also required if: The RESP is terminated, Its registration is revoked, An AIP is made to the subscriber, or There is an ineligible transfer from one RESP to another. 53

54 3 G r a nt Progr a ms Additional Canada Education Savings Grant Payments To provide further support for moderate and low income families, the Federal Government introduced Additional Canada Education Savings Grant (ACESG) payments in ACESG payments are available on the first $500 of contributions made by qualifying subscribers. The availability and amount of the ACESG will depend on the family s income level: Basic and Additional CESG on first $500 Family s net income Less than $41,544 40% Between $41,544 and $83,088 30% Greater than $83,088 20% These income amounts are for 2010; they are updated annually and can be found on the Government of Canada s CanLearn website. MORE ONLINE: The next $2,000 in annual deposits will attract the 20% CESG as usual. 54

55 3 G r a nt Progr a ms The key provisions of this program are: An application for the Additional CESG must be made by the child s primary caregiver (custodial parent) or their spouse/common law partner. Without this application, the CESG rate for all deposits will be at the regular 20% rate. Note that the custodial parent and primary caregiver may be two separate people. Application forms are available on the HRSDC website for use by RESP providers, who apply for the CESG, the Additional CESG and the Canada Learning Bond on behalf of subscribers. The subscriber is required to provide information to identify the Primary Caregiver and Custodial Parent. Unlike basic CESG amounts, there is no carry-forward of the Additional CESG. The maximum CESG (basic and additional) available remains capped at $7,200 per beneficiary. As with the CESG, the ACESG must be applied for within three years of the date of a qualifying contribution. 55

56 3 G r a nt Progr a ms Canada Learning Bond The Canada Learning Bond is a grant offered by the Government of Canada to low and moderate income families to help them save for their children s post-secondary education. Some of the important features of this program that you should know about: To qualify for the Canada Learning Bond, the subscriber must be eligible to receive the Canada Child Tax Benefit, which includes the National Child Benefit Supplement. Canada Learning Bonds are available only to beneficiaries born after December 31, MORE ONLINE: Find out about the Canada Child Tax Benefit and the National Child Benefit Supplement at: In the first year of eligibility, the Canada Learning Bond will pay $500 into the subscriber s RESP. Human Resources and Skills Development Canada (HRSDC) will also provide $25 at that time towards any up-front fees associated with establishing an RESP. In each subsequent year that the family is eligible, $100 is paid until the student reaches the age of 15, for a maximum total Canada Learning Bond of $2,000. The subscriber does not have to make separate contributions to the RESP in order to qualify for the Canada Learning Bond. 56

57 3 G r a nt Progr a ms Many, but not all, Canadian financial institutions offer the Canada Learning Bond for RESP subscribers and will submit the application on behalf of eligible subscribers (see the Human Resources and Skills Development Canada website for details of the institutions that offer Canada Learning Bonds). The funds will be deposited directly into the RESP. If a child is entitled to a Canada Learning Bond payment in a year, but it was not requested, it would carry forward in a manner similar to the CESG. When it is requested, the child can receive Canada Learning Bond entitlements from previous years. If Canada Learning Bond payments from previous years have not been requested by the time the beneficiary turns 18, the beneficiary may still obtain them by opening an RESP for themselves. Any Canada Learning Bond payments that have not been deposited into an RESP by the time the beneficiary reaches the age of 21 will be forfeited. Canada Learning Bond payments will not be included as part of the RESP annual and lifetime contribution limits, nor will they be eligible for the CESG. Canada Learning Bond payments and the income earned on them can be withdrawn in the form of Education Assistance Payments and will be taxable in the hands of the beneficiary in the year in which they are withdrawn. Canada Learning Bond payments that are not used for EAPs by the original beneficiary must be returned to HRSDC. They cannot be pooled and shared with others in the Plan, nor can they be transferred to another student or sibling. Scholarship Plan providers apply for the Canada Learning Bond on behalf of subscribers, just like the CESG and Additional CESG, as previously described. More Online: 57

58 3 G r a nt Progr a ms Alberta Centennial Education Savings (ACES) Plan Children born to or adopted by Alberta residents since January 1, 2005 are eligible to receive grants of up to $800 toward their post-secondary education from the Province of Alberta. The Alberta Centennial Education Savings (ACES) Plan is administered by the Canada Education Savings Program on behalf of the Alberta Government. Here are some of the main features of the ACES Plan: Specific documentation to prove Alberta residency is required for the ACES grant application form for both the initial and subsequent grants. ACES grant payments are available to children named as the beneficiary of an RESP. ACES Plan grants can be applied for through many RESP providers. Fund paid under the program will be deposited directly in the applicant s RESP. An initial grant of $500 is available for babies born to or adopted by Alberta residents on or after January 1, The application for the initial ACES grant must be completed within six years of the child s birth date. Additional ACES grants of $100 each are available to students who are enrolled in school in Alberta and who have turned 8, 11 or 14 years old in 2005 or later. Each additional ACES grant must be applied for separately. The application must 58

59 3 G r a nt Progr a ms be completed within six years of the applicable birthday and evidence must be presented that at least $100 has been deposited to an RESP on behalf of the child in the year preceding the application. Children who are home-schooled at the primary level may also be eligible to receive the $100 ACES grants. A copy of the Home Education Notification Form signed by the relevant associate board or associate private school would serve as proof of enrolment. Former Alberta residents can apply for ACES grants by providing proof of residency during the qualification period. ACES grant payments can be withdrawn in the form of EAPs by the named beneficiary of the RESP. If the ACES grant is not withdrawn through an EAP, the funds must be repaid to the Government of Alberta. Depending on the type of RESP chosen, the ACES funds may be transferable to a sibling. MORE ONLINE: 59

60 3 G r a nt Progr a ms Quebec Education Savings Incentive (QESI) Introduced in 2007, the QESI is a refundable tax credit that is paid by the Government of Quebec directly into a qualifying applicant s RESP. To qualify, children must be resident in Quebec on December 31 of the relevant year, under the age of 18, have a Social Insurance Number, and be the named beneficiary of an RESP into which the QESI would be paid. The QESI will add 10% of the net contributions paid into each beneficiary s RESP to maximum of $250 per year and $3,600 lifetime. As a further incentive for moderate income families, an increase of up to $50 per year, calculated on the basis of family income, may be added to the basic amount. The basic QESI entitlement accrues annually from 2007 or the child s year of birth, whichever is later, until the year the child turns 17. Unused QESI entitlement can be carried forward, though the maximum annual amount of QESI is $

61 3 G r a nt Progr a ms For the QESI to be paid for a given year, the RESP Plan dealer must submit a request to Revenue Quebec no later than 90 days after the end of the year, or after a longer period of time that is deemed reasonable but that may not exceed December 31 of the third year following the year for which the QESI is requested. There are restrictions on entitlement to QESI similar to those for RESPs if the beneficiary of the Plan is 16 or 17 at the end of the year: There must have been contributions to the beneficiary s RESP of at least $2,000 that must not have been withdrawn before the end of the year in which the beneficiary turned 15; or A minimum of $100 in annual RESP contributions must have been paid into the RESP over at least four years prior to the year in which the child turned 16 and the contributions must not have been withdrawn before that year. MORE ONLINE: 61

62 3 G r a nt Progr a ms Chapter 3 Summary The Federal Government launched the Canada Education Savings Grant in 1998 to provide further incentives for families to save for their children s post-secondary education. The CESG program is administered by Human Resources and Skills Development Canada and provides a grant of up to $500 per year (including the Additional CESG), to a lifetime maximum of $7,200, to the RESP of qualifying beneficiaries. The Additional Canada Education Savings Grant program provides an extra grant (up to $100) to moderate and low-income families on the first $500 contributed to an RESP. There are special contribution rules for beneficiaries who are 16 and 17 years old. CESGs must be repaid to the Federal Government if the beneficiary does not pursue post-secondary education. The Canada Learning Bond is available to families that are eligible for the National Child Benefit Supplement. This grant can be as high as $2,000. Grant programs in Alberta and Quebec can provide up to $800 and $3,600 respectively. 62

63 3 G r a nt Progr a ms Test Your Knowledge Chapter 3 1. Why was the CESG program introduced? (a) To boost university enrolment. (b) To encourage parents to save for post-secondary education for their children. (c) To reduce university and college tuition fees. 2. What qualifies for the CESG? (a) $2,500 RESP contribution per year per beneficiary. (b) All RESP contributions. (c) RESP contributions in leap years. (d) $4,000 RESP contribution per family per year. 3. Under what conditions must the CESG be repaid to the Federal Government? (a) If an RESP is terminated. (b) If the beneficiary does not maintain a C average. (c) If the subscriber stops contributing to an RESP. (d) If the beneficiary chooses an out-of-province educational institution. 63

64 3 G r a nt Progr a ms 4. Which of the following applies to the Additional CESG? (a) There is a carry-forward provision for the additional rate. (b) Additional rates apply only on the first $500 of deposits. (c) Only applies to residents of Nova Scotia and Newfoundland. (d) The next $1,500 of annual deposits attract a 30% CESG 5. The total grant available under the Alberta Centennial Education Savings program is: (a) $500 (b) $300 (c) $800 (d) $ Which of the following is true about the Canada Learning Bond? (a) Families that aren t eligible for the National Child Benefit Supplement (NCBS) are generally eligible to receive the grant. (b) There are carry forward provisions. (c) A request for the Canada Learning Bond entitlements from previous years must be made before the child turns 16. (d) $300 is paid to eligible families each year until the student is

65 3 G r a nt Progr a ms 7. The Canada Learning Bond is designed primarily for: (a) Upper middle income families. (b) New immigrants, regardless of income. (c) Middle income families. (d) Low and middle income families. 8. The lifetime maximum for the Quebec Education Savings Incentive is (a) $1,000 (b) $2,500 (c) $3,600 (d) $5,000 Answers: 1 B, 2 A, 3 A, 4 B, 5 C, 6 B, 7 D, 8 C 65

66 4 K e y B enefits a nd Potenti a l R isk s of R ESPs 4. Key Benefits and Potential Risks of RESPs Chapter 4 Overview Your clients and the Code of Ethical Business Conduct will expect you to be able to objectively explain the advantages of RESPs as well as the potential risks. This chapter outlines both. Your Scholarship Plan Dealer will provide you with more specific information and training to support your sales efforts, but it s important that all sales representatives have a sound understanding of the key benefits and the risks associated with investing in RESPs. 66

67 4 K e y B enefits a nd Potenti a l R isk s of R ESPs Benefits of RESPs 1) Tax Savings RESPs provide a tax-deferred means for subscribers to accumulate savings specifically for post-secondary education. The subscriber s contributions to an RESP are not tax-deductible, but the income earned on those contributions can accumulate tax-free until the money is withdrawn from the Plan. On withdrawal, the subscriber s contributions are not taxed. The income that has been earned on those contributions will be taxed in the hands of the beneficiary. Typically, beneficiaries who are pursuing post-secondary education will have limited income and so will be subject to little or no tax. 67

68 4 K e y B enefits a nd Potenti a l R isk s of R ESPs 2) Tax-Free Compound Interest The income earned on RESP contributions is not taxed until it is withdrawn and can compound tax-free for up to 35 years. Compounding interest: Interest that is paid on the original amount deposited, and also on any interest that has been earned in previous periods. In Year 1, the bank pays you $5 interest on your $100 deposit. In Year 2, it pays you interest on $105. 3) Savings Enhanced by Government Grants The Federal Government will add to savings with the Canada Education Savings Grant (CESG) equal to 20% of every eligible dollar contributed to an RESP up to $2,500 contributed per year (CESG of $500) and a lifetime limit of $7,200 per beneficiary. Additional CESG, the Canada Learning Bond and the Alberta and Quebec provincial education savings programs could provide additional grant money to eligible subscribers and beneficiaries. See Chapter 3: Grant Programs for details. As outlined in the Smith/Jones examples in the previous chapter, this amount plus the income earned on the CESG can add significantly to the funds saved. 68

69 4 K e y B enefits a nd Potenti a l R isk s of R ESPs RESPs in the Real World Sanjay contributes $2,500 per year to an RESP for 18 years. In addition, CESG of $500 is received until the $7,200 maximum is received. The RESP earns an average return of 5% over the period. At the end of 18 years, the RESP has a value of $86,597. His brother Sam contributes the same total amount ($45,000) but does so in one lump sum at the start of the period. Sam only receives a $500 CESG in the first year. His RESP earns an average return of 5% over the period. At the end of 18 years, Sam s RESP has a value of $109,501. While the brothers have invested the same amount of money and despite the fact that he only received $500 in CESG, Sam s education savings are almost $23,000 more than his brother s savings because he maximized contributions early. See the calculations in Appendix C. 69

70 4 K e y B enefits a nd Potenti a l R isk s of R ESPs Chart 4.1 Value of Maximizing Contributions Early 4) Flexibility In the past, if a student didn t pursue post-secondary education, the RESP subscriber risked losing all of the income that had been earned on their investment. Today, when the student does not qualify for EAPs, a subscriber in an Individual or Family Plan may transfer up to $50,000 of income earned in the RESP to their RRSP (if they have contribution room) or withdraw the income and pay tax on it, subject to a 20% penalty tax. 70

71 4 K e y B enefits a nd Potenti a l R isk s of R ESPs This benefit is usually not available to subscribers in many Group Plans, but those with a self-determined option will have some of the features of a Self-Directed Plan such as the ability to transfer income to an RRSP or withdraw it. Subscribers in Group Plans can also transfer their Plan to an Individual or Family Plan. These options are discussed in more detail in Chapter 5. 5) Education Incentive When subscribers start saving towards post-secondary expenses, they provide an incentive to their beneficiaries to pursue further education. The beneficiaries have the confidence that someone planned ahead for them and that financial resources are available for their education. Lack of financial resources is the number one reason why students do not continue education after high school greater than all other reasons combined. Potential Risks of RESPs RESPs are only as secure as the investments held in the portfolio. Subscribers in Self-Directed RESPs such as those offered by banks can choose from a wide range of investments from the most conservative to the most volatile. The investment objectives of Group RESPs are designed to preserve capital while maximizing the long-term rates of return for investors within the guidelines established by National Policy 15. However, even conservative investment portfolios like these can fluctuate in value and may not provide the rate of return that was expected by the subscriber. 71

72 4 K e y B enefits a nd Potenti a l R isk s of R ESPs No matter what form of RESP is used, it is essential that the portfolio of investments be suitable for the needs, objectives and risk tolerance of the subscriber. There are fees associated with almost all RESPs. These fees can be for trading commissions, enrolment, depository and administration costs. These charges will reduce the investment returns that would otherwise be earned on the portfolio and could even reduce the amount of principal to be returned to the subscriber. (Some Group RESPs offer a return of all or a portion of the enrolment fees with each EAP or at another time designated by the foundation.) Funds contributed to RESPs are held in trust by financial institutions on behalf of the subscribers and beneficiaries. Even the most stable financial institution could conceivably be affected by events that impact global financial markets. Scholarship Plans may allow subscribers to make contributions prior to obtaining a Social Insurance Number for the Plan s beneficiary. However, if the required Social Insurance Number is not provided within 24 months, the Plan will be terminated. Contributions and interest will be returned to the subscriber, less any applicable enrolment fees, administrative fees, depository fees or insurance premiums (if applicable). 72

73 4 K e y B enefits a nd Potenti a l R isk s of R ESPs With no annual minimum, subscribers may deposit up to a life time maximum of $50,000 which could be contributed in one year to an RESP. However, large onetime contributions may not attract the full amount of government grants that would otherwise be available over a multi-year contribution period. The advantages of RESPs will be substantially reduced for those whose beneficiaries do not pursue post-secondary education. Grant monies will have to be repaid, and subscribers may not be entitled to receive the income that has been earned on their contributions. For those who do attend post-secondary education, there are certain conditions that will affect the beneficiaries ability to withdraw EAPs. In certain situations, the termination and withdrawal of principal from a Plan in which contributions were made after 2004 could result in a forfeiture of the Additional CESG for the remainder of that year and the next two calendar years The amount of the tax benefit obtained from RESPs will depend, in part, on the beneficiary s tax rate when EAPs are paid out. In most cases, the tax rate applicable to full time students will be very low or even zero, but students with substantial amounts of income may find that they have to pay significant taxes on the income they receive from EAPs. 73

74 4 K e y B enefits a nd Potenti a l R isk s of R ESPs Chapter 4 Summary The primary benefits of RESPs are: Tax savings: RESPs provide a tax-sheltered investment vehicle for education savings, savings accumulate tax-free and withdrawals are taxed at the (much lower) tax rate of the beneficiary. Tax-free compounding: income can compound tax-free for up to 35 years. Savings enhanced by CESG: The 20% Federal Government grant helps build education savings. Flexibility: If a beneficiary does not pursue post-secondary education, there are options to ensure earned income is not lost. Education incentive: Students are more likely to pursue further studies if there are education savings to draw upon. The potential risks of RESPs include fluctuating portfolio values, changing financial markets, fees that reduce investment returns, beneficiaries who aren t eligible for EAPs and the tax rate of the beneficiary when EAPs are received. 74

75 4 K e y B enefits a nd Potenti a l R isk s of R ESPs Test Your Knowledge Chapter 4 1. What is the situation with RESPs and tax? (a) RESP contributions are tax-deductible. (b) Income earned on contributions accumulates tax-free until it s withdrawn. (c) Funds from RESPs can be withdrawn tax-free to make a down payment on a first home. (d) Income earned on contributions is tax-free upon withdrawal. 2. Why is tax-free compounding of interest such a benefit for the investor? (a) It allows the investment to grow more quickly because the investor doesn t have to pay tax each year on the interest earned. (b) It allows the company paying the interest to deduct the amount from its taxable income. (c) The subscriber pays tax, not the beneficiary who is unlikely to have extra money. (d) Interest can only compound if it is tax-free. 3. The CESG is added to the investment but is not permitted to earn interest. (a) True (b) False 75

76 4 K e y B enefits a nd Potenti a l R isk s of R ESPs 4. What happens if a student doesn t qualify for EAPs? (a) If they are in an Individual or Family Plan, the student must pay a $500 tax penalty. (b) If they are in an Individual or Family Plan, the beneficiary can transfer income earned to their RRSP. (c) If they are in a Group Plan, the subscriber is taxed on all contributions made. (d) If they are in a Group Plan, the income earned may be made available to other students in the Plan. 5. Which of the following is NOT a potential risk associated with RESPs? (a) Financial institutions can be affected by events that impact global financial markets. (b) There are fees associated with almost all RESPs that can reduce investment returns. (c) An increase in interest rates will result in a two-fold decrease in RESP values. (d) Even conservative investment portfolios can f luctuate in value. Answers: 1B, 2 A, 3 B, 4 D, 5 C 76

77 5 H ow Schol a r ship Pl a ns Wor k 5. How Scholarship Plans Work Chapter 5 Overview This chapter outlines how Scholarship Plans are structured, administered and invested, as well as how they derive value. A solid understanding of these factors will help you explain the features, benefits and risks of Scholarship Plans to your clients and prospects. How Individual, Family and Group Plans Differ As outlined in Chapter 2, there are three types of RESPs: Individual, Family and Group Plans. Most Scholarship Plan foundations specialize in Group Plans but also offer subscribers the option of investing in pooled Family (multiple beneficiary) Plans or pooled Individual Plans in which contributions are managed by the Plan s portfolio advisers. The foundations will also allow transfers from Group Plans to Individual or Family Plans, subject to certain conditions. 77

78 5 H ow Schol a r ship Pl a ns Wor k Group Plans In Group Plans, the amount of money that may be available to beneficiaries in the form of EAPs will depend on the income that has been earned in the Plan and on the number of other beneficiaries in the group who qualify for EAPs for the same qualifying year. If some of the beneficiaries in the Group Plan fail to qualify for EAPs (e.g. do not pursue post-secondary education or later drop out), the income earned on those subscribers contributions is made available for distribution to other beneficiaries who do qualify for EAPs. This can be a substantial benefit for those beneficiaries who do pursue post-secondary education, but it also represents a risk for those subscribers whose beneficiaries who do not continue post-secondary education. This is how Group Plans are structured: Subscribers contributions are held by the Plan s trustee in a pool that is invested collectively on the instructions of the Plan s advisers. While the funds are managed and invested collectively, the Plan s administrator tracks each subscriber s contributions, CESGs, other government grant programs (i.e. Canada Learning Bond, Alberta Centennial Education Savings Plan and Quebec Education Savings Incentive) and share of investment returns separately. 78

79 5 H ow Schol a r ship Pl a ns Wor k Subscribers contributions are typically administered on an age group or maturity date basis. The subscriber determines when the beneficiary is expected to start their post-secondary education (often when the beneficiary turns 18) and the foundation administers that subscriber s contributions together with its other contracts for beneficiaries expected to start post-secondary school at the same time. To participate in a Group Plan, subscribers must typically join the Plan before their beneficiary reaches the age of 13 or 15 (depending on the Plan). Subscribers to a Group Plan agree to buy units, either through a lump sum contribution or through a series of periodic deposits, such as annual or monthly contributions. The units are scheduled to mature when the beneficiaries are ready to begin their post-secondary education. The amount that must be contributed for each unit is determined by the Plan s actuary and depends on the frequency of the contributions made and the number of years before maturity. Deposits are structured so that no matter when a subscriber starts to contribute, all units have earned approximately the equivalent amount of income by the time the Plan matures. Typically, when the subscriber s Plan reaches its maturity date, the accumulated investment income earned is set aside and used to fund the base EAPs to be paid. The base EAP amount is determined by the investment income earned, the number of units purchased by the subscriber, as well as the number of beneficiaries from the pool who actually continue their post-secondary education. Those who do not pursue post-secondary education leave their share of income to those that do. All grant funds are returned to the government. 79

80 5 H ow Schol a r ship Pl a ns Wor k EAPs are typically made up of income earned on contributions, income left behind by terminated Plans, grant and income on grants. With some Group Plans, it may also include all or a portion of the enrolment fees. Investment income earned on the pool after maturity is normally accumulated in a general fund (often called the Income Account or Enhancement Fund). These funds may be used to pay certain expenses of the Plan and to top up or add to EAPs. Group Plans may have different programs in place for the payment of EAPs. Some allow beneficiaries to claim their EAPs from the Plan over a specified number of years, while others allow subscriber to select from various options that spread EAPs over shorter or longer periods, such as with a Self-Directed Plan. Subscribers in a Group Plan often have the option of transferring their Plan to an Individual or Family Plan if they do so in advance of their Plan s maturity date. This may be advantageous for subscribers if it appears that their beneficiary will not be in a position to take full advantage of the EAPs available under the Group Plan. 80

81 5 H ow Schol a r ship Pl a ns Wor k RESPs in the Real World Scarlett had been contributing to a Group Plan for Josh since he was 10 years old. A year before he finished high school, Josh decided he was going to take a oneyear post-secondary program and then become a rock musician. Scarlett knew her Group Plan would not allow Josh to take advantage of all the EAPs available unless he participated in a program that was at least two years. She decided to transfer her Plan to an Individual Plan with the same dealer. 81

82 5 H ow Schol a r ship Pl a ns Wor k Individual and Family Plans Subscribers may not wish to or may not be able to participate in a Group Plan. They may be saving for a beneficiary who is too old to qualify for participation in a Group Plan. Perhaps their beneficiary is planning to pursue a post-secondary education program that will not allow them to take full advantage of the EAP payment schedules offered by the Group Plan. Perhaps the subscriber is very uncertain about whether or not their beneficiary will pursue post-secondary education at all. In cases like these, Individual or Family Plans may be attractive alternatives. Individual Plans and Family Plans maintain their own individual investment accounts rather than participating in a group allocation. The subscriber s contributions are invested and the income earned on those contributions, along with the CESGs and other government grant programs, is available to the named beneficiaries in the form of EAPs providing the beneficiary attends qualifying post-secondary education. In Individual or Family Plans, subscribers do not share in any income earned by other subscribers, as they might in a Group Plan. 82

83 5 H ow Schol a r ship Pl a ns Wor k If the subscriber s beneficiaries do not pursue post-secondary education, the subscriber must repay the CESGs and other government grants to the Government but may be able to: Transfer the income that was earned in the Plan (including the income earned on CESG funds) up to a maximum of $50,0000 to an RRSP if the subscriber has unused RRSP contribution room, or Withdraw the income as an AIP and pay income taxes on that income plus the 20% tax penalty specified in the Income Tax Act. See Chapter 2 for a review of EAPs and AIPs. Specified Plans A Specified Plan is a single beneficiary RESP where the beneficiary is entitled to a disability tax credit. The following rules apply: The beneficiary is entitled to the disability tax credit ending in the 32nd year of the Plan s existence. No other individual may be named beneficiary in a Specified Plan. No contributions (except transfers from another RESP) may be made in the 37the year of the Plan. A Specified Plan can stay open for a maximum of 40 years. 83

84 5 H ow Schol a r ship Pl a ns Wor k Chart 5.1 How RESPs Work Subscriber enters into an RESP contract with the promoter and names one or more beneficiaries under the Plan Government grants (if applicable) Subscriber makes contributions to the RESP Canada Education Savings Grant (CESG) is paid to the RESP Canada Learning Bond (CLB) is paid to the RESP Designated provincial savings program paid to the RESP The promoter of the RESP administers all amounts paid into the RESP. As long as the income stays in the RESP, it is not taxable. The promoter also makes sure payments from the RESP are made according to the terms of the RESP. The promoter can return the subscriber s contributions tax free. The promoter can make payments to the beneficiary to help finance his or her postsecondary education The promoter can make Accumulated Income Payments. 84

85 5 H ow Schol a r ship Pl a ns Wor k Chart 5.2 Comparison of RESP plans Beneficiaries Type of investment account Sharing of income earned? Amount of money for EAPs depends on Individual Family Group One One or more Multiple Own account Own account Group account No No Yes Income earned Income earned AND number of beneficiaries who qualify for EAPs Income earned 85

86 5 H ow Schol a r ship Pl a ns Wor k Administration of Scholarship Plans Here are the various roles and responsibilities involved in administering Scholarship Plans: Not-for-profit foundations typically sponsor Scholarship Plans. They are responsible for the Plans structure, administration and prospectus. They have overall responsibility for the Plans and oversee the investments of the Plan s assets. Administration of the Plan accounts may be contracted to a third party. The party that manages the Plan will ordinarily be registered as an Investment Fund Manager under securities legislation. The foundation and the fund manager keep all necessary account information and administer financial activity such as:»» Tracking deposits,»» Allocating investment income and expenses,»» Administering scholarship payments, and»» Preparing regulatory reports, prospectus renewals and financial statements for clients. Distributors are appointed by the foundations to distribute units in the Plans to subscribers. The distributors must be registered (licensed) as Scholarship Plan Dealers in each province and territory in which they sell the Plans. 86

87 5 H ow Schol a r ship Pl a ns Wor k Sales representatives (also referred to as dealing representatives) employed by distributors must also be registered with the applicable securities commission as a dealing representative of a Scholarship Plan Dealer in each jurisdiction in which they do business. In most cases, the foundation that sponsors a Plan and the dealer that distributes it are closely related. Securities regulations require that clear distinctions be drawn between sponsoring foundations and distributors to ensure that the public will not be misled about the for-profit nature of the distributors. A trustee (typically a chartered bank or trust company) is appointed by the foundation. The trustee holds the trust assets in accordance with the scholarship agreement. Regulations generally require that the trustee agrees to act as administrator for the Plan in the event that the sponsoring foundation is unable to do so. A depository (usually a chartered bank) is appointed by the foundation to receive subscribers contributions, maintain records of subscribers contributions, withdrawals, deductions and income, and to remit deposits to the Plan s trustee. Registered portfolio advisers are retained by each foundation to provide advice on the investment of the Scholarship Plan s portfolio. 87

88 5 H ow Schol a r ship Pl a ns Wor k Chart 5.3 Scholarship Plans: Roles and Responsibilities FOUNDATION Administers the Plans MANAGER Appointed to manage the business DISTRIBUTOR Dealer who distributes the Plan to subscribers SALES REPRESENTATIVES Enrol clients (subscribers) PORTFOLIO ADVISERS Registered portfolio managers who advise the foundation on the Plan s investments DEPOSITORY Handles contributions to and payments from the Plan TRUSTEE Holds the assets in the Plan in trust for the subscribers 88

89 5 H ow Schol a r ship Pl a ns Wor k How Scholarship Plans Derive Value Group Scholarship Plans offer subscribers the same benefits as other types of RESPs: Tax-free compounding of the income earned on contributions, Reduced taxation of the income earned when it is withdrawn by beneficiaries in the form of EAPs, and CESG and other government grant enhancements. Generally, Group Plans have the highest returns for those beneficiaries who pursue post-secondary education for a long enough period to receive all of the available EAPs. Subscribers in Group Plans may derive additional value from their share of the CESGs and investment income earned by beneficiaries from the same pool who do not pursue post-secondary education. Subscribers whose beneficiaries do not pursue post-secondary education may forfeit a considerable amount of income, and in some cases the enrolment fee, to be allocated to others in the pool. 89

90 5 H ow Schol a r ship Pl a ns Wor k RESPs in the Real World Bonnie s parents enrolled her in an Individual RESP. Her friend Clyde s parents enrolled him in a Group Plan. After several years of contributions, Bonnie and Clyde both have accumulated RESPs (principal, income on their principal, government grants and interest on the grants) of $35,000. If both go on to a multi-year university program, it is quite likely that Clyde will be able to obtain more money in EAPs than Bonnie will, because Clyde will be entitled to a portion of the income earned for other students in his Group Plan who didn t pursue post-secondary education. The amount of Clyde s additional benefit is uncertain and will depend on the attrition rate from the Plan. If Clyde had decided to embark on his banking career without first pursuing postsecondary education, his parents could recoup their original investment, but would lose accumulated income and have to repay the CESG. 90

91 5 H ow Schol a r ship Pl a ns Wor k Investment Mandate of Scholarship Plans Like all RESPs, Group Scholarship Plans are subject to certain investment restrictions imposed by the Income Tax Act. Go to Chapter 2 for more information about RESP-eligible investments under the Income Tax Act. Scholarship Plans are also subject to provincial securities laws and policies. One of these is National Policy 15, which, among other things, defines the nature of the investments that may be held in a Scholarship Plan. Generally, Scholarship Plans must invest primarily or exclusively in low risk, interest-bearing securities (such as federal or provincial government bonds, GICs, variable rate securities, corporate bonds and Treasury Bills). It is the responsibility of the Scholarship Plan s portfolio advisers to direct the investment of subscribers funds prudently and in accordance with the stated investment strategy of the Plan. Their goal is to attain the highest return available given the investment criteria and low tolerance for risk that apply to Scholarship Plans. 91

92 5 H ow Schol a r ship Pl a ns Wor k While Scholarship Plans are generally focused on investing in low-risk, incomeproducing securities, there can still be differences sometimes significant differences in the rates of return earned by different Plans. These differences may be the result of several factors, including: Different investment objectives of the Plans, The relative performance of each Plan s portfolio adviser, and Different administrative cost structures. Most Scholarship Plan foundations appoint an Investment Committee to define the specific investment mandate for the Scholarship Plan and to monitor the performance of the Plan s portfolio advisers. Independent Review Committees are also established to oversee potential conflicts of interest that could affect the Plan and its unit holders. Investment Strategies A Scholarship Plan s portfolio adviser may apply various strategies to minimize the risks and maximize the returns earned in a Plan. Here are a few of those strategies, focusing on fixed income (bond) investments since Scholarship Plans are primarily invested in these types of investments. An eye on interest rates: Portfolio advisers will often review various economic indicators to assess expected future changes in short-term, mid-term and longterm interest rates. There is an inverse relationship between interest rates and bond prices: as interest rates increase, bond prices tend to decrease. An increase 92

93 5 H ow Schol a r ship Pl a ns Wor k in interest rates will tend to have a greater effect on long-term bond prices than on short-term bond prices. See Chapter 15 for more discussion about bond pricing and interest rates. Investment mix: Expected changes in interest rates may cause a portfolio adviser to change the mix of the Plans investments. An anticipated increase in long-term interest might, for example, lead to a reduction in the Plan s holdings of long-term bonds and an increase in the Plan s holdings of short-term bonds or cash. Diversification: the strategy of not putting all of the Plan s eggs in one basket is a commonly used risk management strategy. Portfolio advisers will want to ensure that the Plan s holdings are not overly concentrated in the securities of a particular issuer or in one geographical area, and that the investments will not all mature at the same time. Hold or trade: Portfolio advisers may have to decide whether to actively trade the securities held in the portfolio or simply to hold them to maturity. Holding a fixed income security to maturity can reduce transactions costs and reduce some risks, but it may lead to increased volatility of the portfolio in the short-term. Availability of funds: Portfolio advisers will also try to structure the Plan s portfolio so that funds will be available when the Plan expects to make distributions to subscribers and beneficiaries. They will also try to match the duration of the Plan s assets to the future liabilities that the Plan expects. 93

94 5 H ow Schol a r ship Pl a ns Wor k Chapter 5 Summary There are three types of RESPs: Individual, Family and Group Plans. In Group Plans, the amount of money that may be available to beneficiaries in the form of EAPs will depend on the income that has been earned in the Plan and on the number of other beneficiaries in the group who qualify for scholarships for the same qualifying year. Subscribers contributions are held by the Plan s trustee in a pool that is invested collectively on the instructions of the Plan s advisers. Individual or Family Plans may be attractive alternatives for subscribers who are saving for a beneficiary who is too old to qualify for participation in a Group Plan or if they aren t confident the beneficiary will pursue post-secondary education at all. 94

95 5 H ow Schol a r ship Pl a ns Wor k Not-for-profit foundations typically sponsor Scholarship Plans. They appoint distributors, who in turn employ sales representatives. Scholarship Plans are subject to investment restrictions under the Income Tax Act. Generally, Scholarship Plans must invest primarily or exclusively in low risk, interest-bearing securities. Most Scholarship Plan foundations appoint an Investment Committee (to define the specific investment mandate for the Scholarship Plan and monitor the performance of the Plan s portfolio advisers) and Independent Review Committees (to oversee potential conflicts of interest). 95

96 5 H ow Schol a r ship Pl a ns Wor k Test Your Knowledge Chapter 5 1. What is the best definition of a pooled investment? (a) The investors funds are held in a non-interest-bearing account. (b) Funds are invested in the swimming pool industry. (c) Funds from a number of investors are invested together as part of a single pool of capital. (d) Investors forego interest to protect their principal. 2. In what circumstances might an Individual or Family Plan be more appropriate for a subscriber than a Group Plan? (a) The beneficiary is too old to qualify for participation in the Group Plan. (b) The education program that the beneficiary Plans to pursue would not allow him or her to take full advantage of the EAP payment schedule offered by the Group Plan. (c) The subscriber is not confident that the beneficiary will pursue post-secondary education at all. (d) All of the above. 96

97 5 H ow Schol a r ship Pl a ns Wor k 3. What happens to a Group Scholarship Plan at maturity? (a) The fund is immediately split among all the beneficiaries in lump sum payments. (b) Subscribers have the option of withdrawing the entire investment or leaving it for the beneficiary. (c) The subscriber pays accumulated income tax to the government. (d) Contributions are returned to the subscriber while investment income and CESGs are retained for distribution to qualifying beneficiaries in the form of EAPs. 4. Which of the following is true about the relationship between Scholarship Plan foundations and distributors? (a) Foundations appoint distributors to promote the sale of units in Scholarship Plans to subscribers. (b) Foundations and dealers must occupy separate offices. (c) Both foundations and distributors are not-for-profit entities. 5. Which of the following is NOT on the list of allowable investments for RESPs? (a) Futures contracts (b) T-bills (c) GICs (d) Bonds 97

98 5 H ow Schol a r ship Pl a ns Wor k 6. Why is diversification of a portfolio an important investment strategy? (a) It ensures Scholarship Plan returns are consistent from province to province. (b) It helps Scholarship Plans qualify for the Canada Education Savings Grant. (c) It keeps interest rates down. (d) It can significantly reduce portfolio risks. Answers: 1 C., 2 D, 3 D, 4 A, 5 A, 6 D 98

99 6 Schol a r ship Pl a n D isclosur e D ocuments 6. Scholarship Plan Disclosure Documents Chapter 6 Overview Scholarship Plans are governed by the securities laws of each jurisdiction in which the Plans are distributed. Among other things, those laws require Scholarship Plans to provide detailed disclosure to investors and the public. As a sales representative, you must be familiar with these disclosure requirements and with the documents provided by your Scholarship Plan Dealer. They are public records designed to inform and protect investors. This chapter provides information about the key documents, which are: The prospectus, The continuous disclosure system, Key financial statements, Financial reporting requirements, and Accessing disclosure documents through the SEDAR system. 99

100 6 Schol a r ship Pl a n D isclosur e D ocuments The prospectus is the single most important disclosure document concerning a Scholarship Plan. The prospectus is required by law to provide full, true and plain disclosure of all material facts concerning the Scholarship Plan s securities, and it must be given to every subscriber at or before the time of their investment. The prospectus must be given to every subscriber at or before the time of their investment. The purpose of the prospectus is to provide the subscriber with all the information needed to make an informed decision about the purchase. It gives clients detailed information they need to know about their investment including: The name of the foundation sponsoring the Plan, The Plan s distributing dealer, manager, trustee, depository and portfolio advisers, The terms and conditions of each type of enrolment option available, The Plan s investment policies and the types of securities in which the Plan will invest, The enrolment process, Subscription and withdrawal fees, The process for becoming eligible for EAPs, 100

101 6 Schol a r ship Pl a n D isclosur e D ocuments Administration fees charged to the Plan, Risks associated with investment in the Plan, The laws concerning RESPs and the government grants (CESG, Canada Learning Bond, Alberta Centennial Education Savings Plan and Quebec Education Savings Incentive), Tax considerations relevant to subscribers, Management report on Fund Performance, and Financial statements and auditor information for the Plan. This is a good time to review your Scholarship Plan Dealer s prospectus. MORE ONLINE: Prospectuses and many other disclosure documents can be freely accessed online at the System for Electronic Document Analysis and Retrieval (SEDAR) website, at the RESPDAC website or through your Scholarship Plan s website. 101

102 6 Schol a r ship Pl a n D isclosur e D ocuments A few things you need to know about the prospectus: You must study your Plan s prospectus carefully to ensure you have detailed knowledge of its contents and can clearly and accurately explain the Plan to potential subscribers. You must never make representations to subscribers that are inconsistent with the disclosure in the Plan s prospectus. Scholarship Plans may not be distributed to the public in any jurisdiction where the securities regulator has not issued a receipt for the Plan s prospectus. The issuance of a receipt is not an endorsement by the securities regulator of the accuracy of the disclosure in the prospectus, the merits of the Plan or the capabilities of the Plan s management. Prospectuses are generally renewed each year. Subscribers must be given a copy of the Plan s current prospectus. The prospectus is reviewed and approved by Canada Revenue Agency. This indicates that the prospectus has fulfilled specific CRA requirements but not that CRA endorses the prospectus disclosure or the merits of the Plan. 102

103 6 Schol a r ship Pl a n D isclosur e D ocuments Financial Statements When a Scholarship Plan files a prospectus in a Canadian province or territory, the Plan becomes a reporting issuer in that jurisdiction. Securities laws require all reporting issuers to provide timely and accurate disclosure to the public regarding their business and financial affairs on an ongoing basis. This is known as the continuous disclosure system. Scholarship Plans are a form of securities or investment funds under securities law. Under the continuous disclosure system, Scholarship Plans must provide regular disclosure regarding the Plans financial results and financial condition. Financial statements for the Plan are prepared on an interim and annual basis. Annual financial statements undergo an independent audit. Complete financial statements are included in each prospectus. Please review the financial statements included with your Plan s prospectus at or your Scholarship Plan Dealer s website. Currently, Scholarship Plans provide four primary financial statements: the Statement of Net Assets, the Statement of Operations, the Statement of Changes in Net Assets and the Statement of Investment Portfolio. In addition, the Notes to the Financial Statements provide pertinent information which often is supplemented with other schedules. 103

104 6 Schol a r ship Pl a n D isclosur e D ocuments 1) Statement of Net Assets The Statement of Net Assets provides a snapshot of the financial position of the Scholarship Plan at a particular point in time. In a more traditional corporate setting, this statement would be considered the Plan s balance sheet. It includes information about the Plan s assets and liabilities. The Plan s assets less its liabilities (net assets) represent the net value of the fund. The Assets section of the statement provides summary information of the various significant types of assets held, such as cash, securities holdings and accounts receivable. The securities holdings are valued at their market value and the cost, amortized cost and other pertinent information will be explained in the notes that accompany the financial statements. Other details regarding the Plan s investments may also be provided in the Notes to the Financial Statements. The investment holdings are detailed in the Statement of Investment Portfolio, described below. The Liabilities section of the statement discloses the Plan s debts or other financial commitments that are still outstanding. This can include general accounts payable, subscriber deposits held, maturity amounts payable, EAP payables and unclaimed subscriber funds. If a particular liability is unusual or material it may be explained in more detail in the Notes to the Financial Statements. 104

105 6 Schol a r ship Pl a n D isclosur e D ocuments The difference between the Plan s assets and liabilities its Net Asset position is broken down to highlight the significant components, typically comprised of: Accumulated interest on subscriber deposits, Government grants, Accumulated interest on government grants, and The General Fund and any other surplus funds. The Notes to the Financial Statements will usually describe the purpose of the General Fund and any activity in that account. 2) Statement of Operations The Statement of Operations shows the investment income activities over a period of time. The income includes interest earned on the Plan s portfolio during the period as well as any realized gains/<losses> on disposal of invested assets. Expenses include costs charged to the Plan such as administration fees, investment counsel fees, trustee and custodial fees. Changes in unrealized investment gains/<losses> may be shown separately or as part of income (above). 105

106 6 Schol a r ship Pl a n D isclosur e D ocuments 3) Statement of Changes in Net Assets This statement shows the significant financial activity (inflows and outflows of capital) in the Plan over a period of time. The major inflows to the Plan are typically subscriber assets from operations, CESG and any other government grants received and any amounts transferred from other Plans. The major outflows from the Plan are typically payments to subscribers and students (including repayment of fees and EAPs paid) and CESG and other government grant activity. 4) Statement of Investment Portfolio The Statement of Investment Portfolio provides detailed information regarding each of the investment holdings, including description of the instrument, coupon rate, par value, maturity date, cost and market value. 106

107 6 Schol a r ship Pl a n D isclosur e D ocuments Notes to the Financial Statements An integral part of the financial statements, the Notes to the Financial Statements generally include the following information: Nature of operations: The Notes provides a brief description of the operation and some significant historical information. Significant accounting policies: The Notes will describe the method used to value the Plan s investment assets (cost, amortized cost, market value, etc.), the policies applied in recognizing investment income (cash, market, amortized, realized and/or unrealized capital gains/losses) and any other significant information about the Plan s accounting procedures. Investments: This includes the types of investments held, the carrying value and market value of the assets and the profile of the portfolio s term to maturity. Accounting standards dictate that investments should generally be carried at market value. That value is often different than the cost of the investment due to changes in interest rates and other market factors. Financial risk: This Note describes the various risks that may be associated with the Plan s investment strategies, financial instruments and markets in which it invests. This could include credit risk, liquidity risk and market risk and the related practices employed to deal with each of those situations. 107

108 6 Schol a r ship Pl a n D isclosur e D ocuments Related party transactions: This refers to any material transactions between the Plan and any persons who are not at arm s length, such as the Plan s foundation, its administrator, its distributor or its directors and officers. General Fund: The Notes often will describe the characteristics of the Plan s General Fund and any restrictions that apply to it. Typically, all investment income earned by the Plan after a pool s maturity date is credited to the General Fund and may be used to offset some Plan expenses and supplement scholarship (EAP) levels. Other Scholarship Plan Information Statement of Scholarships Paid to Qualified Students This is often provided either as part of the Notes to the Financial Statements or as a separate statement. It provides information about the number of units or agreements that have received payments from the Group Plan and the amount paid in scholarships or EAPs for each unit. This information can be useful to subscribers in assessing the potential value of units. The values should be used with some caution, however, since there are many factors that affect the ultimate EAPs available. It s important to stress to subscribers that past investment performance is not indicative of future expected returns. 108

109 6 Schol a r ship Pl a n D isclosur e D ocuments Statement of Subscriber Contributions & Subscriber Accumulated Income This optional extra schedule provides, for each year of eligibility, a breakdown of the number of units outstanding, subscribers deposits and accumulated income. Subscriber deposits and accumulated income may be shown in total or separately by category (principal, accumulated income) for each year of eligibility. This statement provides the reader with details of the amount of funds on deposit for each year of eligibility pool. At maturity, the amount of funds available per unit is expected to be the same for all units in a pool. This statement provides important information about the timing of the Plan s potential liabilities to subscribers and beneficiaries in future years. Additional Financial Disclosure and Oversight The disclosure obligations of Scholarship Plans and other investment funds are outlined in several National Instruments sets of rules that are adopted by provincial and territorial securities regulators. All National Instruments are available for review at the website of your provincial or territorial securities regulator. The key National Instruments for Scholarship Plan disclosure are: National Instrument (General Prospectus Requirements). MORE ONLINE: 109

110 6 Schol a r ship Pl a n D isclosur e D ocuments National Instrument (Investment Fund Continuous Disclosure): This sets out standardized reporting requirements for all types of investment funds, including Scholarship Plans, regarding:»» Financial statement disclosure,»» Management Reports of Fund Performance,»» Delivery of disclosure materials to unit holders, and»» Disclosure of material changes. MORE ONLINE: National Instrument (Independent Review Committee for Investment Funds): This rule requires all publicly-offered investment funds to establish an Independent Review Committee (IRC) to review conflict of interest matters and requires the fund s manager to establish written policies and procedures for dealing with conflicts of interests. Independent Review Committees must have at least three members who are independent from the fund and its manager. They must report to subscribers at least annually on their composition and activities. MORE ONLINE: 110

111 6 Schol a r ship Pl a n D isclosur e D ocuments Effective January 1, 2011, International Financial Reporting Standards (IFRS) will replace Canadian GAAP for publicly accountable enterprises, which includes investment funds. IFRS will apply to fiscal years beginning on or after January 1, As a result, organizations are required to assess the impact of this change on net assets and disclosures in the financial statements. MORE ONLINE: CSA Staff Notice on International Financial Reporting Standards: Accessing Disclosure Documents Sales representatives, subscribers and the general public can obtain copies of a Plan s disclosure documents through the Plan s distributor or by visiting the website of the System for Electronic Document Analysis and Retrieval (SEDAR). SEDAR provides free on-line access to a corporate profile for every reporting issuer and to each issuer s prospectuses, annual reports, financial statements and other significant filings required by securities law. MORE ONLINE: 111

112 6 Schol a r ship Pl a n D isclosur e D ocuments Chapter 6 Summary The prospectus is the most important disclosure document for Scholarship Plans. You must be familiar with its content, and you must give it to every subscriber. Scholarship Plans are required to provide regular disclosure regarding the Plans financial results and financial condition. This includes annual financial statements. The key financial statements for Scholarship Plans are Statement of Net Assets, Statement of Operations, Statement of Changes in Net Assets, Statement of Investment Portfolio and Notes to the Financial Statements. Disclosure documents for all reporting issuers are freely accessible through the System for Electronic Document Analysis and Retrieval (SEDAR). 112

113 6 Schol a r ship Pl a n D isclosur e D ocuments Test Your Knowledge Chapter 6 1. Which of the following is not true about the Scholarship Plan prospectus? (a) The prospectus is the most important disclosure document for a Scholarship Plan. (b) The prospectus is updated monthly, based on performance of the Plan s investments. (c) The prospectus must be given to every subscriber. (d) The prospectus gives investors all the information they need to make an informed decision about the purchase. 2. How do securities regulators deal with the prospectus? (a) A securities commission writes the prospectus. (b) Prospectuses are accepted for filing by the regulators without review. (c) The securities commission endorses the prospectus as a prudent investment. (d) The securities commission reviews and, if appropriate, issues a receipt for the prospectus before it becomes effective. 113

114 6 Schol a r ship Pl a n D isclosur e D ocuments 3. Which of the following is not true about the Statement of Net Assets? (a) It s comparable to a company s balance sheet. (b) It s sent to subscribers every month for their account. (c) It shows the financial position of a Scholarship Plan at a particular point in time. (d) It shows the difference between the Plan s assets and liabilities. 4. Which is not an inflow to a Plan as shown in the Statement of Changes in Net Assets? (a) EAPs (b) CESGs received (c) Subscriber deposits (d) Amounts transferred from other Plans 5. What does the Statement of Scholarship Agreements show? (a) The number of scholarship agreements operated by the dealer. (b) A copy of the contract signed by subscribers. (c) A breakdown of the number of units outstanding, deposits and accumulated income for each year of eligibility. (d) A legally binding statement signed by subscribers attesting to their understanding of the prospectus. 114

115 6 Schol a r ship Pl a n D isclosur e D ocuments 6. Which of the following is true about SEDAR? (a) It monitors Scholarship Plan compliance across Canada. (b) It administers the CESG program. (c) It offers free on-line access to a Scholarship Plan s disclosure documents. (d) It is not available to the general public. Answers: 1 B, 2 D, 3 B, 4 A, 5 C, 6 C 115

116 7 Fees a nd E x penses 7. Fees and Expenses Chapter 7 Overview You will need a thorough understanding of fees and expenses in order to answer client questions. This chapter explains the fees associated with Scholarship Plans, why they are charged, when and how. Enrolment or Membership Fees The subscriber incurs certain sales charges when enrolling in a Scholarship Plan. These are generally enrolment fees (or membership fees) that are paid to the distributing dealer to cover the costs of distributing the Plan, paying commissions to sales representatives and providing service to subscribers. Enrolment fees generally range from $50 to $200 per unit. While National Policy 15 (discussed in Chapter 13) comments on maximum allowable enrolment fees, the limits acceptable to the regulators have changed since NP 15 was first adopted in

117 7 Fees a nd E x penses The enrolment fee is normally collected from the subscriber s early contributions. Most foundations will allocate 100% of the subscriber s initial payments towards the enrolment fee until 50% of the total fee is paid. They then allocate 50% of subsequent deposits to the enrolment fee until it is paid in full. If the Scholarship Plan is funded by a lump sum payment, as opposed to a monthly contribution, the enrolment fee is paid from the subscriber s lump sum contribution. Because enrolment fees are paid when the subscriber first invests in the Plan, they are referred to as front-end fees (or a front-end load ). Enrolment fees charged by your Scholarship Plan Dealer will be explained in your dealer's prospectus. RESPs in the Real World Jill and Phil enrol in a Group RESP for their son Bill. They want to put away $150 each month. The total enrolment fee for their Plan will be $1,200. The first four monthly contributions the couple make (totalling $600) will be allocated entirely to enrolment fees. For the next eight months, half of their contribution ($75) will be allocated to paying enrolment fees until the full $1,200 is paid. 117

118 7 Fees a nd E x penses Chart 7.1 Enrolment Fee Payments The following shows how Jill and Phil s $1,200 enrolment fee is collected. Principal Deposited to Account Month Contribution Enrolment Fee Portion 1 $150 $ $150 $ $150 $ $150 $150* 0 4 $150 $75 $75 5 $150 $75 $75 7 $150 $75 $75 8 $150 $75 $75 9 $150 $75 $75 10 $150 $75 $75 11 $150 $75 $75 12 $150 $75 ** $75 Total $1,800 $1,200 $600 * enrolment fees 50% paid ** enrolment fees now fully paid 118

119 7 Fees a nd E x penses Sales charges are not unique to Scholarship Plans. Investors who trade in stocks pay sales commissions each time they buy or sell, and mutual fund investors may be subject to sales charges that are paid when they first invest in the fund (known as front end load ) or when they redeem the fund (a back end load or deferred sales charge ). Front-end load mutual funds typically charge from 2% to 9% of the amount invested, while deferred sales charges generally range from 7% to 0%, depending on how long the investor has held the fund (the deferred sales charge usually declines to zero over five or six years). Scholarship Plan enrolment fees have sometimes been criticized in the past as being high in relation to the fees charged on other investment products. In assessing those fees, people must consider that: Scholarship Plans are designed to be lifetime investments; subscribers are not subjected to recurring transaction fees that are charged to investors who regularly trade their stock or mutual fund portfolios. Scholarship Plan investments typically involve many years of ongoing service to the subscriber and the administration of numerous payments from the subscriber and to the beneficiary over the life of the contract. Despite the complexity of administering RESPs, CESGs and EAPs on behalf of subscribers and beneficiaries, the administration fees charged by Scholarship Plans compare favourably to management fees charged by many less complex investment funds. 119

120 7 Fees a nd E x penses Enrolment Fee Refunds If a subscriber elects to withdraw from a Group Scholarship Plan within 60 days of enrolment, the subscriber will be entitled to a full refund of enrolment fees, and if applicable insurance premiums. In most cases, a subscriber who withdraws from a Plan after 60 days will forfeit some or all of the enrolment fees paid. In addition to these refund provisions, some Scholarship Plans offer subscribers a full or partial return of enrolment fees, or an amount equivalent to the enrolment fee, where the subscriber has fully completed the enrolment contract. Check the prospectus for your Scholarship Plan for details. Completion Insurance Many Plans also offer subscribers insurance policies that are issued by insurance companies and designed to complete the subscriber s payments under the enrolment contract in the event of the subscriber s death or disability. In some Plans, completion insurance is an option; in other Plans it is a built-in feature. For optional policies, premiums will vary depending on the size of the contract and the circumstances of the insured subscriber. 120

121 7 Fees a nd E x penses Withdrawal Fees If subscribers decide to terminate a Plan after the 60-day withdrawal period described above, they will usually forego some or all of their enrolment fees and may also be subject to other fees, including withdrawal fees and depository fees (specified in the prospectus). Subscribers who opted to insure their Plan should also expect to forfeit any insurance premiums paid. Administration and Management Fees Enrolment fees cover the costs of marketing and distributing the Plan, but there are other costs associated with the ongoing operation of the Plan. These recurring administration and management costs are sometimes charged directly to the subscriber s account and sometimes charged against income the Plan has earned. The amount of the fees and the method of collection will vary from one Plan to the next. Review the prospectus for your Plan carefully to ensure that you can clearly explain these fees to your clients. Depository fees pay for the cost of depository and banking services used by the Plan. These fees are usually charged annually to the subscriber s account and will vary, depending on the number of transactions in the subscriber s account (such as whether they make monthly or annual deposits). 121

122 7 Fees a nd E x penses Administration fees pay for the general administration of the Plan and subscribers accounts and management of the EAP process. These fees may be charged to the subscriber or paid from the income earned on the Plan s portfolio. Administration fees for Group Plans are typically about ½ of 1% (0.5%) per annum, while administration fees for Individual and Family Plans can range from 0.5% to 1.5% per year. Investment management or council fees pay for professional management of the Plan s investment portfolio. These fees are typically in the range from 1/10 to 1/3 of 1% (0.10% to 0.33%) of the Plan s assets, annually. Independent Review Committee fees pay for the compensation of committee members and permitted committee expenses. These fees are paid to IRC members from the Plan s assets. Custodial/trustee fees pay the costs of holding and safekeeping of the Plan s investment assets. Typically this is a fraction of 1% of the Plans assets, paid annually from the income earned on the portfolio. Other Charges Subscribers may also be subject to other miscellaneous fees and charges related to the operation of their account. For example, they may be charged for such things as NSF cheques, replacement cheques or transfers of funds. These fees will vary from one Plan to the next, but will be described in detail in each Plan s Prospectus. 122

123 7 Fees a nd E x penses Chapter 7 Summary Scholarship Plan enrolment fees range from $50 to a maximum of $200 per unit. The enrolment fee is normally collected from the subscriber s early contributions. Due to the lifetime nature of the investment and the complexity of administering RESPs and the various government grant programs, the administration fees charged by Scholarship Plans compare favourably to management fees charged by many less complex investment funds. Subscribers who withdraw from a Plan within 60 days of signing the contract are entitled to a full refund of fees including insurance premiums where applicable. Subscribers who withdraw from a Plan more than 60 days after signing the contract are entitled to a refund of principal less fees and insurance premiums where applicable. While enrolment fees cover the cost of marketing and distributing a Scholarship Plan, other fees are paid to the depository, portfolio adviser, Independent Review Committee and trustee for administration and management of the Plan. Completion insurance covers the subscriber s payments under the enrolment contract in the event of their death or disability. 123

124 7 Fees a nd E x penses Test Your Knowledge Chapter 7 1. How can Scholarship Plan dealers justify charging an enrolment fee? (a) Scholarship Plans only charge enrolment fees for people who aren t residents of Canada. (b) There are Plans to eliminate enrolment fees and refund all past fees paid. (c) It is a complex process to administer RESPs, CESGs and EAPs on behalf of subscribers and beneficiaries over multi-year periods. (d) Enrolment fees are a requirement of the Income Tax Act. 2. Which statement is true with respect to the refund of enrolment fees? (a) Subscribers can get a full refund only if they change their mind within two days. (b) Subscribers can get a full refund if they change their mind within 60 days. (c) Subscribers get half their money back if they change their mind within 30 days. (d) There is no refund permitted for enrolment fees. 124

125 7 Fees a nd E x penses 3. What is not true about administration fees? (a) They typically vary from ½% to 1 ½% of a Plan s assets per annum. (b) They cover general administration costs of a Scholarship Plan. (c) Dealing representatives charge clients a $50 administration fee annually. (d) They may be an extra charge to clients or be paid from income earned in the Plan. 4. What is completion insurance? (a) Insurance that covers the life of a beneficiary until they complete their education. (b) A policy that covers your costs if your child does not complete a university degree. (c) A complete package of term and life insurance. (d) Insurance that pays a subscriber s RESP contributions in the event of their death or disability. Answers: 1 C, 2 B, 3 C, 4 D 125

126 8 Schol a r ship Pl a n D e a ler s 8. Scholarship Plan Dealers Chapter 8 Overview This chapter outlines the regulations that apply to Scholarship Plan Dealers related to their business structure, management, working capital, record keeping and business practices. You will learn about roles and responsibilities in the supervisory structure of dealers, which includes: The Ultimate Designated Person (UDP) The Chief Compliance Officer (CCO) Head Office Compliance Department Regional Compliance Officers, and Local and regional Supervisors. 126

127 8 Schol a r ship Pl a n D e a ler s Role of the Scholarship Plan Dealer Scholarship Plan Dealers are for-profit entities that are separate and distinct from the foundations that sponsor the Plans. As discussed in more detail in Chapter 9, dealers and sales representatives who trade or advise in securities must be registered with the securities regulators in each province and territory in which they do business. Sales representatives will not be registered unless they are retained to act on behalf of a registered dealer. Since Scholarship Plan units are securities, this registration requirement applies to you and to your dealer. Both dealers and sales representatives must be registered to sell Scholarship Plan units. Dealers are subject to regulations regarding their business structure, management, working capital, record keeping and business practices. Among other things, dealers are required by law to: Establish, maintain and apply policies and procedures and a system of supervision to ensure compliance with securities legislation and to prudently manage the risks of the business. Deal fairly, honestly and in good faith with their clients. Ensure that their sales representatives are properly registered in each appropriate jurisdiction and qualified to perform the services offered to clients. 127

128 8 Schol a r ship Pl a n D e a ler s Appoint an Ultimate Designation Person (UDP) and a Chief Compliance Officer (CCO) to promote compliance and oversee the dealer s compliance initiatives. Maintain detailed records of the dealer s business activities as well as records that demonstrate compliance with the dealer s policies and securities legislation. Maintain at least the minimum specified levels of capital and bonding to help ensure that the dealer is always able to meet its financial obligations to clients. Know the identity, needs, objectives and risk tolerance of its clients and ensure that transactions made are suitable for the client. Identify and respond to potential material conflicts of interest between the dealer and its clients. Properly inform clients about the relationship between the dealer and its clients. Respond fairly and effectively to complaints about the products or services offered by the firm and its representatives. Make available to clients, at the dealer s expense, an independent dispute resolution or mediation service to resolve complaints about trading or advisory activities of the dealer and its representatives. 128

129 8 Schol a r ship Pl a n D e a ler s Many of the key regulations that govern the conduct of dealers and sales representatives like you are set out in National Instrument Registration Requirements, Exemptions and Ongoing Registrant Obligations. MORE ONLINE: Provincial securities regulators post National Instruments on their websites. Here s a link to NI : Internal Policies and Procedures All Scholarship Plan Dealers have developed internal policies and procedures that cover a wide range of operational and conduct standards from new business processing and staff recruitment to sales practices and supervisory duties. These policies are designed to fulfil the dealer s obligations under securities legislation to establish and apply prudent written business procedures for dealing with clients. The policies also serve as important internal controls to protect the dealer, its staff and its clients. Compliance with the internal policies and procedures of a dealer is a term and condition of a sales representative s engagement with their Scholarship Plan Dealer. It is essential that all staff members understand and abide by their dealer s policies. 129

130 8 Schol a r ship Pl a n D e a ler s Supervisory Systems Every dealer is required to establish an effective supervisory system but they have some flexibility to design a system that best suits their business structure and operations. To fulfil their supervisory duties, Scholarship Plan Dealers typically establish a tiered supervisory structure, as outlined below. 130

131 8 Schol a r ship Pl a n D e a ler s Chart 8.1 Scholarship Plan Dealers Supervisory Structure Dealer s Board of Directors Ultimate Designated Person (UDP) Chief Compliance Officer Regional Compliance Officer Regional Compliance Officer Local or Regional Supervisor Local or Regional Supervisor Local or Regional Supervisor Local or Regional Supervisor Sales representatives Sales representatives Sales representatives Sales representatives BACK NEXT 131

132 8 Schol a r ship Pl a n D e a ler s Ultimate Designated Person (UDP) Each dealer is required by regulation to appoint a UDP. That person must:»» Supervise the activities of the dealer that are directed toward ensuring compliance with securities legislation by the dealer and its representatives, and»» Promote compliance by the dealer and its representatives with securities legislation. The UDP must be the dealer s Chief Executive Officer or equivalent. Chief Compliance Officer (CCO) Each dealer is required by regulation to appoint a qualified and registered CCO who must:»» Establish and maintain the dealer s policies and procedures for ensuring compliance by the dealer and its representatives with securities legislation,»» Monitor compliance by the dealer and its representatives, and»» Report regularly to the UDP and the Board of Directors on potential noncompliance and on the effectiveness of the dealer s compliance program. 132

133 8 Schol a r ship Pl a n D e a ler s Head Office Compliance Department Typically managed by the dealer s CCO, the Head Office Compliance Department is usually responsible for ensuring, on a day-to-day basis, that the dealer and its personnel comply with securities and other laws and with the policies, procedures and standards of conduct established by the dealer. Head Office Compliance staff will generally be involved in:»» Monitoring client account activity,»» Reviewing and dealing with client complaints,»» Monitor changes in regulatory requirements and updating internal compliance policies,»» Overseeing the supervisory activities of Regional Compliance Officers and local and regional Supervisors, and»» Handling internal disciplinary actions. Typically, the Head Office Compliance Department will rely heavily on Regional Compliance Officers and local and regional Supervisors for front-line supervision and compliance in each region. 133

134 8 Schol a r ship Pl a n D e a ler s Regional Compliance Officers Most dealers will appoint one or more Regional Compliance Officers as the senior personnel responsible for the dealer s compliance program in a particular jurisdiction. These Regional Compliance Officers are generally responsible for:»» Overseeing the dealer s business activity in the jurisdiction,»» Ensuring that salespersons are properly supervised, usually by a designated local or regional Supervisor,»» Ensuring that the dealer s policies and procedures are followed by all personnel in the jurisdiction,»» Ensuring that dealer personnel properly prepare and maintain the business and compliance records that the dealer is required to maintain,»» Ensuring that complaints from clients in the region are properly reviewed, recorded and addressed, and»» Overseeing the compliance and supervisory efforts of designated Supervisors in the region. 134

135 8 Schol a r ship Pl a n D e a ler s Local and Regional Supervisors These are the personnel assigned to provide day-to-day supervision of sales representatives and other dealer personnel in a particular region or branch office. At most dealers, every sales representative will have a designated supervisor (sometimes a branch manager or agency director) to whom they report. That supervisor will, in turn, report on supervisory and compliance issues to a senior Supervisor or a Regional Compliance Officer. The specific duties of local and regional supervisors will be set out in the dealer s policies and procedures. Most local and regional supervisors are responsible for:»» Ensuring that the sales representatives and other personnel under their supervision act at all times in compliance with the law and with the dealer s policies and procedures.»» Ensuring that those who seek registration as sales representatives have the education, training, experience and integrity that are required to meet the expectations of regulators, the dealer and its clients.»» Promptly reviewing and, if appropriate, approving all new subscriptions (new subscriber accounts) opened in their branch or region.»» Conducting regular (daily and monthly) reviews of all business activity conducted through the branch.»» Maintaining detailed records of their supervisory efforts. 135

136 8 Schol a r ship Pl a n D e a ler s»» Providing the training required to ensure that those under their supervision understand their professional obligations and the regulations and policies that govern their conduct.»» Conducting regular on-site reviews of business locations in their region to ensure that standards of conduct are being met.»» Documenting all supervisory activities. Reviewing and approving new subscriptions is a primary responsibility of Supervisors. Sales representatives As a sales representative registered under securities law, you must comply with the regulations that apply to registrants and with the policies established by your dealer. You are a key part of your dealer s supervisory system and, as discussed in the next chapter, you will be expected to demonstrate the highest standards of knowledge, professionalism and integrity. 136

137 8 Schol a r ship Pl a n D e a ler s Chapter 8 Summary Scholarship Plan Dealers are subject to regulations regarding their business structure, management, working capital, record keeping, complaint handling and business practices. Many of the key regulations that govern the conduct of dealers and sales representatives are set out in National Instrument Registration Requirements, Exemptions and Ongoing Registrant Obligations. Dealers have established internal policies and procedures to fulfil the dealer s obligations under securities legislation to establish and apply prudent written business procedures for dealing with clients, and to protect the dealer, its staff and its clients. Dealers typically establish a tiered supervisory structure that involves the Ultimate Designated Person (UDP), Chief Compliance Officer (CCO), Head Office Compliance Department, Regional Compliance Officers, and local and regional Supervisors. 137

138 8 Schol a r ship Pl a n D e a ler s Test Your Knowledge Chapter 8 1.What are the registration requirements for Scholarship Plan Dealers and sales representatives? (a) Only dealers have to be registered to sell Scholarship Plan units. (b) Only sales representatives have to be registered to sell Scholarship Plan units. (c) Both dealers and sales representatives have to be registered to sell Scholarship Plan units, and they must be registered in each jurisdiction in which they do business. (d) It isn t mandatory for either dealers or sales representatives to be registered. 2.What do securities regulators require dealers to do? (a) Establish and apply policies and procedures to ensure compliance with the law and to manage the risks of the business. (b) Ensure sales representatives are qualified and properly registered. (c) Create and maintain detailed records of all business activities. (d) All of the above. 3.Every registered Scholarship Plan Dealer must: (a) Appoint a new Ultimate Designated Person (UDP) every year. (b) Appoint a Chief Compliance Officer (CCO) to establish and maintain compliance polices and to report on the dealer s compliance efforts. (c) Retain a Chief Legal Counsel so that sales representatives do not have to learn about securities laws and regulations. (d) None of the above; compliance is completely the responsibility of the individual sales representative. 138

139 8 Schol a r ship Pl a n D e a ler s 4. Securities law applies only to registered dealers and not directly to registered sales representatives. (a) True (b) False 5. The key securities law obligations of dealers and sales representatives are set out in: (a) Section 146 of the Income Tax Act. (b) National Instrument (c) The Financial Institutions and Dealers Act. (d) The Conduct and Practices Handbook. 6. Dealers appoint Regional Compliance Officers and local and regional Supervisors to: (a) Teach advanced sales techniques to new sales representatives. (b) Ensure that sales representatives are not held accountable for errors or misconduct. (c) Protect the dealer, its staff and its clients by ensuring that all personnel comply with securities legislation and the dealer s policies. (d) Prevent sales representatives from doing any business. Answers: 1 C, 2 D, 3 B, 4 B, 5 B, 6 C 139

140 9 R esponsibilities of the Sa les R epr esentati v e 9. Responsibilities of the Sales Representative Chapter 9 Overview In this chapter you will learn about your obligations under securities and other laws, including: National Instrument , Registration requirements, The Fair Dealing, Know Your Client and Suitability rules, Your disclosure obligations, Your clients privacy rights, Record keeping requirements, Conflict of interest rules, and Complaint handling procedures. 140

141 9 R esponsibilities of the Sa les R epr esentati v e As a sales representative, you will play a central role in the relationship between the Plan, the dealer and the subscriber. You are the primary contact person for the subscriber. It is imperative that you fully understand the needs of subscribers and ensure that the product(s) being offered will be suitable in their situation. As a registrant under securities law, you will have a number of obligations to your clients and your dealer. You will be expected to conduct your business with the highest standards of ethics and integrity, and you will be expected to have expert knowledge of the products that you are offering to subscribers. Many of the key legal obligations of sales representatives and dealers are set out in National Instrument Registration Requirements. You should be familiar with this regulation and the Companion Policy. MORE ONLINE: National Instrument and Companion Policy : 141

142 9 R esponsibilities of the Sa les R epr esentati v e The Sales Representative s Responsibilities Your responsibilities as a sales representative fall under seven general categories. 1) Standards of Conduct Knowledge of Securities Laws Securities laws are complex and are changing constantly. You will probably never become an expert in securities law, but you must understand the fundamental requirements that apply to you, your dealer and the Scholarship Plan(s) you are offering to your clients. Your dealer will send out notices from time to time regarding important developments in the law. You are expected to study these notices and to revise your practices in response to changing legal requirements. You should also check the website of the securities regulator in your jurisdiction regularly for important notices or proposals that may affect your business. Copies of the legislation, policies, decisions and notices are available online in many jurisdictions. 142

143 9 R esponsibilities of the Sa les R epr esentati v e Comprehensive information on securities law is available from the securities regulator in your province or territory: Alberta Alberta Securities Commission British Columbia British Columbia Securities Commission Manitoba Manitoba Securities Commission New Brunswick New Brunswick Securities Commission Newfoundland and Labrador Department of Government Services, Consumer and Commercial Affairs Branch Northwest Territories Superintendent of Securities, Department of Justice Nova Scotia Nova Scotia Securities Commission Nunavut Superintendent of Securities, Department of Justice Ontario Ontario Securities Commission 143

144 9 R esponsibilities of the Sa les R epr esentati v e Prince Edward Island Securities Office, Consumer, Corporate and Insurance Services Division Quebec Autorité des marchés financiers Saskatchewan Saskatchewan Financial Services Commission Yukon Territory Superintendent of Securities, Community Services Your Scholarship Plan Dealer s Chief Compliance Officer, Regional Compliance Officer and local Supervisors can also be important resources in keeping up with the law. MORE ONLINE: If you are uncertain about securities regulations, obtain advice from your dealer before proceeding. 144

145 9 R esponsibilities of the Sa les R epr esentati v e Compliance with Dealer Policies Scholarship Plan Dealers are required to establish, maintain and apply policies and procedures to ensure compliance with the law and to manage business risks (section 11.1, NI ). Your dealer will provide you with a copy of its internal policies, procedures and forms. It is your responsibility to read and understand these materials. They are designed to protect you and your clients, as well as the dealer, and will help you process business efficiently and professionally. Compliance with dealer policies and procedures is a condition of your relationship with your dealer. Non-compliance may put that relationship and your ability to be registered in the future at risk. Your dealer s compliance staff and your local Supervisors can help with any questions you have about dealer policies. Compliance with the Code of Ethical Business Conduct The Code of Ethical Business Conduct, found in Chapter 10, has been adopted by members of the RESP Dealers Association of Canada. You must study the Code and must at all times comply with the standards of conduct that it prescribes. 145

146 9 R esponsibilities of the Sa les R epr esentati v e 2) Registration Requirements Registration The requirements for registration as a sales representative and the mechanics of the registration process are discussed in greater detail in Chapter 13. You must submit detailed personal information to the regulators through your Scholarship Plan Dealer on your registration application form (in most jurisdictions, known as Form F4). You are responsible for providing complete and accurate responses to every question. Regulators and your sponsoring dealer rely on that information in assessing whether you have the proficiency, integrity and solvency to be fit for registration. You must ensure that your registration is approved by the relevant regulators before you engage in the business of trading or advising in securities. You must also ensure that you are registered in each jurisdiction in which you intend to conduct business. Contravening registration requirements can lead to serious sanctions for you and for your dealer. 146

147 9 R esponsibilities of the Sa les R epr esentati v e It is also your responsibility to: Report any changes in the information contained in your registration application form promptly usually within 10 days (refer to section 4.1 of National Instrument for more information on update requirements), and Ensure the annual renewal fees for your registration are paid in full and on time to your dealer. MORE ONLINE: NI Selling Out of Province/Country You may only sell Scholarship Plans in the provinces and territories in which you are registered and where the Plan s prospectus has been receipted by the regulators. If a subscriber moves to another province or country after enrolling in the Plan, it may be necessary to reassign the subscriber to another representative who is registered in the jurisdiction your subscriber moved to. Section 2.2 of National Instrument , provides a limited mobility exemption that may allow you to continue to serve a very limited number of clients who reside in a province or territory in which you are not registered. This exemption is subject to specific conditions that require, among other things, specific disclosure to clients and to regulators. Refer to your dealer for more details. Your dealer will have specific procedures for transferring accounts out of province or country. 147

148 9 R esponsibilities of the Sa les R epr esentati v e 3) Client Service The Fair Dealing Rule Every sales representative and every dealer has a duty under the law to deal fairly, honestly and in good faith with every client. This principle is expressed in RESPDAC s Code of Ethical Business Conduct and in various provincial/territorial regulations and instruments. The regulators and the courts interpret this obligation quite broadly, as will your clients. In every service business, clients expect to be given balanced and accurate information about the product they are considering. They expect to be informed of the risks just as clearly as the potential rewards. They expect to be told about the fees and charges that will apply to their investment, and they expect the advice you give them to be objective and to be based on their best interests. Honesty, fairness and a commitment to serving the interests of your clients are essential to building long-term relationships with your clients and to building your business. 148

149 9 R esponsibilities of the Sa les R epr esentati v e The Know Your Client (KYC) Rule The Know Your Client Rule is set out in section 13.2 of NI It dictates that you must take reasonable steps to learn the essential facts about every client including: The identity of the client and, if you have cause for concern, the reputation of the client, and The client s financial circumstances, investment needs and objectives, and risk tolerance. The Know Your Client Rule is one of the most important rules in the securities industry. In most cases, your dealer s Enrolment Application Form is the template to follow when collecting and documenting KYC information. The information collected may vary slightly with each dealer but must include a minimum of the following: Full name, address and telephone number of the subscriber, Personal information of the subscriber, including birth date and Social Insurance Number and any other information required by Canada Revenue Agency, Financial information about the subscriber, which may include such things as employment status, primary occupation, family income, net worth and number of dependants, Information about the client s tolerance for investment risk, and The subscriber s signature. 149

150 9 R esponsibilities of the Sa les R epr esentati v e Obtaining and recording detailed KYC information is a legal obligation; it is also the foundation of service to subscribers. Your goal is to ensure that you, your local Supervisors and your dealer understand who the client is, what the client wants to achieve, what the client can afford and how much risk the client is willing and able to take. All of these factors are important in determining the suitability of any investment for the client and will give you a reasonable foundation on which to base your advice. Prospective subscribers may question the need for such detailed KYC information and may even be reluctant to provide it for privacy reasons. However, these subscribers will generally cooperate if they are reassured that: You are obliged under securities law to obtain detailed KYC information, and the law does not entitle the client to waive this obligation. The information is essential for you to properly advise them and to ensure that they are eligible to contribute to the Plan. You and your dealer are obliged by securities legislation, privacy legislation and internal policies to hold the subscriber s personal information in confidence. You will not be able to open an account for a subscriber who is not prepared to provide essential KYC information. 150

151 9 R esponsibilities of the Sa les R epr esentati v e Subscribers may want to transfer from one representative to another or from one Scholarship Plan to another. If a new account is transferred to you from another sales representative at your dealer, you must apply the same Know Your Client standards that you would for any other new client. You will be expected to review the subscriber s existing KYC data and discuss it with the subscriber to ensure that it is still current. You will also want to understand the reason for the transfer and the nature of the service and advice that the subscriber is expecting from you. Understanding Know Your Client inquiries Among other things, KYC regulations oblige you to make inquires about a client s reputation if you have cause for concern. Let s look at that obligation more closely. Cause for concern When should you have cause for concern about a client s reputation? The regulations are not specific, but generally you should be concerned if you become aware of information suggesting that the client could pose a risk of misconduct in the course of his or her business dealings with your dealer. If you have those concerns, consult with your local Supervisor or Regional Compliance Officer. You or your dealer may not wish to do business with the client, or you may decide that some additional information or additional supervisory procedures are necessary to resolve your concerns. 151

152 9 R esponsibilities of the Sa les R epr esentati v e Updating KYC Information You must make reasonable efforts to keep KYC information current. That typically means checking with the client from time to time, particularly if new transactions are being considered. You must also update your dealer s KYC records if you become aware of a significant change in what was previously recorded for the client. Changes to important subscriber information such as changes of objectives, address, employment and banking detail should be provided by the subscriber in writing. Banking detail change Many subscribers make regular RESP contributions using automated payment services through their bank. When there is a change in a subscriber s banking detail, the information should be sent to the dealer in the form of a void cheque. This will allow verification of the information and ensure that the bank account, transit number and branch number get entered in the proper order to prevent any future errors. Name change A subscriber or a beneficiary may undergo a legal change of name, perhaps following a marriage or divorce. When such a name change occurs the foundation will require the proper legal documentation to verify the authenticity of the change. If a change in client information is simply to correct a typographical error (i.e., was entered as Parry and should be Harry), the change can be made without 152

153 9 R esponsibilities of the Sa les R epr esentati v e additional documentation. The correction request should, however, be made in writing. Change of beneficiary To designate a new beneficiary, the subscriber is required to complete a Change of Beneficiary form (the name of the form may vary by dealer) and follow the proper procedures and provide the required documentation. The request must be made in writing, accompanied by a copy of the new student s birth certificate and Social Insurance Number. The Suitability Rule As a registrant, you are bound to recommend to your client only those investments that are consistent with the client s financial circumstances, investment needs, objectives and risk tolerance. This is known as the Suitability Rule (see section 13.3 of NI ) The Suitability Rule is the second important rule of the securities industry. You are also required to make reasonable efforts to ensure that every purchase or sale instruction the client gives you, even if you did not recommend the transaction, is suitable for the client. If the client instructs you to buy or sell a security and you reasonably consider the transaction unsuitable for them, you must inform the client of your opinion and not buy or sell the securities unless the client tells you to proceed anyway. This duty to warn is intended to help protect clients who might 153

154 9 R esponsibilities of the Sa les R epr esentati v e otherwise make unwise investment decisions. This rule would come into play more often for dealers who offer clients access to high risk investment products, but it s important that you are aware of it. As a general principle, you should ensure that the acceptance of any new subscription or a change in any existing agreement is not only in the interests of the client but is within the bounds of prudent business practice. RESPs in the Real World Martin, a prospective new subscriber, wants to start a Plan for his daughter. He indicates that he d like to contribute $350 per month. Unfortunately, Martin has run into some financial problems recently, and his income is quite modest. You realize it might be difficult for him to maintain his $350 contributions unless his circumstances change. You think he ll be able to meet his longterm savings goals, and take full advantage of the CESGs, with a lower, more affordable monthly contribution. What do you do? You explain to Martin the risks of over-committing financially and set out a realistic contribution that he can afford. You explain he can buy additional units, if the need arises, when funds are available. You also work with him to see if he is eligible for supplementary grants such as the ACESG and the Canada Learning Bond. 154