Last Updated on July 12, 2024 by Finance Faded
The Registered Education Savings Plan (RESP) was introduced by the federal government in 1974 with retroactive effect to January 1, 1972. The purpose of the RESP is to allow parents to save money to finance their child’s post-secondary education at the opportune time. The RESP is a registered account since it is an account that must be registered with the Canada Revenue Agency.
This article presents the following concepts:
- Who can open an RESP?
- The maximum contribution
- Government grants
- How to invest with an RESP
- Tax and the RESP
- The different types of RESPs
- How to make RESP withdrawals?
Who can open a Registered Education Savings Plan?
From the child’s birth, the RESP can be opened by their parents, grandparents, cousins, uncles, etc. All you need is the child’s social insurance number to open one. RESP subscribers for the child cannot deduct the amounts paid. However, the accumulated income is tax-free as long as it remains in the child’s RESP.
What is the maximum contribution amount?
There is no annual limit on contributions to an RESP. However, for each child, the lifetime contribution limit to an RESP is $50,000. This limit includes all contributions made to all of the child’s RESPs. So, if you are fortunate enough to have multiple subscribers contributing to your child’s RESP, it is important that they communicate well with each other so as not to exceed this lifetime contribution limit.
Contributions can generally be made until your child reaches the age of 31 and the RESP has a lifetime of 35 years. For a child with a mobility impairment, the maximum contribution period is 35 years and the plan’s lifetime is limited to 40 years.
Government grants
Depending on your family income, opening an RESP may entitle you to up to four government grants:
- The Canada Education Savings Grant (CESG)
- The Additional Canada Education Savings Grant (AESG)
- The Canada Education Bond (CEB)
- The Quebec Education Savings Incentive (QESI) for Quebec residents only.
The Canada Education Savings Grant (CESG)
As soon as an RESP is opened, the Canada Education Savings Grant (CESG) is paid into the child’s account, which is 20% of the first $2,500 contributed, for a maximum of $500 per year. In other words, if you manage to contribute $2,500 to your child’s RESP in a given year, the federal government will pay $500 in that same year. If you contribute less than $2,500 in the year, for example $2,000, the federal government will pay 20% x $2,000 = $400.
Note that unused contributions in one year can be carried forward to subsequent years, generally until your child reaches the age of 17. However, including the carryover, the amount of the basic CESG cannot exceed $1,000 for a given year, which is the equivalent of the maximum for the current year plus one catch-up year.
The Additional Canada Education Savings Grant (AESG)
Additional help (AESG) could be paid into your child’s RESP depending on their family net income. Thus, if the child’s net family income varies, the AESG will also vary. The AESG applies to the first $500 of contributions made to the RESP. In other words, for the year 2024, if the eligible child’s net family income is:
- $55,867 or less, the amount of the AESG will be 20% on the first $500 of contributions made to the RESP, for a maximum of $100.
- Between $55,867 and $111,733, the AESG is then 10% of the first $500 of contributions made to the RESP, for a maximum of $50.
- More than $111,733, the AESG is not eligible.
In total, the cumulative ceiling of the CESG (basic + additional) is $7,200 per lifetime per child.
Canada Learning Bond (CLB)
The Canada Learning Bond (CLB) is an additional incentive to help low-income families start saving early for their child’s post-secondary education.
To be eligible for the CLB, your child must:
- be a resident of Canada;
- have a social insurance number;
- be designated as a beneficiary of an RESP (that is, you must have already opened an RESP account for them);
- be born on or after January 1, 2004;
- be from a low-income family.
In addition, to be eligible for the CLB, the child’s primary caregiver must:
- have filed a tax return for each year for which they want to claim the CLB for the child;
- be eligible for the Canada Child Benefit.
You do not need to contribute to an RESP to get the CLB. It is the primary caregiver’s adjusted family income that determines whether or not your child can receive the CLB.
If all of the above conditions are met, your child will be eligible for the CLB and could receive $500 the first year. In addition, an additional $25 will be paid to help your family with the cost of opening an RESP. As well, the CLB will deposit an additional $100 grant into your child’s RESP for each year of eligibility thereafter, up to a maximum lifetime amount of $2,000.
If your child does not pursue post-secondary education, the CLB must be repaid in full to the government.
Finally, please note that the CLB is retroactive and its amounts accumulate each year until your child is 15 years old. You then have until the day before their 18th birthday to claim the CLB on their behalf. However, if the CLB has never been claimed, your child can become a subscriber to their own RESP at age 18, and claim the CLB for themselves until the day before their 21st birthday.
Quebec Education Savings Incentive (QESI)
The QESI came into force on February 21, 2007 in Quebec and is a refundable tax credit that is paid directly into your child’s RESP at your financial institution that offers the QESI. It is not up to the parents/subscribers to apply for the QESI but rather to the provider where you opened your child’s RESP. Therefore, not all institutions pay the QESI. You should choose one that offers it if you wish to benefit from it.
The basic amount of the QESI is 10% of the annual RESP contribution, up to a maximum of $250 (reached with an RESP contribution of $2,500 per year). Unused contributions can be carried forward for future use, generally until your child reaches the age of 17. However, including the carry-forward, the amount of the QESI cannot exceed $500 for a given year, which is the equivalent of the maximum for the current year plus one catch-up year.
Like the SCEE, the QESI offers an additional amount to help low-income families. Thus, for the year 2024, if the net family income is:
Less than $51,780 then an additional 10% credit on the first $500 of contributions, for a maximum of $50, will be paid into your child’s RESP. Between $51,780 and $103,545, the additional credit is then 5% of the first $500 of contributions, for a maximum of $25. More than $103,545, your child will not be eligible for the additional QESI credit.
In total, the cumulative lifetime limit of the QESI (basic + additional credit) is $3,600.
Investing in a Registered Education Savings Plan (RESP)
You can invest the available funds in your child’s RESP with a financial advisor, a robo-advisor, or on your own through an online brokerage platform. With your child’s RESP, you can invest in almost all types of investments: stocks, bonds, Exchange Traded Funds (ETFs), Guaranteed Investment Certificates (GICs), Mutual Funds (MFs), etc.
Taxes and the Registered Education Savings Plan
As described above, an RESP has three components: contributions from parents or others (such as grandparents for the lucky ones ), government grants, and the return generated over time on these amounts. These amounts accumulate tax-sheltered, but at the time of withdrawal, government grants and returns will be taxable in the hands of the child.
If your child pursues post-secondary education for a minimum of 3 consecutive weeks during which he or she devotes at least 10 hours per week to classes or schoolwork, then parents can make RESP withdrawals in the form of Education Assistance Payments (EAPs). In these cases, EAPs will be paid to your child to help them pay for their post-secondary education. EAPs include all government grants listed above (CESG, BEC, IQEE, etc.) and the income generated in the RESP (e.g., investment returns).
EAPs are limited to the total cost of education, up to a maximum of $8,000 for the first 13 weeks of full-time study and up to $4,000 for each 13-week period of part-time study. After the first 13 weeks of full-time study, the $8,000 limit is lifted.
The EAPs paid to your child will therefore be added to their taxable income, not that of the subscriber (parents, grandparents, etc.). Since at the time of receiving the EAPs your child would be a student, their marginal tax rate will probably be relatively low or even zero. Thus, your teenager will pay almost no tax on the EAPs received.
However, if for some reason your teenager does not pursue post-secondary education, the RESP can be transferred to another child. If the latter already has an RESP, it is important to check their contribution limits so that the transfer does not result in an over-contribution. If the RESP is not transferred to another child, you must repay the government grants received (CESG, BEC, IQEE, etc.) and the income they generated, but you will keep your contributions and their growth.
If you decide to withdraw your contributions and their growth, they do not have to be included as income in the subscriber’s (parents, grandparents, etc.) tax return, as no tax benefits were granted during the years of contribution. If you still have room in your RRSP, you can transfer your contributions and their growth to it.
The Different Types of Registered Education Savings Plans
There are three types of RESPs: individual, family, and collective.
Individual Plan
The individual RESP is a plan designed for one child only. The child’s parents therefore do not have to worry about sharing the money available in this account with another child. The individual plan is probably the best option for parents who would like to open an RESP for a child with whom they are not related.
Family Plan
For a family with more than one child, the family plan may be suitable for them, because the parents will be able to share (if they wish) the money available in the account among all their children. In a family plan, all children must be related to their subscribers, by blood or adoption, such as grandchildren, great-grandchildren, brothers or sisters.
Parents or subscribers to a family RESP have the option of adding or changing beneficiaries under the age of 21 for the life of the plan. When distributing the money available in the family RESP, the children do not necessarily need to have equal shares. The family RESP gives parents the advantage of managing one account for multiple children.
Collective plan
A group RESP (Registered Education Savings Plan) pools your child’s savings with those of many other subscribers. When you buy into a group RESP, you agree to purchase a certain number of units in the plan. These units represent your share of the plan. The maturity date of the plan is usually set based on your child’s date of birth. Scholarship plan dealers must provide you with all documentation containing the information you need. Be sure to read and understand this document carefully.
The group plan manager invests your savings and government grants with the money of other plan members. Your money is usually invested in low-risk, fixed-income investments such as bonds, guaranteed investment certificates, mortgages, etc. The sales charges you pay when you buy into this type of plan typically reduce your potential investment income in the early years of contributions.
If you stop contributing to the plan before the maturity date, you will get back the money you put in, but the investment income could go to other members of the group plan. However, if you contribute to the plan until the maturity date, your child could receive a share of the income from those who stopped contributing before the maturity date.
When the plan matures, your child shares the pool’s income with the children of the same age in the plan. The amount your child will receive generally depends on the:
- amount in the pool account at the maturity date;
- number of children in the group who will begin post-secondary education.
If your child does not start post-secondary education at the same time as the other children in the group (of the group plan), this could affect the amounts you will receive from the plan.
Please also note that if for any reason you decide to withdraw from the plan in the early years, be aware that you will get back a significantly smaller amount than you put in. This is because the sales charges have been deducted from your early contributions, and therefore a smaller portion of your money has been invested by the plan manager.
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Disclaimer:Â While I strive to provide valuable information, I am not a financial advisor. The content on this page is intended for informational purposes only and should not be taken as financial advice. To choose the financial asset that best fits your individual profile, consult with a professional financial advisor and discuss your specific circumstances.
