Education Savings Plans (RESPs)

A post-secondary education is one of the most important gifts you can provide to a child. Not only does it provide better career opportunities and self-confidence, it has far reaching economic benefits as well. According to census data, university graduates earn an average of $1 million more over their lifetimes than do high school graduates*.

Given recent trends, however, sending your loved ones to school may be easier said than done. Canadian students can no longer rely on assistance programs to get them through. A child born today may face education and living-expense costs of well over $100,000 for a standard four-year degree program by 2020*. Since few families can afford such substantial costs out-of-pocket, you will likely need a sound strategy for paying for your loved ones’ education at some point down the road.

*Higher Education and University Research: Empowering Canadians and Their Communities. Association of Universities and Colleges Canada. September 8, 2003.

What is an RESP?

A Registered Education Savings Plan (RESP) is a registered plan that allows family and/or friends to contribute towards a child’s education. Contributions to the plan can grow tax-free over the life of the plan.

Benefits of RESPs

  • Tax-deferred investment growth

Contributions made to an RESP can accumulate and grow tax-free over the life of the plan. When withdrawals are made for the purpose of education, only the growth and grant portion of the plan is taxable in the hands of a child. Moreover, because your loved one will likely be reporting a low level of income while they are attending school, the amount of tax they can expect to pay should be minimal.

  • Easy access to government grants

Your contributions to an RESP may qualify for the CESG. Through the Canada Education Savings Grant (CESG), the federal government will contribute 20 per cent of your annual RESP contribution to a maximum of $500 per child per year.

  • More control and flexibility

With an RESP, you have complete control over how much you contribute each year, subject to a lifetime contribution of $50,000 per beneficiary. Furthermore, you can invest in a portfolio of growth-oriented investments from a wide range of investment funds.

  • No foreign content restrictions

There are no foreign content restrictions on your RESP. Therefore, mutual funds that invest outside of Canada make it easy to build a properly diversified RESP portfolio.

  • Low minimum investment

You can open an RESP for as little as $25 per month.

What is the Canada Education Savings Grant (CESG)?

Through the CESG, the federal government adds 20 per cent to the first $2,500 of annual contributions you make to an RESP up to a maximum grant of $500 per year.

How does it work?

The CESG is available each year until the beneficiary turns 18. The total grant payments to a beneficiary cannot exceed $7,200 over the life of the plan. Any unused CESG grant room can be carried forward to future years.

Who qualifies for the CESG?

To qualify for the CESG, the following conditions must be met:

  • The beneficiary must be under the age of 18
  • The beneficiary must be a Canadian resident with a valid Social Insurance Number (SIN)
  • A minimum contribution of $100 per year, for four years, or total contributions of at least $2,000 must be made prior to the year the beneficiary turns 16. (This condition only applies for the years the beneficiary turns 16 or 17.)

Who can contribute to an RESP?

Anyone can contribute to an RESP. Immediate family, grandparents, uncles and aunts and even friends of the beneficiary call all contribute. But it’s important to note that the source of the contributions will have a bearing on the type of RESP account that is opened on the beneficiaries’ behalf. There are two different types of plans available: Family plans and individual plans.

What are the consequences of over-contributing to an RESP?

Over-contributions (exceeding maximum $50,000 lifetime contribution limit) to an RESP are subject to 1 per cent per month tax on the excess amount until it is withdrawn. The excess amount still counts against the lifetime limit even if it has been withdrawn.

When must an RESP be terminated?

Contributions to an RESP can be made for 22 years but the RESP must be terminated on or before December 31st of the plan’s 26th year or by the end of February of the year after the first Accumulated Income Payment (AIP). The age of the beneficiary is irrelevant. Thus, it is possible for a beneficiary to take time off to work or travel before beginning their post-secondary education.

Can a subscriber be changed or replaced on an RESP account?

Yes. In the case of separation or divorce, a spouse or former spouse may replace the original subscriber on an RESP as a result of a court order or written agreement.

Can a change be made to the original beneficiary?

Yes, the RESP allows for a beneficiary to be changed or replaced at any time.

If the beneficiary does not go on to post-secondary education, what happens to the proceeds in the RESP?

An RESP can be transferred into the subscriber’s RRSP or spousal RRSP provided they have the available contribution room (up to a maximum of $50,000). There are, however, some stipulations involving the transfer: The RESP beneficiary (ies) must have reached the age of 21 and are ineligible for educational assistance payments The RESP account must have been held for at least 10 years

Is the money contributed to an RESP tax deductible?

No. RESP contributions, or any interest owed on money borrowed to contribute, are not tax deductible. However, any investment income earned within the RESP will grow free of tax until a beneficiary withdraws the funds to pay for their post-secondary education (an educational assistance payment “EAP”). When an EAP is received, it is taxed at the beneficiary’s marginal tax rate.