Registered Education Savings Plan

A Registered Education Savings Plan, also known as an RESP is a savings account for parents who want to save for their child’s education. Its an investment vehicle that allows investment income to accumulate on a tax deferred basis. Funds within an RESP are used to pay for post secondary education and related expenses.

Opening an Registered Education Savings Plan

An Registered Education Savings Plan can be opened by anyone for the  benefit of a beneficiary. It can be opened by parents, guardians, grandparents and other relatives or friends.  A beneficiary can be a child but you can also name yourself or another adult as the beneficiary.

The person(s) opening the RESP is also known as the subscriber and they will be the one contributing into the account for the benefit of the beneficiary to attend post secondary education. There is a maximum contribution limit of $50,000 per beneficiary.

Why an RESP?

The investment income inside the Registered Education Savings Plan grows tax free and when the beneficiary enrols in post-secondary education, they can start taking out payments out of the RESP, also known as Educational Assistance Payments (EAP). EAPs are a combination of investment earnings and government grants inside of that RESP. 

The RESP provider will generate a tax slip for the beneficiary when using EAP in which the student would include it as income on his or her return for the year the student receives it. As the student has limited income, there is very little amount of tax, if any, to be paid.

Canada Education Savings Grant (CESG)

One of the advantages of Registered Education Savings Plan is the grant that is contributed by Employment and Social Development Canada to help out with your child’s education. ESDC pays a basic of 20% of annual contributions that you make to all eligible RESPs for a qualifying beneficiary to a maximum of $500 in respect of each beneficiary. This $500 limit becomes $1000 if there is unused grant room from a previous year. There is a lifetime limit grant of $7,200. Beneficiaries qualify for a grant on the contributions made on their behalf before the end of the calendar year in which they turn 17 years of age.

Keep in mind that there are specific contribution requirement rules for children who are 16 or 17 years old. In order for children in that age group to receive government grant, they must have met one of the following:

• a minimum of $2,000 contribution has been made, to and not withdrawn from, RESPs in respect of the beneficiary before the year in which the beneficiary turns 16
• a minimum of $100 annual contributions has been made and not withdrawn from, RESPs in any of the last 4 years

Additional CESG

ESDC will contribute an additional amount of grant for each qualifying beneficiary depending on your family income.

For 2017, the additional CESG rate on the first $500 contributed to an Registered Education Savings Plan for a beneficiary who is a child under 18 years of age is:

• 40% (extra 20% on the first $500), if the child’s family has qualifying net income for the year of $45,916 or less; or
• 30% (extra 10% on the first $500), if the child’s family has qualifying net income for the year that is more than $45,916 but is less than $91,831.

Canada Education Savings Grant Summary Chart

 The qualifying net income of the child’s family for a year will generate be the same income used to determine eligibility for the Canada Child Tax Benefit (CCTB).

Additional Provincial and Government Grants

Besides the Canada Education Savings Grant, specific provinces offer their own variation of additional grant to help with funding education. Below are other provincial grants in addition two popular government benefits.

1. British Columbia Education Savings Grant
2. Quebec Education Savings Grant
3. Saskatchewan Education Grant
4. Canada Learning Bond
5. Canada Child Benefit

Types of RESPs

There are generally two types of Registered Education Savings Plan

• Single Beneficiary RESP
  • Single beneficiary RESPs mean that only one beneficiary exist and the subscriber that opened this account does not have to be related to the beneficiary. In rare circumstances, the beneficiary and the subscriber can the same person. This means that the individual is saving up for their own education
• Family RESPs
  • Family RESPs allow the subscriber to name more than one beneficiary. Each beneficiary must be related by blood or adoption to the other beneficiaries.  The subscriber must be a parent, grandparent, sister, or brother of the beneficiary. The benefit of having more than one beneficiary is flexibility which means that if one child doesn’t go to school, the other child can take advantage of the EAPs.

Rules of Withdrawal

In order for a beneficiary to withdraw from their Registered Education Savings Plan, the student must either 

• Be enrolled full time in a qualifying educational program at a post secondary institution, including distance education courses
• The student has reached the age of 16 and is enrolled part time in a specified educational program

Qualifying educational programs include programs taken in university, college, CEGEP, apprenticeships or trade schools.

Limits on Withdrawals

For Registered Education Savings Plans opened after 1998, there is a limit in regards to how much EAP a student may withdraw

• For student enrolled in full time education – $5,000 for the first 13 consecutive weeks of school. After 13 weeks have passed, there is no limit on the amount of EAP that the student may redeem.  If the student decides to take a 12 month break from school, then they must abide to the $5000 rule again
• For students enrolled in part time education – $2,500 for the first 13 consecutive weeks of school.

 Maximum Term of an RESP

You can contribute to an Registered Education Savings Plan for up to 31 years, and the plan can remain open for a maximum of 35 years, allowing for long term accumulation on a tax-deferred basis. Contributions and the grant portion amounts accumulate in the plan-tax free. 

Can you deduct RESP contributions?

Unlike the RRSP deduction, you cannot claim a tax deduction towards your RESP contributions. However, you will get the benefit of tax deferral as the income and grant is sheltered from tax. 

What if the Child Doesn’t Attend School?

If the child doesn’t attend school, the funds can also be withdrawn but for non school purposes. Keep in mind that when the funds are withdrawn for non school purposes, the government grant will go back to the government and the income portion of the RESP, also known as the Accumulated Income Payment will be taxed at an additional federal penalty tax of 20% (12% in Quebec). The amount of money contributed to RESP will not be taxed, just the interest earned or investment gains.

For example, you have $10,000 in your Registered Education Savings Plan broken down as:

• Capital: $5,000
• Grant: $1,500
• Income: $3,500

If you were to withdraw for non school purposes, $1,500 will go back to the government and $3,500 will be taxed 20% or 12% in Quebec.

Transferring an RESP into an RRSP

The income portion of an Registered Education Savings Plan can be transferred into the subscriber’s RRSP. There is a lifetime limit of $50,000 of AIP (income) which can be transferred into the subscribers RRSP or spousal RRSP, as long as there is available contribution room.  In order to successfully transfer, two conditions must be met

• The Registered Education Savings Plan must have existed for 10 years or longer
• All beneficiaries must be at least 21 years of age and not attending post secondary education

Tax On Over-Contributions

There is a lifetime limit of $50,000 of contribution per beneficiary.  Contributing over this amount may cause the subscribers to be liable to pay 1% per month on the over contribution amount. If not withdrawn, it’s payable within 90 days of the end of the year. 

For more information visit Government of Canada’s official website at https://www.canada.ca/en/services/benefits/education/education-savings/resp.html