A Registered Education Savings Plan, or “RESP” since people love using acronyms when talking about personal finance, is a savings account that can be used to save for a child’s post-secondary education.
How does it work, and what is the benefit?
- Money going in (contributions) do NOT generate a tax deduction (similar to a TFSA). Contributions are subject to a lifetime limit of $50,000 per beneficiary (over contributions are taxed heavily)
- Canada Education Savings Grant (“CESG”): One of the most attractive features of an RESP is that the Canadian government will match 20% of annual contributions you make (up to an annual maximum of $500 and a lifetime limit of $7,200)
- This means that if you contribute $2,500 in a year, the government will match $500!
- To maximize the 20% match, you have to contribute at least $36,000 in total over the years. Every child under the age of 18 who is a Canadian resident will accumulate $500 of CESG contribution room annually. Unused CESG contribution room is carried forward and used when RESP contributions are made in future years.
- If the beneficiary is 16 or 17 years old at the time of the contribution, they can only receive the CESG if one of the following conditions is met
- a minimum of $2,000 was contributed to (and not withdrawn from) the RESP of the child before the end of the calendar year they turned 15
- a minimum annual contribution of $100 was made (and not withdrawn from) the RESP in at least four of the years before the end of the calendar year the child turned 15
- If the beneficiary is 16 or 17 years old at the time of the contribution, they can only receive the CESG if one of the following conditions is met
- There is an additional CESG available for lower income families (that can increase the annual match to $550 or $600, however, the lifetime maximum for the match is still $7,200)
- Canada Education Savings Grant (“CESG”): One of the most attractive features of an RESP is that the Canadian government will match 20% of annual contributions you make (up to an annual maximum of $500 and a lifetime limit of $7,200)
- Money from the CESG and investment earnings within the RESP are not taxed until money is taken out to pay for education
- Money that was contributed initially is not taxed when it was withdrawn (since it was already after-tax money going in)
- Money taken out of the RESP as an Educational Assistance Payment (money coming from the CESG and investment earnings) is taxed in the hands of the student – and since most students have little or no income, this usually results in withdrawals being tax-free. Initial contributions can be withdrawn tax-free.
What can the funds be used for?
- Qualifying educational program – an educational program at a post-secondary school level, that lasts at least three consecutive weeks, and that requires a student to spend no less than 10 hours per week on courses or work in the program
- Specified education program (if the student is at least 16 years old) – a program at post-secondary school level that lasts at least three consecutive weeks, and requires a student to spend no less than 12 hours per month on courses in the program
- A post-secondary educational institution includes
- a university, college, or other designated educational institution in Canada;
- an educational institution in Canada certified by Employment and Social Development Canada (ESDC) as offering non-credit courses that develop or improve skills in an occupation;
- a university outside Canada that has courses at the post-secondary school level at which the beneficiary was enrolled on a full-time basis in a course of not less than three consecutive weeks; and
- a university, college or other educational institution outside Canada that has courses at post-secondary school level at which a beneficiary was enrolled in a course of not less than 13 consecutive weeks.
What if your child / beneficiary doesn’t end up pursuing post-secondary education?
- If your child does not end up using the funds within their RESP, the money can be refunded to the contributor
- Initial contributions can be returned tax free
- CESG grants will be forfeited and returned to the government
- Remaining cash within the plan can be
- Withdrawn as an “Accumulated Income Payment” – these funds will be taxed at marginal tax rates and penalties may apply
- Transferred to an RRSP, subject to government maximums
For more information on RESPs, visit the Government of Canada Website: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/registered-education-savings-plans-resps.html