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DAC Sales Representitive Proficiency Course resp 020 -1resp 020

This course includes materials from several sources. We
would like to thank:

• The members of the RESP Dealers a__ociation of
Canada
• The British Columbia Securities Commission
• The Canadian Securities Administrators
• Canada Revenue Agency
• Human Resources and Skills Development
Canada
• Ken Goodwin, C.A.
• Dean Holley, CMC Capital Market Consulting
Corp.

These course materials are the property of the RESP
Dealers a__ociation of Canada and are not to be
reproduced with prior permission.

TABLE OF CONTENTS

1. INTRODUCTION
A. Who is this course for?
The RESP Dealers a__ociation of Canada has
developed this Sales Representative Training Program
as the initial training and proficiency requirement for new
sales representatives. The a__ociation's goal is to have
this course accepted by the securities regulators in each
province and territory as the educational prerequisite to
licensing as a sales representative for a scholarship plan
dealer.

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 integrity. To meet these
expectations, you must have proper training and a
through understanding of your regulatory and ethical
obligations.

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 a
significant amount of time - 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. Of course with hard
work and diligence, you may complete the course and
the exam in a much shorter timeframe. Sample
examination questions have been included in the material
(see Appendix I) to reinforce important concepts and to
illustrate the scope of the knowledge required to
successfully complete the course.

This course is the initial
training and proficiency
requirement for all new
sales representatives of
scholarship plan dealers.

Plan to spend 20-30
hours studying this
material.

B. What will be covered in the material
This course will cover:

.. The RESP Dealers a__ociation's Code of Sales
Practices.

.. The rules governing RESPs and the CESG
program, the Canada Learning Bond (CLB) and
the Alberta Centennial Education Savings Plan
(ACES)

.. The general design of scholarship plans.

.. The various disclosure documents provided by
scholarship plans.

.. Scholarship plan fees and expenses.

.. The role of the scholarship plan dealer.

.. Responsibilities of sales representatives.

.. Advertising practices and regulations.

.. The regulatory framework.

.. An overview of the economic and financial
environment in Canada.

C. The RESP Dealers a__ociation of Canada
The RESP Dealers a__ociation of Canada represents its
members with the provincial securities commissions that
regulate the sale of securities and the federal agencies
that oversee the RESP and Canada Education Savings
Grant (CESG) legislation. Its aim is to establish rules
and procedures for self-regulation and to improve the
understanding of scholarship plans by the investing
public, regulators and the media.

Mission of the
RESPDAC: to
establish rules and
procedures for self-
regulation and improve
understanding of
scholarship plans.

The a__ociation was formed in 2000 by a group of
institutions that specialize in the education savings
business. The current members are:

• Heritage Education Funds Inc.: distributing the
Heritage and Impression Plans.

• C.S.T. Consultants Inc.: distributing the
Canadian Scholarship Trust Plans.

• Children's Education Funds Inc.: distributing the
Children's Education Trust of Canada Plans.

• USC Education Savings Plans Inc.: distributing
the USC Education Savings Plans.

2. DEFINITIONS

A sales communication that is published or
designed for use on a display, sign, billboard or
other public media, newspaper, magazine or
other periodical, radio, television or the
Internet.

a__isted Contributions

RESP contributions for which CESG has been
or will be paid.

Beneficiary

A student designated by a RESP subscriber as
the person who will receive Educational
a__istance Payments. Sometimes called a
"nominee".

Best Practices

Recommended practices that may exceed
minimum regulatory requirements and that
increase efficiency, improve client service or
reduce risks.

Branch Office

A location (including a residence but not the
dealer's chief place of business in the province)
where the dealer carries on business directly or
through one or more salespersons. If there are
three or fewer salespersons at the branch
office, the branch office will be considered a
sub-branch, which may be supervised by
another branch or by head office in the
province.

Canada Learning Bond
(CLB)

Canada Revenue Agency
(CRA))

A grant available to children whose families
are eligible for the National Child Benefit
Supplement.

Canada Revenue Agency, formerly known as
Canada Customs and Revenue Agency.

Canada Education
Savings Grant (CESG)

A grant paid by Human Resources and
Social Development Canada to the RESP
trustee for deposit into individual RESP
accounts on behalf of the beneficiary.

Code of Sales Practices

The code of conduct published by the RESP
Dealers a__ociation and adopted by each of its
members.

CSA

Canadian Securities Administrators - a forum
for the 13 securities regulators of Canada's
provinces and territories to coordinate and
harmonize regulation of Canada's capital
markets.

Designated Educational
Institution

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 a__istance Act or similar
legislation. A master list of designated
educational institutions is published by Human
Resources and Social Development Canada

Distribution

The sale by an issuer of its own securities or
the sale of securities from the holdings of a
"control person".

Educational a__istance
Payment (EAP)

Any amount paid or payable from CESGs or
income earned in an RESP to a beneficiary to
a__ist with post-secondary education costs.

Grant Contribution Room

Since 1998 or their date of birth (whichever is
later), each child under age 18 who is resident
in Canada accumulates CESG "grant
contribution room" of $2,500 per year up to and
including the year of their 17th birthday.

Misrepresentation

An untrue statement of material fact or an
omission to state a material fact that is required
to be stated or necessary to prevent a
statement that is made from being false or
misleading.

National Registration
Database (NRD)

A web-based system that permits scholarship
plan dealers and other security dealers to file
sales representative registration forms on-line
with the securities commissions.

Post-Secondary
Educational Institution

Can be:

• A university, college or other Canadian
educational institution that has been
recognized for the purposes of the Canada
Student Loans Act, the Canada Student
Financial a__istance Act or the Quebec
Student Loans and Scholarships Act.
• A Canadian educational institution certified
by the Minister of Human Resources and

Skills Development as providing
occupational skills courses.
• A university, college or other educational
institution outside Canada that provides
post-secondary level courses, provided the
beneficiary is enrolled in a course running
at least 13-consecutive weeks.

Promoter

An organization that establishes and offers
RESPs to the public.

Prospectus

The comprehensive disclosure document that
discloses all of the material facts regarding a
security that is being distributed to the public.

PTO

The Provincial Trading Officer for a scholarship
plan dealer.

Registered Education
Savings Plan (RESP)

An education savings plan registered under the
Income Tax Act that provides certain tax
advantages to the subscribers (or "members")
who are saving money for a child's post-
secondary education.

RESP - Non-Family Plan

A Non-Family (or Individual) RESP can have
only one beneficiary. The beneficiary does not
have to be related to the subscriber and can be
any age when named. Contributions to an
individual plan can be made for up to 22 years
after the plan is established.

RESP - Family Plan

Family plans can have one or more
beneficiaries, but each must be connected by
blood or adoption to each subscriber.
Beneficiaries must be under 21 when named.
Contributions can only be made until a
beneficiary turns 21.

RESP - Group Plan

Group plans are operated on a pooling
principle. Subscribers contribute funds to the
plan and income earned on those contributions
is contributed to the pool. The subscriber's
beneficiaries can receive EAPs from the pool
when they enrol in a qualifying program. If a
subscriber's beneficiary fails to qualify for EAPs
(e.g. does not pursue post-secondary
education), then the income that was earned
on the subscriber's contribution is distributed to
others in the plan who do qualify.

RESPDAC

The RESP Dealers a__ociation of Canada.

Registrant

An individual or business entity registered, or
required to be registered, under a Securities
Act.

Sales Communication

Any oral or written communication by a dealer
or its salespersons to a subscriber or potential
subscriber.

Scholarship Plans

Group RESPs administered by not-for-profit
foundations and distributed by scholarship plan
dealers.

Scholarship Plan Dealer

An organization registered with one or more
securities commissions to trade in scholarship
plan securities.

Securities Regulator

The securities commission or securities
registrar that administers securities legislation
in a particular province or territory.

Securities Legislation

The Securities Act, rules and regulations that
apply in any jurisdiction.

Securities

Include common shares, stock options, bonds,
debentures, scholarship plan units, investment
contracts and other investment instruments.

Subscriber

A person (or "member") who enters into an
RESP contract with the promoter and agrees to
contribute to the plan on behalf of one or more
beneficiaries.

Supervisor

Dealer personnel who have supervisory
obligations under securities legislation or the
dealer's policies. Supervisors may include
senior management, Provincial Trading
Officers, Compliance Officers, Enrolment
Directors, a__ociate Enrolment Directors,
District Managers and Branch Managers.

Telemarketing

The use of the telephone to promote the supply
or use of a product or to promote any other
business interests or to gain approval for an
appointment.

Trade

The disposition (sale) of a security for valuable
consideration, as well as any act,
advertisement, solicitation, conduct or

negotiation directly or indirectly in furtherance
of a trade.

Trustee

The corporation, licensed as a trustee, that
holds the funds contributed to an RESP.

Unassisted Contributions

RESP contributions for which no CESG has
been or will be paid.

3. CODE OF SALES PRACTICES
Preface

The following Code of Sales Practices has been
endorsed by members of the RESP Dealers a__ociation
of Canada, an a__ociation of organizations whose
primary activity is the provision of Registered Education
Savings Plans to fund post-secondary education for
children.

The Code applies to sales practices used in the
marketing and presentation of RESP products by active
RESPDAC members and their sales forces to the
ultimate consumer who invests in education savings
plans. The Code reflects the RESPDAC's commitment to
upholding the Rules and Regulations established by
Federal and Provincial Regulators.

Members of the RESPDAC have agreed to abide by the
Code in conducting themselves corporately and through
their sales representatives.

A. Purpose of the Code
(i) Establish and Codify Uniform
Standards of Behavior - which recognize
the primacy of acting in the public interest by
adhering to the highest standards of integrity
and ethical business practice.

(ii) Ensure broad awareness of these
Standards - with sales personnel,
Regulators and the investing public.

(iii) Act as a reference document - in
evaluating sales practices with respect to
compliance with the Code and applicable
laws.

(iv) Establish and build awareness of
consequences - in the case of a breach of
the Code.

B. Standards
General

a) Act in the Public Interest - A representative has a
fiduciary duty to his Clients to act honestly, in good
faith and in the best interest of the Client. The
representative must be objective when his Client or
any potential Client asks him for information. He must
express opinions and make recommendations
objectively and impartially, without considering his
personal interest.

b) Compliance with Laws - All persons acting on
behalf of Member organizations shall comply with the
laws and regulations governing its business in each
jurisdiction in which it operates. Salespersons must
be licensed by and in good standing with the
appropriate regulator.

c) Supervision - Officers and managers, both
corporately and in field sales organizations, are
responsible for ensuring that employees and
representatives under their supervision are made
aware of, and comply with, the laws, regulations and
guidelines related to their specific activities, especially
with regard to securities registration.

d) Training and Proficiency - All sales representatives
will have taken a training program in preparation for
passing a proficiency examination that will enable
them to hold a valid license for trading in Scholarship
Plans. The examination must be accredited by the
RESP Dealers a__ociation of Canada and the
applicable Securities Commission. Sales
Representatives are required to undertake ongoing
training to ensure product knowledge and market
awareness remains current.

Approaching Prospects/Clients

a) Respect of Privacy - The salesperson shall not be
intrusive. The right of the customer to refuse further
discussion shall be scrupulously respected. Contacts
with prospective customers shall be made during
reasonable hours.

b) Telephone Solicitation - activities must be
conducted consistent with applicable securities
legislation and Bill C-20, specifically:
- There can be no false or misleading statements.

- There must be disclosure in a fair and reasonable
manner at the beginning of each telephone
communication of the identity of the person and
the company (Scholarship Plan Dealer), on behalf
of whom the phone call is being made, the nature
of the product (or business) being promoted and
the purpose of the communication.

- There is a prohibition against promises of a "free"
gift if they buy or enroll.

c) Advertising claims - all representations made in
advertisements are to be truthful, balanced and
clearly written; with the basis for claims made
available upon request, e.g., performance claims.
Further:
- No advertisement shall contain exaggerated
statements or misrepresentations.

- No advertisement shall contain guarantees
regarding employment, income, yield, investment
returns, risk or future values.

- Financial performance claims must be based on
generally accepted accounting measures.

Presenting to Prospects/Clients
a) Disclosure - Representatives will provide full, true
and plain disclosure in presenting the product at all
times, including the delivery of the most current
approved Prospectus at the time of sale.

b) Accuracy of Information - The representative shall
not, in the course of a sales presentation, or
completion of the sales contract with any consumer,
make any statement or take any measures which,
directly or by implication, omission, ambiguity or
exaggeration, is likely to mislead the consumer with
regard to the term of the offer. Further, the
representative shall not:
- Commit to a future value for the RESP being sold.

- Hold out enticements, which may cause a
consumer to invest beyond their financial
capability.

c) Jurisdiction - The representative shall advertise to
attract or pursue potential Clients who are within the
appropriate provincial jurisdiction (i.e., province where
representative is licensed).

Suitability/Know Your Client
a) It is required that each representative shall determine
the general investment knowledge, needs, risk
tolerance and objectives of each Client and shall
ensure that every recommendation and proposed
purchase of sale is appropriate and suitable for the
Client.

b) Documentation of this information will be reviewed by
the Agency Director/Branch Manager and maintained
by the Scholarship Plan Dealer.

Transferring of Business
a) RESPDAC Members agree that transfers out of
Group plans, to another Group plan, that have been
enrolled for more than 60 days, may not be in the best
interest of subscribers and accordingly, RESPDAC
Members will not directly or indirectly promote the
transfer of plans from other Group plans. This is due
to the potential forfeiture of Enrolment/Membership
fees and accrued interest.

b) RESPDAC Members recognize and respect that
subscribers are legally permitted to transfer from one
Group plan to another. Should a subscriber wish to
do so, in addition to compliance with the practices set
out herein, the receiving RESPDAC Member will
require the subscriber to acknowledge in writing the
financial implications of such transfer, using the Plan
Transfer Disclosure Form endorsed by the
RESPDAC, a signed copy of which shall be provided
to the sending RESPDAC Member. In addition, the
receiving RESPDAC Member will ensure that the
subscriber fully understands the implications of such
transfer.

Confidentiality
a) A representative must treat all personal information of
Clients as confidential, applying proper safeguards to
protect that confidentiality. This information is to be
used only to determine the suitability of the
investment. A representative must ensure there are
tight controls on access to Client information.

b) A representative must not disclose personal or
confidential information, except with the Client's
written consent or in accordance with Securities Laws
and must not use that information to the detriment of
his Client or to obtain advantage for himself or for
another person.

Claims against competitors
a) Organizations and their representatives must not,
directly or indirectly, make comments of any kind,
which are false, misleading, inaccurate or incomplete
about another representative, organization, product,
or service.

b) A representative must be objective and fair in any
discussion of any competitors or their competing
products, and must not make derogatory statements.
The representative should also present balanced

information about the merits, risks and potential tax
consequences of other investments.

c) A representative shall only utilize written product
information approved by the RESPAC firm, and on
such member firm's letterhead.

C. Breach
Consequences

a) Failure to comply with the Code may be grounds for a
warning, revision of responsibilities, suspension or
dismissal without further notice, depending on
circumstances. Failure to comply with certain
sections of this Code may also be a violation of
securities laws and may be punishable accordingly.

b) All employees, licensed representatives, officers or
directors have a duty to report any contravention of
this Code which comes to their notice, and to co-
operate with Corporate officials or Securities
Commission personnel in the investigation of possible
breaches of the Code.

c) Any perceived breaches of this Code, together with all
supporting information, are to be reported to the
Compliance Officer of the member organization in
breach. Member organizations in breach are to rectify
breaches of this Code and respond to the original
organization about the action taken.

4. SAVING FOR EDUCATION

Rising costs and the increasing benefit of post-secondary
education are two key factors that underline the
importance of saving for education.

1. Rising cost of post-secondary education

The cost of post-secondary education in Canada is high
and rapidly getting higher. Consider these facts from
Statistics Canada:

• In 2002, the estimated cost of a four-year
university education away from home was
$58,527.

• Since 1990-91, the average tuition has increased
by more than 100%.

The Canadian government estimates that the cost of a
university or college education in 2018 could be as high
as
$100,000.

University/college
education could cost
$100,000 by 2018.

While most Canadian parents hope their children will go
on to post-secondary education, only 41% of parents in
1999 had savings for college or university. Student debt
rose from an average of $8,700 per student in the early
1990s to over $25,000 in 2002, according to the Federal
Government.

Without a sound program of saving for education, a post-
secondary education could become out of the reach for
most Canadian families.

2. Increasing benefit of post-secondary education

In recent years a post-secondary education has become
critical to success in the 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 post-secondary education continues to
increase.

The Link Between Knowledge, Skills, and Jobs

[Courtesy of USC Education Savings Plans Inc.]

Average student
debt level has
increased to over
$25,000.

A post-secondary
education is
increasingly important
in the job market.

Here are the facts from Statistics Canada:

• Two of every three new jobs in Canada require a
post-secondary education.

• In 1999, 167,000 jobs in Canada disappeared for
people with no more than a high school education.
Meanwhile, 431,000 jobs were created for workers
with post-secondary education.

• College and university grads are more likely than
less educated people to find jobs, keep jobs and
earn more money.

• Graduates with university degrees earned an
average of $61,823 in 2001, $25,545 more than
high school graduates.

According to Employment and Immigration Canada, a
university graduate will earn $1.6 million more in their
lifetime than will a high school graduate, and this amount
could triple by 2015.

Two-thirds of new
jobs require a post-
secondary
education.

5. REGISTERED EDUCATION SAVINGS
PLANS

Savings plans designed specifically to deal with the rising
cost of education 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 after-tax income from the plan.

A. Introduction of the RESP
In 1974, retroactive to 1972, the Federal Government
enacted changes to the Income Tax Act to encourage
people to save for their children's education. The
changes allowed education savings plans to become
"registered" and to serve as tax shelters - RESPs.

In an RESP, the subscriber contributes funds to the plan
to help pay for future educational costs incurred by the
beneficiary. While the contributions to an RESP are not
tax-deductible, the income earned on those contributions
is sheltered from tax until withdrawal. So long as the
funds are withdrawn to pay for eligible post-secondary
education costs, the income that has been earned in the
plan is taxed in the hands of the beneficiary (the student),
rather than the subscriber. The student will generally be
attending school full-time and will be earning little or no
income. As a result, the income that the student receives
from the RESP will be subject to a very low tax rate.

B. Registration of a Plan
RESPs are regulated from an income tax perspective by
the Federal Government and administered by the
Canada Revenue Agency (CRA).

In order for an education savings plan to be established
as a "Registered Education Savings Plan", the plan must
be reviewed and approved by CRA. CRA's role is to

Primary benefit of
RESPs: income
earned is sheltered
from tax for several
years and is usually
taxed at a low rate on
withdrawal.

RESPs must be
reviewed and
approved by CRA.

review the terms and conditions of the plan and ensure
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 and once approved, the plans are given a
registration number under which they are allowed to
operate.

C. Types of RESP
There are three basic types of RESPs:

Individual (or Non-Family) Plans: An individual RESP
can have only one beneficiary.

Family Plans: Family plans can have one or more
beneficiaries, but all must be connected by blood or
adoption to the subscriber.

Group Plans: Usually offered by not-for-profit scholarship
plan foundations, Group plans pool the contributions
made by subscribers and invest them to earn income.
When the plan matures, the subscriber's contributions
are returned and the income that has been earned is
distributed to qualifying beneficiaries in the form of
Educational a__istance Payments (EAPs) or
scholarships. If a subscriber's beneficiary fails to qualify
for EAPs (e.g. does not pursue post-secondary
education), the income that was earned on the
subscriber's contribution is distributed to others in the
plan who do qualify. Subscribers' contributions are
typically administered on an "age group" or "maturity
date" concept (e.g. all contracts for beneficiaries who are
expected to attend post-secondary school in the same
year would be administered together).

Scholarship plan dealers generally specialize in Group
plans, although most offer Family and Non-Family
(Individual) plans as well.

Most scholarship plan
dealers offer
individual, family and
group plans.

D. RESP Distributors
RESPs have grown tremendously in popularity over the
last few years, particularly since the introduction of the
CESG program (discussed below). RESPs are now
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" Non-Family
and Family RESPs where the subscriber decides what
investment will be made in the RESP. In many cases,
subscribers to self-directed RESPs will pay annual
administration fees and may also pay 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. In managed
RESPs, subscribers are typically charged fees for the
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
adviser. Subscribers to scholarship plans can expect to
be charged enrolment fees, which are deducted from
early contributions, and fees related to the ongoing
management and administration of the plan. (See
Chapter 10: Fees and Expenses.)

E. RESP Eligible Investments
Section 146.1 of the Income Tax Act (Appendix A)
describes the types of investments that qualify to be held
in RESPs. With the exception of certain annuity
contracts, the investments that qualify for an RESP are
the same as those that qualify for a Registered
Retirement Savings Plan (RRSP), as described in section
204 of the ITA.

In self-directed
RESPs, the subscriber
chooses the
investment.

Scholarship plans are
managed RESPs; a
professional adviser
chooses the
investments.

RESP "qualified investments" include:

• Money and deposits,

• Guaranteed Investment Certificates 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),

• An investment acquired by the RESP trust prior to
October 28, 1998.

Unlike RRSPs, RESPs have no restrictions on foreign
content.

Note that scholarship plans are subject to certain
additional investment restrictions imposed by provincial
and territorial securities regulators. Under these
restrictions - discussed in more detail in Chapter 15 -
scholarship plans must generally invest subscribers'
funds in secure debt instruments such as guaranteed
investment certificates, government bonds and
debentures and certain mortgages.

Investments that
qualify for RESPs are
mostly the same as
those that qualify for
RRSPs.

Provincial and
territorial regulators
also place restrictions
on RESP investments.

F. RESP Rules
Changes to the RESP provisions of the Income Tax Act
have been implemented over the past several years.
The RESP rules appear primarily in sections 146.1, 118.6
and 204 of the Act (Appendix A). The essential
regulations include:

Contribution Limit: A subscriber may contribute up to
$50,000 in total, per beneficiary. Annual limits no longer
apply.

Non-Family RESPs: Contributions to a Non-Family
RESP (single beneficiary) can be made for up to 21
years. The beneficiary does not have to be related to the
subscriber and can be any age when named. The
subscriber in a Non-Family RESP can also be the
beneficiary.

Family RESPs: Contributions to a Family RESP (where
more than one child is named as a beneficiary) can be
made only until the beneficiary turns 21. Each
beneficiary must be connected by blood or adoption to
each subscriber (e.g. brother, sister, child, grandchild).
All named beneficiaries in a Family plan must be under
21 when named.

Mandatory Termination: An RESP must be collapsed at
the end of the 25th year following the year in which it is
established.

Subscribers: Subscribers' contributions to an RESP are
not tax-deductible, but they are not subject to taxation
when withdrawn from the plan. Subscribers who are
individuals (cannot be 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 care of
that agency. Contributions can also be made on behalf of
a subscriber (for example by an employer) and qualify for
grants. Spouses can be joint subscribers. Control of the

Maximum contribution
is $50,000 per student.

Subscribers and
beneficiaries must
have a Social
Insurance Number.

subscriber's contributions remains with the subscriber,
rather than the beneficiary. EAPs, however, are paid
directly to the qualifying beneficiary.

Beneficiaries: A Social Insurance Number must be
provided for each beneficiary. A person can be named
as the beneficiary of more than one plan, subject to
annual and lifetime contribution limits. 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 beneficiary. Effective
January 1, 2004, beneficiaries must reside in Canada
while contributions are being made to the plan.

Educational a__istance Payments (EAPs): EAPs are
distributions to a beneficiary of the income earned (and
Canada Education Savings Grants. EAPs include all
grants (CLB , ACES and CESG) in an RESP to a__ist the
beneficiary to further his or her post-secondary
education. For a payment to qualify for an EAP, the
beneficiary must be enrolled full-time in a qualifying
educational program at a recognized (designated) post-
secondary institution, or be enrolled part-time if the
beneficiary has a documented mental or physical
impairment that prevents full-time enrollment or be
enrolled part-time in a non-group plan.

A "qualifying education program" is defined in section
118.6 of the Income Tax Act and means 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. For part-time students
who spend less than 10 hours per week, but at least 12
hours per month, EAPs to a maximum of $2500 are
allowed for each 13 week semester of part-time study.
Apprenticeship programs qualify for EAPs as well.

Some part-time
students may be
eligible to receive
EAPs.

A "designated educational institution" is also defined in
section 118.6 of the Income Tax Act and 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 a__istance Act or similar
legislation. A master list of designated educational
institutions is published by Human Resources and
Skills Development Canada and is available at

Note that a beneficiary who pursues full-time post-
secondary education outside of Canada can still qualify
for EAPs but will not be entitled to receive any CESG
funds that have accumulated in the plan if not deemed a
Canadian resident..

For plans entered into after 1998 (except for certain
'grandfathered' plans), EAPs cannot exceed $5,000
before the beneficiary has completed 13 consecutive
weeks in a qualifying educational program. EAPs are
subject to taxation in the hands of the beneficiary and not
the subscriber.

Accumulated Income Payments and other Withdrawals::
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, subject
to restrictions, in the form of Accumulated Income
Payments (AIPs).

Subscribers may withdraw income in the form of an AIP
providing that:

• The plan has been in existence for at least 10
years,

• All beneficiaries have reached age 21 and are not
eligible to receive EAPs,

If not used for post-
secondary education,
accumulated income can
often be contributed to
the subscribers RRSP.

• The subscriber is a resident of Canada, and

• The plan is not a Group plan or under other
restrictions on withdrawals.

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 subscribers and will be subject to an
additional 20% penalty tax (12% in Quebec) in the year
of withdrawal.

Note that the withdrawal of a subscriber's contributions at
a time when a beneficiary does not qualify for EAPs will
result in the repayment of any CESGs to the Federal
Government.

A 20% tax penalty may
be levied on income
withdrawn from an
RESP for non-
educational purposes.

6. GRANT PROGRAMS
A. Canada Education Savings Grant (CESG)

In 1998, the Federal Government launched the Canada
Education Savings Grant (CESG) program to provide
further incentive for parents to save for the post-
secondary education of their children.

The CESG program is administered by Human
Resources and Social Development Canada (HRSDC)
and provides a grant of up to $600 per year (with a
lifetime maximum of $7,200) to the RESP of qualifying
beneficiaries ($500 from CESG program plus $100 from
Additional CESG program as per 6B). The grant money
is held in the plan for distribution in the form of EAPs to
a__ist the beneficiary with post-secondary education
expenses.

The key CESG rules are:

Qualifying Contributions: Annual RESP contributions
(after 1997) of up to $2,500 per beneficiary qualify for the
CESG. The beneficiary must be a Canadian resident
with a valid Canadian Social Insurance Number at the
time of the contributions. The CESG must be applied for
within 3 years of the date of deposit. Qualifying
contributions can be made up to December 31st of the
year in which the student turns 17 years of age.

Special Contribution Rules: Beneficiaries who are ages
16 and 17 are subject to other special rules. 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, for
the beneficiary in at least any four years before the year
in which the beneficiary turned 16.

CESG program was
launched in 1998 to
encourage parents to
save for post-secondary
education.

Amount of the Grant: The CESG program will normally
pay (see Section B - Additional CESG for exceptions) an
additional 20% of the subscriber's qualifying contribution
to the RESP for the beneficiary. Maximum c__ulative
CESG is $7,200 per beneficiary. The CESG amounts
are not included in the calculation of the annual and
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 will still earn $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.

Reallocation of CESGs: Subject to certain limits, CESGs
paid into a Family plan on behalf of a particular
beneficiary can be used for the educational expenses of
other beneficiaries.

Repayment Provisions: The CESG must be repaid to the
Government if the beneficiary of an RESP does not
pursue qualifying post-secondary education.

When contributions are withdrawn from an RESP that
contain the CESG, and the beneficiary is not eligible to
receive an Educational a__istance Payment, the RESP
trustee will be required to make a CESG repayment
equal to 20 per cent of the withdrawal. The CESG would
also be repaid if the beneficiary is replaced, except when
the beneficiary is replaced with a new beneficiary who is
under 21 and a brother or sister of the original
beneficiary, or if both a brother or sister of the original
beneficiary, or if both the old and new beneficiaries are
under 21 and are related to the subscriber.

Repayment of the CESG would also be required if the
RESP was terminated, its registration was revoked, an
AIP is made to the subscriber, or there was an ineligible
transfer from one RESP to another.

CESGs can sometimes
be reallocated to other
beneficiaries in Family
and Group RESPs.

B. Additional Canadian Education Savings Grant
(ACESG) payments for first $500

ACESG payments will apply to RESP contributions made
on and after January 1, 2005.

ACESG percentages beyond 20% are available on the
first $500 of deposits depending on the child's family's
net income as follows:

Child's family's net income CESG percentage on first
$500

< $36,378 40%

Between $36,378 and $72,756 30%

> $72,756 20%

These income amounts are indexed and change each
year.

The next $1500 in annual deposits will attract the 20%
CESG as per usual. An application for the ACESG
amount of 40% or 30% must be made by the child's
primary caregiver (custodial parent) or their
spouse/common law partner. Without this consent, 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 entities.

The additional rate on the first $500 will only apply on
deposits in a given year. There is no carry-forward of the
ACESG.

The maximum CESG available remains capped at $7200.

As is the case for the CESG, the ACESG must be applied for
within 3 years of the date of deposit.

C. Canada Learning Bond (CLB)

The CLB is available to children born on January 1, 2004
or after and available to those families eligible for the

An application for the
ACESG must be made
on behalf of the child.

National Child Benefit Supplement (NCBS) in that year.
At birth or the first year the family is eligible for the
NCBS, whichever comes first, $500 is paid to the
beneficiary.

In each subsequent year that the family is eligible for the
NCBS, $100 is paid until the student is 15. Therefore the
grant money paid to a child can be as much as $2000.
Human Resource and Social Development Canada
(HRSDC) will also provide $25 towards any up front fees
a__ociated with establishing an RESP bringing the total
initial contribution to $525.

Designed for low and middle income families the Canada
Learning Bond (CLB) will be delivered by HRSDC into an
RESP for the child in the same manner as the Canada
Education Savings Grant (CESG) is currently handled.

The primary caregiver makes the request for a CLB on
behalf of the child. If a child is entitled to a CLB 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 CLB entitlements from previous
years. However, a request for a CLB must be made
before the child turns 18.

If the CLB that they were entitled to from previous years
has not been requested for the child by the age of 18, the
child (now adult) may still access it by opening an RESP
for themselves if they do so by age 21. However if the
CLB recipient has not transferred CLB monies to their
own RESP by age 21, these monies will be forfeited.

The CLB amounts will not be included as part of the
RESP annual and lifetime contribution limits, nor will it be
eligible the CESG. CLB and income earned in the
Program will be issued as part of the Education
a__istance Payments and taxable in the hands of the
student.

Total grant money per
child can be up to
$2,000.

The student pays tax on
income earned in the
program.

The CLB not used by the original student in an RESP must be
returned to the HRSDC. It cannot be pooled and shared with
others in the plan, nor can it be transferred to another student
or sibling.

D. Alberta Centennial Education Savings (ACES) Plan
(Alberta residents ONLY)

From January 1, 2005 and onward, children born to or
adopted by an Alberta resident (or become resident) are
eligible to receive a grant of up to $800 toward their post-
secondary education from the Alberta government.

An initial grant of $500 is available along with three
subsequent grants of $100 each for a total of $800.

The ACES program is jointly administered through the
federal government's Canada Education Savings Grant
(CESG) program and the Alberta government. The Plan
can be applied for through financial institutions or a
RESP provider.

The application for the initial ACES Grant must be
completed within six years of the child's birth date.
Depending on the RESP provider chosen by the parent
or guardian (the "subscriber"), some money may be
required from the subscriber to open the RESP account
to access the grant money.

Subsequent grants of $100 each are available when the
child turns 8, 11 and 14 and is attending an Alberta
school. Each additional grant must be applied for
separately. A parent or guardian residing in Alberta can
be the subscriber of the Plan for any child.

For the subsequent ACES Grants the application must be
completed within six years of the applicable birthday and
evidence that at least $100 has been deposited to a
RESP on behalf of the child within one year of the
particular application. A beneficiary doesn't have to have
received previous grants to get subsequent grants.

The ACES grant can
total $800 per eligible
child.

Each subsequent grant
must be applied for.

Sales representatives must note the specific types of
documentation to prove Alberta residency on the ACES
grant application form for both the initial and subsequent
grants.

As part of the Educational a__istance Payment (EAP),
the ACES Grant is paid out to the eligible beneficiary
named on the RESP or to a sibling if there has been a
change of beneficiary on the RESP of that beneficiary.
An EAP may only be paid to a beneficiary who is enrolled
in a qualifying educational program at a designated post-
secondary institution inside or outside Canada. Courses
taken to acquire or improve occupational skills (including
apprenticeship courses) are also eligible.

Should the grant not be withdrawn through an EAP, the
funds must be repaid to the Government of Alberta or
depending on the type of RESP chosen, the funds may
be transferable to a sibling.

EAPs are paid to the
eligible beneficiary or
their sibling, if there has
been a change of
Beneficiary on the
RESP.

7. KEY BENEFITS OF RESPS

1. RESPs provide a tax-sheltered means for subscribers
to accumulate savings specifically for the post-
secondary education costs of the plan's beneficiaries.

2. 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.

3. On withdrawal, the subscriber's contributions are not
taxed and the income that has been earned on those
contributions will generally be taxed in the hands of
the beneficiary at very low rates.

4. The benefits of saving for post-secondary education
in an RESP include:

• Compound interest: Income earned on RESP
contributions is not taxable until withdrawn and
can compound tax-free for up to 25 years.

The benefit of compound interest can be seen in
the following example:

Investor A contributes $2,500 per year to an
RESP for a period of 18 years. In addition,
CESG of $500 is also received until the
$7,200 maximum is received. The RESP
earns an average return of 7% over the
period. At the end of 18 years, the RESP
has a value of $107,024.

Investor B contributes the same total
amount ($45,000) but does so immediately.
In addition, CESG of $500 is received in the
year of contribution. The RESP earns an
average return of 7% over the period. At

Tax shelter: a means
of organizing business
affairs to minimize or
defer the payment of
tax.

the end of 18 years, the RESP has a value
of $153,787.

Maximizing contributions early will result in
higher value at the end of the period, even
if the CESG is not received.

• Tax Free Compounding: The benefit of tax-free
compounding can be seen in the following
example:

Investor B contributes $2,500 per year for
18 years to a non-registered savings
account that earns 7% interest, but must
pay tax of 38.5% on the income earned
(leaving an after-tax return of 5% per year).
At the end of 18 years, Investor B's account
has a value of $73,848.

Paying tax on the investment income, as
well as not receiving the CESG (and the
investment income that can be earned on
it), makes it much more difficult to
accumulate value.

• Tax relief: When income is paid out as an
Educational a__istance Payment (EAP) or
scholarship, it is taxed in the hands of the
beneficiary, not the subscriber. The beneficiary
will usually be taxed at a lower rate than the
subscriber and in many cases will pay little or no
income tax on the EAPs received.

In many cases, students
pay little or no income tax
on EAPs because of their
low income level.

To continue the example above:

Investor A can withdraw the principal of
$45,000 from his RESP free of tax.
a__uming his beneficiary is a full time
student who pays no tax, the $62,024 of
income that has been earned in the plan
can be paid out to the beneficiary over time
for educational expenses without tax.

The tax on investor B's saving account has
already been paid, but he earned after-tax
interest of only $28,848 which is $33,156
less than Investor A and his beneficiary
received.

• Savings enhanced by CESG: 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 student. This amount
plus the income earned on the CESG can add
significantly to the funds saved.

a__ume Investor A contributes $2,500 per
year for 18 years to an RESP that earns 7%
per year. Investor A does not claim the
CESG. At the end of the period, the RESP
will have a value of $90,947.

Investor B contributes the same amount to
an RESP for the same period, but does
claim the CESG. At the end of 18 years,
Investor B's RESP has a value of $107,024.
The CESG made a difference of $16,077.

Note: This example is based on the 20%
CESG. However, Additional CESG as well
as the Canada Learning Bond (CLB) and

CESG contributions
can add $20,000 to
the value of an
RESP.

the Alberta Centennial Education Savings
(ACES) Plan may be available to some
subscribers and their beneficiaries. If they
qualify additional grant money will be
available to them. See Chapter 6 "Grant
Programs for details.

• Flexibility: In the past, if a student didn't pursue
post-secondary education, the 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 income earned in the
RESP to their RRSP or withdraw the income and
pay tax on it, including a 20% penalty tax. The
same benefit is usually not available to
subscribers in Group plans.

• Education incentive: When subscribers start
saving towards post-secondary expenses, they
provide incentive to their beneficiaries to pursue
further education. The beneficiaries have the
confidence that someone planned ahead for them
and that financial resources are being made
available for their education. Lack of financial
resources is the number one reason why students
do not continue education after high school. This
is greater than all other reasons combined.

Subscribers in Individual or
Family Plans no longer risk
losing investment income if
the student doesn't pursue
post-secondary education.

8. HOW SCHOLARSHIP PLANS WORK
A. Structure of Scholarship Plans
In scholarship plans, subscribers' contributions are held
by the plan's trustee in a pool that is invested collectively
on the instructions of the plan's adviser. While the funds
are managed and invested collectively, the plan's
administrator tracks each subscriber's contributions,
CESGs and share of investment returns separately. The
income earned on contributions is pooled with the income
of other qualifying beneficiaries who are expected to start
post-secondary school at the same time.

Historically, scholarship plan foundations have
specialized in offering Group plans, although many also
offer subscribers the option of investing in pooled Family
multiple student plans or pooled Non-Family (Individual)
plans in which contributions are managed collectively by
the plan's trustee and advisers. Some foundations allow
transfers from Group plans to Non-Family or Family plans
under certain circumstances.

Family and Non-Family Plans

In certain cases, subscribers may not wish to participate
in a Group plan. The subscriber may not feel confident
that their beneficiary will pursue post-secondary
education and therefore will not be eligible for all of the
EAPs available. With a Group plan, a subscriber could
forfeit some, if not all, of the investment income earned if
their beneficiary did not pursue post-secondary
education.

Non-Family (Individual) plans and Family plans are
education savings plans that do not participate in a group
allocation, but rather maintain their own individual
investment accounts. The subscriber invests funds and
the investment income earned by the subscriber's
contributions, along with the CESGs, is later available to
the named beneficiaries for the purposes of EAPs. The

A Group Plan may not
be the best choice if the
subscriber is unsure if
the student will pursue
post-secondary
education.

subscriber may also, under certain circumstances,
withdraw the investment income earned as an AIP.

In Family or Non-Family plans, subscribers are not
entitled to share in any income earned by other RESP
investors.

If the subscriber's beneficiaries do not pursue post-
secondary education, the subscriber must repay the
CESGs to the Government but may be able to:

• Transfer the income that was earned in the plan
(including the income earned on CESG funds) to
an RRSP if the subscriber has unused RRSP
contribution room, or

• Withdraw the income as an AIP and pay income
taxes and the 20% tax penalty specified in the
Income Tax Act.

Group Plans
In Group plans, the amount of money that may be
available to beneficiaries in the form of EAPs (or
scholarships) 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.

If a subscriber's beneficiary fails to qualify for EAPs (e.g.
does not pursue post-secondary education or later drops
out), the income that was earned on the subscriber's
contribution is made available for distribution to other
beneficiaries who do qualify. Obviously, this represents a
substantial potential 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.

In Group plans, subscribers' contributions are typically
administered on an "age group" or "maturity date"
concept, where all contracts for beneficiaries who are

If none of the
beneficiaries in a Family
or Non-Family Plan
pursue post-secondary
education, the
subscriber must return
the CESGs to the
Federal Government.

Subscribers in Group
Plans risk losing the
income earned on their
investment if their
beneficiary doesn't
pursue post-secondary
education.

expected to start post-secondary school at the same time
would be administered together.

Subscribers to a Group plan agree to buy "units", either
through a lump sum contribution or through a series of
periodic payments. 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. Payments are structured so that,
no matter when a subscriber starts to contribute, all units
have earned an approximately equivalent amount of
income by the time they mature.

Typically, the accumulated investment income earned at
maturity is frozen and this pool is used to determine the
base EAPs or scholarships to be paid. The base amount
is determined by the investment income earned 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
EAPs to those that do.

Investment income earned on the pool after maturity is
normally accumulated in a general fund (often called the
Income Account or Enhancement Fund), which may be
used to pay certain expenses of the plan and to "top-up"
or add to EAPs.

B. Administration of Scholarship Plans
Scholarship plans are typically sponsored by not-for-profit
foundations that are responsible for the plans' structure,
administration and prospectus.

These foundations appoint distributors 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 plan to sell the plans.

Investment income
earned per unit is
approximately equal
for all units maturing in
the same year.

Accumulated income
is frozen at maturity
and serves as the
base for EAPs.

Scholarship plans are
set up and
administered by not-
for-profit foundations.
They are distributed by
for-profit scholarship
plan dealers.

The distributor's sales representatives must also be
registered as scholarship plan salespersons 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.

The foundation must also appoint a trustee (typically a
chartered bank or trust company) who has primary
responsibility to hold the trust a__ets 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.

The foundation is responsible for the administration of the
plan accounts, although that function may be contracted
to a third party. The administrator must keep all
necessary information for the plan accounts and
administer all financial activity, such as:

• Tracking deposits made,

• Allocating investment income and expenses,

• Administering scholarship payments, and

• Preparing necessary regulatory reports,
prospectus renewals and financial statements.

Most scholarship plans appoint a depository, usually a
chartered bank, to receive subscriber's contributions, to
maintain records of subscribers' contributions,
withdrawals, deductions and income, and to remit
deposits to the plan's trustee.

The trustee holds trust
a__ets and disburses
funds.

Scholarship plan
distributors and sales
representatives must
be registered in each
jurisdiction in which
they do business.

The foundation is
responsible for
administration of
accounts but may
contract that function
out.

C. How Scholarship Plans Derive Value
Scholarship plans offer subscribers the same benefits as
other types of RESPs, including:

• Tax-free compounding of the interest earned on
contributions,

• Reduced taxation of the income earned when it is
withdrawn in the form of EAPs, and

• CESG enhancements.

Subscribers in Group Plans may derive additional value
from their pro-rata share of the CESGs and investment
income earned by beneficiaries from the same pool who
do not pursue post-secondary education.

Generally speaking, 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 whose beneficiaries do not pursue post-
secondary education may forfeit a considerable amount
of income to be allocated to others in the pool. For
example, a subscriber who invests $2,000 per year for 15
years at an average return of 7% would earn more than
$34,500 in income and CESGs over the period. If their
beneficiary does not pursue post-secondary education,
that amount could be allocated to other participants. The
redistribution of these funds can be a very significant
benefit to those particip