The Accounting and Tax

What Are RESPs in Canadian Tax?

A Registered Education Savings Plan (RESP) is a tax-advantaged account in Canada designed to help parents, guardians, or anyone else save for a child’s post-secondary education. RESPs are a crucial part of financial planning for families, as they make it easier to set aside money for college, university, or vocational training while benefiting from government grants and tax-deferred growth.

Let’s explore how RESPs work, why they’re important, and how to make the most of them.

What Is an RESP?

An RESP is a special savings account registered with the Canadian government to help save for education. Contributions to an RESP are not tax-deductible (unlike RRSP contributions), but the investment income earned inside the plan grows tax-free until withdrawn for educational purposes.

What makes RESPs stand out is the government’s contribution in the form of grants, which can significantly boost savings.

Why Are RESPs Important?

Post-secondary education in Canada can be expensive, with tuition fees, books, and living expenses adding up quickly. RESPs provide a structured way to save for these costs while benefiting from:

1. Tax-Deferred Growth: Investment earnings are not taxed until withdrawn, and even then, they’re taxed in the student’s hands—typically at a low tax rate.
2. Government Grants: The Canadian government offers matching contributions, making it easier to grow your savings.

How Do RESPs Work?

RESPs are flexible accounts that allow you to contribute money, invest it, and withdraw it for qualified educational expenses. Here’s a breakdown of how they function:

1. Contributions:
   • There’s no annual contribution limit, but there’s a lifetime limit of $50,000 per beneficiary.
   • Contributions are made with after-tax dollars and can be invested in various financial products, like mutual funds, GICs, or stocks.
2. Grants and Bonds:
   • The government adds money to your RESP through grants like the Canada Education Savings Grant (CESG) and bonds for low-income families.
   • More on these grants below!
3. Tax Advantages:
   • While contributions are not tax-deductible, the earnings on your investments grow tax-free.
   • Withdrawals of investment income and grants are taxed in the student’s hands, where they’re likely taxed at a low rate (or not at all, depending on income).

Who Can Open and Contribute to an RESP?

Anyone can open an RESP for a beneficiary. Typically, parents or guardians open RESPs for their children, but grandparents, other family members, or even friends can do so.

RESPs can be set up in three main ways:

1. Individual Plans: For one specific beneficiary.
2. Family Plans: For multiple beneficiaries who are related to the account holder.
3. Group Plans: Pooled plans offered by institutions where contributions are combined with other members’ savings.

What Are the Government Grants for RESPs?

One of the best features of RESPs is the free money from the government! Here’s what’s available:

1. Canada Education Savings Grant (CESG):

• The government matches 20% of your contributions annually, up to $500 per year.
• Lifetime maximum of $7,200 per beneficiary.
• If you don’t maximize your CESG in a given year, unused grant room carries forward.

2. Canada Learning Bond (CLB):

• Designed for low-income families.
• Provides an initial $500 when the RESP is opened, plus $100 annually until the child turns 15, up to a maximum of $2,000.
• No contributions are required to qualify for the CLB.

What Happens When the Beneficiary Goes to School?

When the child starts post-secondary education, the RESP funds can be withdrawn in two ways:

1. Educational Assistance Payments (EAPs):
   • This includes grants and investment income.
   • EAPs are taxed in the student’s hands, which often means little to no tax is paid.
2. Contribution Withdrawals:
   • Contributions (principal) can be withdrawn tax-free, as they were made with after-tax dollars.

What Happens If the Beneficiary Doesn’t Go to School?

If the child decides not to pursue post-secondary education, there are still options for your RESP:

1. Change the Beneficiary:
   • Transfer the RESP to another eligible family member under the same plan.
2. Transfer to an RRSP:
   • You can transfer up to $50,000 of investment earnings to your Registered Retirement Savings Plan (RRSP) if you have contribution room.
3. Withdraw Funds:
   • Contributions can be withdrawn tax-free, but investment earnings are taxed, plus a 20% penalty if they’re not transferred to an RRSP.
   • Grants and bonds must be returned to the government.

How Are RESPs Different from Other Savings Accounts?

RESPs offer unique benefits compared to other savings accounts like TFSAs or RRSPs:

Why Should You Open an RESP?

Here’s why an RESP is an excellent savings tool for education:

1. Free Money from the Government: The CESG and CLB can add thousands to your savings.
2. Tax-Free Growth: Maximizes the power of compounding while deferring taxes.
3. Flexibility: Multiple options are available even if the beneficiary doesn’t attend school.

Final Thoughts

A Registered Education Savings Plan is one of the best ways to save for a child’s post-secondary education in Canada. With tax-deferred growth, government grants, and flexibility in handling the funds, it’s a powerful tool to ensure education costs don’t overwhelm your family.

If you’re thinking about opening an RESP, start early to maximize contributions and grant eligibility. Speak with your bank or financial advisor In Canada to find the right RESP plan that aligns with your family’s goals. Education is an investment in the future, and an RESP helps make it possible!