Interested in saving for your child’s future?
How does a RESP work?
Registered Education Savings Plans (RESPs) can help you build an education fund for your child or grandchild (or a relative’s or friend’s child) by allowing you to earn investment income in a tax-deferred environment. You can set up an individual plan with organizations such as life insurance companies, mutual fund companies, and financial institutions, or you can enroll in a group plan offered by a non-profit scholarship or education trust foundation. If the child goes to college or university, the RESP provides funds to help cover the child’s expenses.
Contributions to a RESP are not tax-deductible to the contributor. However, the income in the plan grows tax-free, so RESPs enjoy the effect of tax-free compounding of investment income. When the child withdraws the funds, the income portion will be taxable to the child. As a student, the beneficiary will probably not have much other income and will be eligible for the tuition tax credit, so he or she will likely pay little or no tax.
How much can you contribute to a RESP?
The overall lifetime limit for RESPs contributions is $50,000 per beneficiary. Overcontributions are taxed at a rate of 1% for each month that they remain in the plan.
If you wish, you can withdraw your own contributions to RESP without any tax consequences since you did not get a tax deduction when you contributed the funds. However, you cannot withdraw the income earned by the RESP tax-free. You may also be required to repay some or all any Canada Education Savings Grants upon RESP withdrawal for non-education purposes.
Canada Education Savings Grant
Under the Canada Education Savings Grant (CESG) program, the federal government will provide a direct grant to a RESP of 20% of the first $2,500 of annual contributions made to the RESP. The grant will be worth up to $500 per year for each year the beneficiary is under 18, to a maximum of $7,200 per beneficiary. The grant amount will not be included in the annual and lifetime contribution limits for the beneficiary.
If the maximum contribution is not made in a year, entitlement to the grant can be carried forward to a later year (within restrictions). The total CESG per beneficiary per year is capped at $1,000 or 20% of the unused CESG room, whichever is less.
Example: Michael contributes $1,000 in 2019 to a RESP for his newborn son. This contribution earns a CESG of $200 (20% of $1,000), leaving $1,500 in CESG contribution room available for carry forward in future years.
In 2020, Michael contributes $4,500 to the plan. In this year, contribution for the CESG is limited to the $2,500 of new contribution room arising in the year, plus the $1,500 carried forward. Therefore, the CESG is only 20% of $4,000 or $800. The extra $500 of contribution can not be carried forward and claimed in later years.
CESG contribution room accumulates at the rate of $2,500 per year ($2,000 per year for 1998 to 2006), whether the child is currently a RESP beneficiary. So even if you do not start making CESG-eligible RESP contributions in your child’s first year, you can make catch-up payments eligible for the grant in later years (subject to the lifetime limit of $7,200 per beneficiary and the annual limit per beneficiary of $1,000 or 20% of the unused CESG room).
To qualify for the CESG, the RESP beneficiary must be a resident of Canada under age 18 and must have a Social Insurance Number (SIN) (see 4.8). You can apply for a SIN for your child by contacting Service Canada. Bear in mind that SIN processing may take several weeks.
If your child chooses not to pursue post-secondary education, you will have to repay the CESG funds received but you will only have to pay back the principal amount of the grant. You do not have to pay back the income earned on the grant funds; however, the income will be taxed when it is withdrawn from the RESP.
Payments from a RESP
Your RESP can begin making educational assistance payments to the plan’s beneficiary once he or she enrolls as a full-time student in a qualifying educational program at a qualifying post-secondary institution. Part-time students aged 16 and over are eligible to receive up to $2,500 of educational assistance payments for each 13-week semester. Students with disabilities can also receive educational assistance payments for part-time study.
Payments from the plan can be used to cover the student’s living expenses and educational expenses such as tuition fees and books, although certain plans may restrict which expenses payments can cover.
For an educational program to qualify, generally it must be at least three weeks long, require at least 10 hours per week of instruction (or 12 hours per month for part-time students) and be at a designated educational institution. Correspondence courses and other distance education courses may also qualify, as well as universities outside Canada if the student is enrolled in a course of at least 13 weeks leading to a degree.