Everyone wants the best for their children, and that includes higher education. You can help your kids prepare for the future by planning for it, and an RESP is a great solution.
The Registered Education Savings Plan is a dedicated savings and investing vehicle to make your child’s educational and career dreams come to fruition.
How it works
Anyone can open an individual RESP account, provided this person and the beneficiary (i.e., the student using the account proceeds for post-secondary education) are Canadian residents. For family RESPs, the account opener (known as the “subscriber”) must be parents or grandparents of the beneficiary, and the account assets may be used for the education of any child in the family, or shared among siblings.
While laws are subject to change, currently the lifetime contribution limit for each RESP is $50,000* per beneficiary. Under this federally administered program, the government’s Canada Education Savings Grant (CESG) will match 20% of contributions made to each plan, to an annual maximum of $500 and a lifetime maximum of $7,200. That means each year the CESG will be applied to contributions up to $2,500 ($2,500 x 20% = $500). You may choose to contribute more than $2,500 to an RESP plan in a given year, but there’s no matching CESG for any excess amount contributed.
Clearly, it’s advantageous to contribute $2,500 annually – or as close to that amount as possible – to an RESP, as the CESG will help compound asset growth in the plan. Contribution room accrues (i.e., is carried forward) until the year the child turns 17, so even if you cannot contribute the maximum in a given year, you can “catch up” on your contributions in subsequent years and receive the matching CESG in kind. Please note the annual deadline for making RESP contributions is December 31.
As with RRSPs, the earlier you can open and contribute to an RESP, the more your child will benefit from the power of compound, tax-advantaged growth over the years. RESPs may be invested in any number of financial products, from mutual funds and exchange-traded funds to individual stocks, bonds and GICs. Together, we can determine the appropriate investments for the RESP based on risk tolerance, time horizon, expected returns and other factors.
The Government of Canada also maintains the Canada Learning Bond program1, which may contribute up to $2,000 to an RESP of children from low-income families. As well, each province and territory offers their own student grants or loans (eligibility is often income tested), so we can also explore those potential sources of funding for your child’s education.
Withdrawing RESP funds
Once the child enrols in post-secondary education, they can begin drawing on the assets accumulated in their plan. Contributions you make into the plan (and any investment growth on those contributions) are not taxable when withdrawn, but withdrawing government grant money (and related investment gains) is taxable in the hands of the beneficiary. Presumably, the student won’t be in a high income tax bracket, thereby mitigating the tax impact of these withdrawals.
If your child decides not to pursue post-secondary education, you may transfer the RESP to a sibling. If there’s no sibling or this child also does not pursue qualified educational training after high school, then you may transfer the account to your personal RRSP, tax-free. However, once you close the account (which may remain open for up to 36 years), all CESG contributions made to that account – as well as any investment gains earned – will be taxable to you as the subscriber.
The cost of higher education continues to rise. Contact our office to learn more about how RESPs can be a good investment in your child’s future.
*Source for all RESP figures: Government of Canada,
https://www.canada.ca/en/services/benefits/education/education-savings/resp.html
1 https://www.canada.ca/en/employment-social-development/services/learning-bond.html
Notes:
Canada Education Savings Grant (CESG) Limits: Under the CESG, the government matches 20% on the first $2,500 contributed annually to an RESP, to a maximum of $500 per beneficiary per year. The lifetime maximum per beneficiary is $7,200, up to age 18. If you don’t contribute enough to qualify for the maximum $500 CESG in a given year, the unused entitlement can be carried forward to the next year.