Want to save for your child’s post-secondary school education? The Canadian Government provides a powerful, tax-free option to do so: The Registered Education Savings Plan (RESP). Even better, an additional Canada Education Savings Grant of $7,200 is awarded through the lifetime of the RESP along with other grants that are bestowed depending on the family income and residential province of the individual.
Curious about what the RESP can offer to you? This article answers the following questions:
- What is an RESP? How do RESPs work?
- RESP Grants
- Types of RESPs
- Differences and similarities between an RESP and an RRSP/TFSA
- Withdrawal, Opening, and Penalty rules for an RESP
- Benefits of Opening an RESP
- How to Open an RESP
What is an RESP?
A Registered Education Savings Plan is a tax-sheltered investment account, set up to fund a child’s post-secondary education. An RESP allows you to earn interest tax-free and then withdraw the money when the beneficiary enrols into a post-secondary education program. Capital gains are only taxed only when a child doesn’t enrol in post-secondary education and the funds are withdrawn by the subscriber. There are also several RESP grants including the Canada Education Savings Grant, Canada Learning Bond, and Provincial Grants.
How do RESPs Work?
First, you need to find an RESP provider—typically a bank, credit union, mutual fund dealer, or scholarship fund dealer—and open an account as a sponsor. Make sure to understand the specific terms of the RESP, as providers have slightly different contribution and withdrawal terms.
The sponsor of the plan (also known as the subscriber) who is typically a parent or guardian opens the RESP and makes contributions to the plan. Grandparents, relatives, and friends can also open an RESP for a child and whoever opens the RESP can either name themselves or another adult as the beneficiary.
All About RESP Grants
Canada Education Savings Grant (CESG)
The Government of Canada awards the Canada Education Savings Grant (CESG) to the RESP, adding 20% of up to an annual contribution of $2500 made into the RESP by its sponsor every year.
The RESP has a lifetime contribution room of $50,000 and there is no annual contribution limit into the plan.
So, if you open an RESP for your child and make an annual contribution of $2500, you’d get $500 pay-out from the government added to the RESP. Government pay-outs do not exceed $7,200 throughout the lifespan of the RESP. Since there is no annual contribution limit, you can pay all the $50,000 at once into the plan but doing so would mean that you’re forfeiting about $6,700 of free government money (since only 20% of the first $2500 payment ($500) would be paid by the government).
Additional grants are also available depending on the child’s family income bracket. A family income of less than $45,916 attracts an extra 20% pay-out from the government on the first $500 contributed (totalling 40%) and a family income of between $45,917 and $91,831 attracts an extra 10% grant (totalling 30%) up to the lifetime grant limit of $7200. This means lower income families can contribute less and still receive more government aid money in their RESP.
Canada Learning Bond (CLB)
An additional incentive is provided by the Canada Learning Bond (CLB) which provides up to $2,000 to encourage low-income families to start saving early for their child’s post-secondary education. This money is deposited into the child’s RESP directly, initially only $500 for the first year followed by an additional $100 every year after for up to 15 years until the limit of $2000 is reached.
Provincial RESP Grants
If you live in certain provinces like Saskatchewan, British Columbia, and Quebec, provincial RESP grants are available to add to your child’s education savings which are explained below.
Saskatchewan Advantage Grant for Education Savings (SAGES)
To encourage saving for post-secondary education, the Government of Saskatchewan had provided an additional 10% grant on contributions made for the children of the residents of Saskatchewan between January 1, 2013 and December 31st, 2017 via its SAGES program with a maximum grant of $250 for each child per year. From the beginning of 2018, this grant was suspended. However, it doesn’t affect other grants contributed by the Canadian Government and accumulated SAGES can still be paid out when a beneficiary enrols in a post-secondary program.
British Columbia Training and Education Savings Grant (BCTESG)
This additional grant allows British Columbia residents to access an additional $1200 in grant money for post-secondary education or training programs for children born after 2006 who have been listed as beneficiaries of an RESP with a participating financial institution. Therefore, as a BC resident, you want to open an RESP with one of the approved financial institutions where you can access the $1200 BCTESG grant.
Quebec Education Savings Initiative (QESI)
The Quebec Education Savings Incentive (QESI) provides 10% of annual RESP contribution up to an annual limit of $250 and a lifetime limit of $3,600. Low-income families can also access extra $50 annually. Designated beneficiaries are required to be Quebec residents as of the 31st December of the taxation year. Find RESP providers that offer the QESI here.
What Happens if You Don’t Use Up Your Contribution Room?
Concerned you wouldn’t be able to use up your annual contribution room?
No worries, put in as much as you can, and carry over the unused contribution room for subsequent years. Nonetheless, there is no annual contribution limit for the RESP.
Types of RESPs
There are three (3) types of RESP plans: Individual, Family, and Group RESPs.
- Individual RESP plan: This plan is opened by a sponsor/contributor/subscriber for a beneficiary, with regular contributions made to it. The beneficiary doesn’t have to be directly related to the sponsor of the plan and can be a child or an adult.
- Family RESP plan: This plan can have more than one beneficiary who must have familial ties to the sponsor (by blood or adoption). All beneficiaries in this plan must be less than 21 years-old at the time of being added to the plan. Each beneficiary has the same contribution limit (a maximum of $50,000). The cost of subscribing to this plan is lower than opening several individual accounts, making it an economic option for families.
- Group RESP plan: This plan has more than one contributor but made in the name of a single beneficiary, meaning parents, grandparents, and family friends can all contribute to a plan together. This plan typically has more rules than the others, and you must carefully read the fine print when enrolling in a group RESP. Group RESP providers might pool contributions of subscribers who have children of the same age and invest them over an 18-year period. At maturity, the funds are available to pay for post-secondary education of beneficiaries, but a sponsor who drops out of the plan by stopping regular payment is heavily fined and forfeits a lot of their gains in the pool. The remaining gains are then shared among the remaining participants of the pool. Some group RESPs do not also fund part-time studies, so you must be confident about the terms of the contract prior to enrolling!
Differences/Similarities between RESP and RRSP/TFSA
|Income Taxes on Withdrawal?||Yes; but only EAP is taxed||Yes||No|
|Tax Refund on Contribution to Plan?||No||Yes||No|
|Best Used For?||Educational Purposes||Retirement||Savings|
|Payment Limits||$50,000||Calculated annually based on income: 2020 limit is $27,230||Calculated annually: 2020 limit is $6,000|
RESP Withdrawal Rules: Who Can Withdraw from an RESP?
Only the sponsor/subscriber can withdraw from an RESP. Contributions made to the RRSP are withdrawn in the form of Post-Secondary Education (PSE) Payments and can be sent to the subscriber or the beneficiary. The Canada Education Student Grant (CESG), Canada Learning Bond (CLB), and other investment gains are withdrawn as Education Assistance Payments (EAP) and can only be withdrawn into the beneficiary’s account.
Before withdrawals can commence, the subscriber must provide information about the financial institution holding the RESP with evidence of the beneficiary being enrolled in a verified Post-Secondary Education Program.
While PSE withdrawals aren’t taxable, EAP withdrawals are taxed through the T4A tax form under the beneficiary’s name. In the first 13 weeks after enrolment into a program, EAP withdrawals are limited to $5000 for full-time and $2500 for part-time students. Afterwards, this restriction is lifted. There is no restriction on PSE withdrawals.
Can More than One RESP be Opened in an Individual’s Name?
Yes, but even if five RESPs are opened in your name, the lifetime contribution of $50,000 per beneficiary still holds for all of the RESPs combined.
For a beneficiary with more than one RESP account, CESG grants are paid into the first RESP account where the first annual contribution is made. If contributions are made into two accounts on the same day, the CESG payment is divided in half and split across both plans; if monthly instalments are made into each of these plans, the CESG accrues until the annual or lifetime contribution is reached.
Are There Any Penalties for RESP Overcontributions?
When the lifetime contribution exceeds $50,000 into an RESP, there is a penalty in the form of a 1% monthly tax on the over-contribution until it is withdrawn. All contributions made to the RESP over its lifetime is calculated and considered when assessing over-contribution. So you will be penalized for over-contribution if, for example, you have contributed $52,000 over the lifetime of the RESP (until you withdraw the $2,000 overcontribution).
What Are The Benefits of Opening an RESP
There are many benefits of opening an RESP; here are a few:
1. Provide educational security for your child: In Canada, the average tuition of a four-year undergraduate program is about $24,000 without including additional expenses such as food or accommodation. The RESP is an excellent educational plan to help handle this major cost.
2. Tax-Advantaged Income: With the RESP, you can take advantage of tax-sheltered savings which will be taxed at the level of the student’s income when payments are withdrawn from the RRSP for educational purposes such as for tuition, housing, and other living expenses. These low-taxed withdrawals are made in the form of Educational Assistance Payments (EAPs) by students above the age of 16 who are registered in a post-secondary educational institution. Note that you don’t get a tax break when a deposit is made; instead, investment gains are taxed at the student income level when withdrawn.
3. The Government pays incentives for saving in RESPs: An RESP is a highly incentivized account, with the Canadian government matching 20% of your RESP contribution up to a $2500 limit per year/child via the Canadian Education Savings Grant (CASG) of up to a maximum of $7,200. This is in addition to the Canada Learning Bond and other provincial grants.
4. You can invest money in Your RESP: For a self-directed RESP, you can invest the funds in your RESP in a diverse range of instruments including ETFs, GICs, bonds, stocks, and mutual funds. Many providers invest the money in your RESP for you.
How Long Can an RESP remain open?
An RESP can remain open until the end of the 35th year after which it was opened unless otherwise specified by the terms of the plan. You can contribute to the RESP over a 31 year period (calculated from when it was opened) after which you can still transfer your other RESP savings into one plan. A typical RESP will expire by the end of the 35th year after it was opened.
Help! My Child Doesn’t Want Attend College/University
You are taking a risk by setting up an RESP, so you should know what happens to your money if your child refuses to go to a post-secondary institution such as a college, university, or trade school.
The first thing to do is not to panic; as RESP accounts are long-lived, they can remain open for 36 years. If using a family plan, the money can be transferred to another child’s plan provided their contribution hasn’t been maxed out up to the $50,000 limit. Also bear in mind that each child cannot access grants above $7,200. Each child’s plan including contribution and grants is managed separately within the family plan.
If this isn’t possible, you can withdraw all your original contribution from the RESP tax-free and return all CESG or CLB money to the government. Your capital gains, interest, or dividend payments from investments are paid out to you as Accumulated Income Payment (AIP) and will be taxed in the year of withdrawal with an extra 20% withholding tax.
Ready to Open an RESP? Here’s How
It isn’t difficult to open an RESP once you’re ready. You’ll need the Social Insurance Number (SIN) of you and your beneficiary as well as the beneficiary’s birth certificate. Institutions where you can open an RESP include banks and large financial institutions. Get a list of RESP promoters here.