We all want the best for our children and that includes higher education. You can help your children prepare for the future and for that purpose, an RESP is a great planning tool.
The Registered Education Savings Plan is a specialized savings vehicle that makes your child's education and career dreams come true.
How an RESP works
Anyone can open an individual RESP account as long as the account holder and beneficiary (i.e. the student who will be using the proceeds from the account for their post-secondary education) are residents of Canada. In the case of a family RESP, the person opening the account (the subscriber) must be a parent or grandparent of the beneficiary. Account assets can be used for any child in the family or shared between children.
Although laws may change, the current lifetime contribution limit for each RESP is $ 50,000 * per beneficiary. As part of this federally administered program, the government's Canada Education Savings Grant (CESG) pays an amount equal to 20% of contributions to each plan. The annual maximum is $ 500, up to a lifetime limit of $ 7,200. This means that, each year, the CESG will be applied on contributions up to $ 2,500 ($ 2,500 x 20% = $ 500). You can contribute more than $ 2,500 to an RESP per year, but you will not receive the CESG for the excess amounts contributed.
Obviously, it pays to contribute $ 2,500 per year (or as close to it as possible) to an RESP since the CESG contributes to the compound growth of plan assets. The contribution limit accumulates until the child turns 17. So you can “catch up” in subsequent years and receive the CESG even if you cannot make the maximum contribution in a certain year. Please note that the annual RESP contribution deadline is December 31st.
As with RRSPs, the sooner you contribute to an RESP, the more your child will reap the benefits of compound and tax-efficient growth over the years. RESPs can be invested in a variety of financial products, from mutual funds and ETFs to individual stocks, bonds and GICs. Together, we can determine which investments are right for your RESP based on your risk tolerance, time horizon, expected return and other factors.
The Government of Canada also offers the Canada Learning Bond 1 program , under which $ 2,000 can be put into an RESP for children from low-income families. In addition, each province and territory offers their own student grants and loans (eligibility is often based on income). So we can also explore these potential sources of funding for your child's education.
Withdrawing funds from an RESP
Once enrolled in post-secondary studies, the child can begin to withdraw the funds accumulated in his plan. Contributions made to the plan (and any investment growth made as part of those contributions) are non-taxable when withdrawn. However, the government grant (and related investment gains) is taxable when withdrawn once in the possession of the beneficiary. The student will likely not be in a high tax bracket, which will mitigate the tax implications of these withdrawals.
If your child decides not to pursue post-secondary education, you can transfer the RESP to another of your children. If your only child does not follow a qualified education after high school, you can transfer the account to your RRSP without paying taxes. However, once the account is closed (it can remain open for up to 35 years), you will have to pay tax on all CESG program contributions made into that account as well as any investment gains made.
The cost of higher education continues to rise. Contact our office to learn more about RESPs, great investment tools for your children's future.
* Source for all amounts related to RESPs: Government of Canada,
Canada Education Savings Grant (CESG) Limits: Under the CESG, the government contributes 20% of the first $ 2,500 contributed to an RESP per year, up to a maximum of $ 500 per beneficiary per year. The lifetime limit per beneficiary is $ 7,200 until age 18. If you do not contribute enough to receive the maximum CESG of $ 500 per year, unused contribution room may be carried over to the following year.