Registered Education Savings Plans (RESP)

A Registered Education Savings Plan (RESP) is a government-approved, tax-sheltered account designed to help families save for their child’s post-secondary education. Contributions to this type of account are not tax deductible, but earnings grow tax-free, as long as the funds stay in the plan. 

Once the child (beneficiary) enrolls in a qualifying education program, she or he can withdraw funds directly from the account. The income portion will be taxed at the beneficiary’s marginal tax bracket, which is typically low for students. And the greatest part? The government contributes up to a yearly (and lifetime) maximums towards your child’s education as long as you do.

The Canadian government offers grants to families who contribute towards their children’s RESP accounts. There are two types of federal grants provided: the basic Canadian Education Savings Grant (CESG), additional CESG, and Canada Learning Bond (CLB).

• Basic CESG: is a grant of 20% of contributions made to a beneficiary up until the end of the calendar year in which they turn 17. The yearly grant limit is $500. To maximize the yearly grant, parents need to contribute $2,500 [$2,500 (contribution amount) x 20% (matching rate) = $500, yearly maximum]
• Additional CESG: is an additional grant from the government to help save for your child's education. This grant is based on the net family income of the child's primary caregiver (the individual who receives the Canada Child Tax Benefit)
• CLB: is a government grant that helps children from low-income families. The government can contribute up to a lifetime maximum of $2,000 for each eligible child (with $500 in the first year of eligibility and $100 each year the child continues to be eligible).

The government allows for a lifetime maximum contribution of up to $50,000 and up to $7,200 in grants from the CESG per beneficiary (child).

In addition to federal grants, there are also provincial education savings programs available for Canadians that you can use with your RESP. To learn more about these programs, click here.

• If you’re a subscriber (person who opened the RESP), there’s no annual limit to contributing to an RESP for your beneficiary. However, there’s a $50,000 lifetime contribution limit to all RESPs per beneficiary.
• You can contribute for up to 31 years on a beneficiary, and an RESP can be open for a maximum of 31 years.
• If you have excess contributions to a beneficiary, your beneficiary will be subjected to a 1% tax per month on their excess contribution that is not withdrawn by the end of the month. The over contribution will continue to exist until the funds are withdrawn. 

Inside an RESP contains 3 main components:

• Post-Secondary Education Payments (PSE): the amount of after-tax dollars the subscriber (account holder) has contributed towards their child’s RESP account.
• Education Assistance Payment (EAP): the portion of the RESP that consists of Canada education savings grant (CESG), the Canada learning bond (CLB), provincial education savings program, and investment income earned from dividends, capital gains, and interest. When money is taken from this portion and put in the hands of the student, it is called an Education Assistance Payment (EAP).
• Accumulated Income Payments (AIP): these are funds that are investment earnings inside an RESP.

RESP qualified investments include:

• Cash
• Stocks
• ETFs
• Long options
• Mutual funds
• Bonds
• Gold and silver
• GICs
• And more

There are rules (and limits) when it comes to withdrawing funds from an RESP. This will depend on your child’s situation.

PSE withdrawals

• The PSE component of the RESP (i.e., the contributions made by the subscriber) are not taxed when withdrawn. This is because money contributed into the RESP has already been taxed (after-tax dollars).
• Note: Please see the RESP contribution section above to see where funds go when you contribute to an RESP account. 

EAP withdrawals

• The EAP component of the RESP is tax-sheltered in the account until it is withdrawn. When the student withdraws the EAP component, the EAP funds are  taxed in their hands when they use it for their education. For example, if you withdraw $5,000 EAP funds, that money will be added as taxable income to the student  in that tax year.
• You can’t withdraw all the EAP funds at once. You can withdraw $5,000 (or $2,500 for part time studies) in the first 13 consecutive weeks of enrollment in a qualifying educational program. After the student has completed that 13 consecutive week period, there’s no further limit on the amount of EAPs that can be withdrawn if the student continues to qualify to receive them. If there’s a 12-month period in which the student  is not enrolled in a qualifying educational program for 13 consecutive weeks, the $5,000 maximum limitation would apply again.
• Helpful tip: You can use your (PSE) contribution to fund your child’s education without limitation to supplement the EAP withdrawal in the first 13 weeks.

Please note: To learn more about withdrawing from your RESP, we have a helpful in-depth guide you can check here.

1. If there are unused or leftover PSE funds in the RESP, you (as the subscriber) can receive those contributions back tax free and penalty free. Alternatively, those funds can also be transferred to an RESP for the benefit of any other children who will still attend post-secondary education at a later time.
2. The CESG received can be shared with other siblings (under the age of 21) if they still have grant room available (i.e., the lifetime max CESG is $7,200 per child). If there’s no available room, the grant must be returned back to the Government.
3. An RESP can stay open for up to 41 years for an individual non-family plan RESP or for up to 36 years for a family plan RESP. Contributions are not permitted for an individual non-family plan RESP after the 36th year, and for a family plan RESP after the 32nd year.
4. Remaining or unused funds in the RESP may be withdrawn. Contributions (i.e., the PSE component) can be withdrawn tax free. Government grants (i.e., CESG and CLB) must be returned. Any investment earnings will be taxed (as Accumulated Income Payment or AIP) at your marginal tax rate in the year of withdrawal plus a  20% penalty.

Please note: It is possible for some subscribers to reduce the payable tax by transferring the AIP component to an RRSP if there is sufficient accumulated contribution room. It’s always best to discuss this with your accountant or other financial professionals to see what’s best for you.

Here are some of the most frequently asked questions:

1. What happens if my child doesn't continue on to post-secondary education?
   • Account-holders can withdraw their original contributions (PSE) tax-free and pay taxes on the earned income portion only
   • The remainder of the accumulated income (interest, dividends, and capital gains) is taxable at your prescribed tax rate for Federal and Quebec (if applicable) PLUS an additional 20% penalty tax (12% for Quebec residents)
   • Any government (federal or provincial) incentives (grant/bond) will be returned to the government if an RESP is terminated because the child doesn’t enroll in post-secondary education
   • Any investment income (up to $50,000) earned in the RESP can be rolled over into the account holder’s RRSP account (as long as there’s enough contribution room in the RRSP)
2. What is a family RESP account?

   • If you have (or plan to have) multiple beneficiaries (children), you can open a family RESP account for all beneficiaries and save by buying bigger share lots, rather than multiple lots in different accounts. To add multiple beneficiaries to a family RESP, all the beneficiaries must be blood relatives.

3. What if I want to close my account early?

   • If the account is closed early, any grants paid into the account must be returned to the government. The portion of the account that is made up of direct contributions (PSE or post-secondary education) can be withdrawn by the subscriber (account holder). Any earned investment income will be withdrawn by an accumulated income payment.

4. Withdrawing money from my RESP?
   

   • If you need to take money out of your RESP, the withdrawal is made by capital withdrawal (funds that have been contributed, not grants or income). Grants must be paid back to the ESDC unless you’re withdrawing money to correct an over-contribution, or if the beneficiary qualifies for EAP (Educational Assistance Program).

    

Note: The information in this blog is for educational purposes only and should not be used or construed as financial or investment advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied, is made by Questrade, Inc., its affiliates or any other person to its accuracy.